The recent departure of Pacific Investment Management Co. founder and so-called “Bond King” Bill Gross from the firm he founded over 40 years ago is the culmination of a lot of internal drama that has played out over the course of 2014 and I’m sure prior to that.
The first major piece of the drama to hit the news occurred in January when Co-CEO Mohamed El-Erian announced he was leaving Pimco. There were many news stories about an apparent rift between the two and how they clashed over several issues. El-Erian, for those that don’t know, is the former head of Harvard Management Company and a very well-respected figure in investing and economic circles. Gross had referred to El-Erian as his heir-apparent on several occasions prior to his departure.
Distraction from the Day Job
From that point until Gross’s resignation there were numerous stories in the media about internal strife between Gross and other senior managers stemming in part from his alleged autocratic and confrontational management style. Towards the end, it was reported that several senior managers had indicated that if Gross didn’t leave they would. Reportedly, Pimco’s parent Allianz Se (AZSEY) was set to fire Gross the day after he made his announcement to go to Janus Capital Group, Inc. (JNS). (For more, see: Choose a Fund with a Winning Manager.)
So if you are an investor or perhaps a financial adviser looking to offer your take on the Pimco situation to your clients here are a few thoughts. Note: these are my thoughts and opinions and are based on what I’ve read and heard in the media and not any sort of insider information. (For related reading, see: When to Sell a Mutual Fund.)
Founders Often Leave the Companies they Founded
It's not unusual to read about the founder of a successful company stepping aside a few years down the road as the organization he or she founded evolves to a point where a different style or level of management is needed. This type of change generally occurs sooner than 40 years after the founding of the company, but nonetheless it appears that this was at least partially an issue here. (For related reading, see: What Bill Gross, Steve Jobs and Steve Wynn Have in Common.)
Allianz acquired Pimco in 2000 and the firm has continued to grow in terms of assets under management and the number and types of mutual funds and other investment management services offered.
Not Just Bill Gross
Via his success managing the firm’s flagship bond fund, Pimco Total Return (PTTRX), as well as growth of the firm via its other funds, Pimco has become a very large asset manager in terms of both assets under management and headcount. To Gross’ credit, Pimco is an organization made up of many very smart and talented people.
If the reports of Gross’ confrontational management style are accurate, it's not surprising that some of the more senior managers at the firm had given Allianz the “we go or he goes” ultimatum that has been widely reported in the financial press. Given the recent relative poor performance and outflow of assets from Total Return in recent years (and from the firm as a whole), combined with the negative press surrounding Gross and the firm, it would seem that Allianz was ready to make the decision that this group of managers was more important to Pimco’s future than was Bill Gross. (For more, see: The Greatest Investors: Bill Gross.)
What Does the Future Hold for Pimco Investors?
Certainly this is the $64,000 question. In the short-term, outflows from Total Return and other Pimco funds may continue as financial advisers and large institutions decide that they want to move away from the firm in the wake of Gross’ departure.
Over the long-term, Pimco is a very solid organization that offers a number of quality funds across the fixed income spectrum, as well as across a wider spectrum of investment types, such as equity and alternative styles. It will remain to be seen how the Pimco of the future compares to the Pimco of the Bill Gross era.
Morningstar, Inc. (MORN) did drop their ranking of the Total Return fund from Gold to Bronze (the system is on the order of the Olympic medals and does attempt to look at funds from a prospective viewpoint vs. their star system, which is a ranking based upon past performance). (For related reading, see: How's your Mutual Fund Really Doing?)
Their latest write-up on the fund starts thusly: “PIMCO Total Return enters a new era with uncertainty but also a good deal of promise.” Morningstar's analyst goes on to say that in the short-term there is much uncertainty surrounding the fund due to the continuing outflows and due to the uncertainty surrounding the roles and the approach of the new managers. Additionally, the analyst notes that both of the new co-managers are past Morningstar Fixed Income Managers of the Year with their prior Pimco funds.
Lastly, Allianz is a very successful, diversified international financial services firm. While I’m guessing they never envisioned that the departure of Bill Gross would happen in quite this fashion, they had to know that at some point Gross would be leaving Pimco. Further, I have to believe that Allianz bought Pimco as a long-term going concern rather than just for Bill Gross. Therefore, I have to think that Allianz will do whatever it takes to ensure that Pimco recovers from this setback if for no other reason than to protect its investment. (For more, see: Pimco's New ETF Play: Here's What you Need to Know.)
The Bottom Line
The situation at Pimco is certainly unnerving to investors and financial advisers. Many advisers will choose to move their client’s assets away from Pimco, and as we have seen, the investment committees of many large institutions have been making the same decision. Understanding the long-term implications for the future is tough for individual and institutional investors. The truth is that the future is unknowable. Investors in Pimco Total Return and all other Pimco products need to assess the facts of the situation, how the company has communicated the transition, and determine the best course of action for themselves and/or for their clients based on known factors. (For more, see: Pimco Investor? Consider This Before Bailing.)