A front page article in last Tuesday’s Wall Street Journal outlines the (former?) champion bond fund manager’s problems.  Over the fourteen months ending in June, a time of strong net inflows to US-based bond funds, PIMCO experienced steady net outflows totalling a whopping $64 billion.

 At the same time, the negative media attention that the article embodies is itself one of PIMCO’s bigger problems.

My, admittedly uninformed, outsider’s view:

Recent press coverage of PIMCO has focused on the succession struggle between the firm’s co-founder and Chief Investment Officer, Bill Gross, and Allianz, the German insurance company he sold his firm to in 2000.  Generally portraying Mr. Gross in an unfavorable light, it has been sparked by the surprise resignation of the successor hand-picked by Allianz, Mohamed El-Erian, in January.

Personality conflict between Mr. Gross and Mr. El-Erian may be entertaining, in a gossipy, soap opera-ish way. But I don’t think it’s the main issue.  In fact, outflows form PIMCO were smaller in the five months since Mr. El-Erian’s resignation than during the five months before.

Instead, I see two related factors involved in PIMCO’s recent struggles:

1.  The bigger problem, in my view, is that for a long time PIMCO’s marketing has been focused on the continuing ability of Mr. Gross, an industry legend, to continue to generate market-beating investment returns, as he has been able to do throughout the thirty-year+ period of falling interest rates in the US.  Because of this emphasis, Mr. Gross’s recent performance stumbles have removed the main reason for choosing PIMCO over other alternatives.  

2.  Allianz has bungled the succession issue, mostly, I would guess, because it doesn’t understand the outsized ego that comes with being an American portfolio manager.

Mr. Gross is seventy.  He’s immensely wealthy.  Clients have a concern that he will:

–suddenly decide to retire

–develop physical disabilities that will force him to do so, or, worst of all,

–remain on the job and begin to suffer age-related diminution of his investment skills.

Rightly or wrongly, this is how clients regard any successful manager after, say, age 55.  

For its part, Allianz has a similar interest in protecting the asset it owns.  So succession is a legitimate business issue.

However, rather than emphasize the large stable of successful younger portfolio managers PIMCO employs–as it has since Mr. El-Erian’s departure–and to deemphasize the role of a single key individual, Allianz decided to anoint Mr. El-Erian, a charming marketing guy with little portfolio experience as the next Bill Gross.  It then made him, however implausible, the new investment face of the franchise.

Admittedly, portfolio managers aren’t the most mature people in the world–we’re more like little kids playing video games.  Still, Mr. Gross can’t have been thrilled.  He must have felt he was being forced out at the first whiff of underperformance and that his considerable investment acumen was being trivialized by Allianz through its choice of a successor.  He may also have thought that the entrepreneurial character of “his” company was being destroyed by Allianz (forgetting that the key element in this process was his selling PIMCO to corporate “suits” at what he thought was the peak of the bond market).

I don’t have a strong feeling about how the PIMCO saga will unfold.  Will the firm continue its marketing focus on creating larger-than-life portfolio managers?  PIMCO was built on aggressive bets that interest rates would decline–is it possible it can’t adjust to a market where rates go sideways or up?  Will it remain trapped with their idea of the “new normal,” where bonds are always the asset of choice?  Will Bill Gross begin to be able to play well with others?