Bill Gross, PIMCO and Janus

Bill Gross is the (until recently) extraordinarily successful  lead portfolio manager for the bond titan PIMCO, which he co-founded and which he sold to the European financial conglomerate Allianz in 2000.

Late last week, Gross abruptly resigned from PIMCO to join Janus Capital, a much smaller, equity-oriented firm with a checkered history.  The apparently hasty departure seems to have come after Gross learned he was about to be terminated.

My take:

1.  The PIMCO brand has been built on two ultimately unsound pillars:

–a customer should buy PIMCO products because they would always outperform every other alternative, and

–the brilliant portfolio manager, Bill Gross would supply the returns..

2.  The problems with this brand strategy have certainly become apparent to Allianz in recent years:

–although retail investors don’t think of age as an issue with a portfolio manager, institutions do.  They worry that once a manager reaches, say, 60–and certainly when he/she reaches 65–that the manager will soon leave, that either retirement or illness will force a change.  So for institutions a key question is who the star manager’s successor will be.  It seems to me that, despite a deep, talented bench at PIMCO, Mr. Gross never permitted a successor to be designated.

–Mr. Gross’s string of stellar performance years appears to have come to an end at around the same time interest rates reached their lows.  Since then, my cursory observation is that Gross upped the risk level of his flagship fund, in an attempt to boost returns.  The strategy hasn’t worked, but it has added another level of worry.

3.  Allianz addressed the succession issue, not by selecting a skilled insider with a strong performance record, but by bringing in marketing celebrity Mohamed El-Erian as Mr. Gross’s successor.  This was a weird choice.  Yes, Mr. El-Erian had once been a PIMCO employee   …but he had limited portfolio experience and no public record of successful management.

It’s unclear to me whether Allianz did so because it didn’t know any better or whether the-appearance-of-a-successor-without-there-actually-being-one was all Gross would accept.  The idea may have been that El-Erian would take over many of Gross’s marketing duties, leaving him more time to concentrate on his portfolio.

4.  Mr. El-Erian resigned from PIMCO early this year.  It’s unclear why, although I can imagine several reasons:

–he was unsatisfied with his role as spokesmodel for PIMCO,

–he realized he would be held to blame for PIMCO’s continuing underperformance, even though he had no power to influence it, and

–Allianz came to understand–perhaps with help from PIMCO’s senior investment staff–that Mr. El-Erian was not a particularly good pick to become PIMCO’s lead portfolio manager.  It’s interesting to note that Mr. El-Erian, although still on the Allianz payroll, plays no role in the post-Gross restructuring.

5.  My guess is that the leadership transition at PIMCO has been completed with the appointment of a skilled veteran PM to lead PIMCO, and that the outcome is a lot better than it could have been.  It remains to be seen whether Mr. Gross can reestablish his performance record at Janus.

 

 

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