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Category Archives: Recent Market Action
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.
Current Market Tactics, September 26, 2014
I’ve just updated my Current Market Tactics page. Flattish US market, with stock-specific movements we can trade.
comparing IPOs: Facebook (FB) and Alibaba (BABA)
J\Last Friday, just over two years after the IPO of Facebook (FB) in mid-2012, another major tech company, the Chinese internet conglomerate Alibaba (BABA), made its debut on Wall Street. BABA received a warm reception. This is in sharp contrast to the FB experience, which will certainly go down as one of the bigger stock market disasters of the decade (the century?).
The differences, as I see them:
the FB fiasco
1. FB depended on a single lead underwriter, Morgan Stanley (MS).
2. Morgan Stanley was unusual in that it had made a big effort to remain in touch with Silicon Valley after the collapse of the internet bubble in 2001. It seems to me to have believed FB was its last best chance to cash in on more than a decade of visits and phone calls. It also thought there was no follow-on business to be had. Therefore, its tech investment bankers appear to me to have been more concerned about maximizing their fee income on FB than on ensuring that the buyers had even a mildly profitable experience.
3. Subsequent media reports, presumably based in considerable part on information provided by the underwriters, make it clear that the management of FB was obsessed with the idea of not “leaving any money on the table.” The CFO, David Ebersman, seems to have badly misunderstood how the process of going public works–in particular, the negative effect on company morale of a failed IPO. This is very odd, since most often a CFO is brought in precisely because he/she knows how going public works.
4. Shortly before the IPO date, the IPO price was boosted by about 12% and the number of shares on offer was raised by 25%. In other words, at the last-minute the issue size was upped by MS and Ebersman by almost 50%–soaking up a ton of money that would otherwise have been available for buying in the aftermarket. Virtually none of this went to FB; is all went to early investors, and some employees, cashing out.
5. The FB offering was unusually highly reliant on (inexperienced) retail investors. It appears many tried to “game” the IPO by asking for, say, 5x what they wanted to end up with (see my original post on the FB IPO). Imagine their shock when instead of the $50,000 worth of FB they expected, $250,000 worth of stock–and the accompanying bill–plopped into their accounts.
6. Then, of course, the NASDAQ trading computers broke down. This made it impossible to trade, or even to get an accurate quote. In fact, for at least several days, retail sellers didn’t know how many shares they may have bought or sold on the morning of the IPO, or at what price.
BABA is much better, so far
BABA used six lead underwriters, not one–although MS was included among them.
Retail exposure was minimal.
BABA listed on the New York Stock Exchange, avoiding NASDAQ.
BABA did price at about 5% above the high end of the announced range (apparently indications of interest were huge). But the size of the offering wasn’t boosted, meaning plenty of buying power was still left for the aftermarket. BABA was also arguably priced at a discount to comparable Chinese internet firms, while FB was priced at a premium–just as its business was beginning to slow.
Abe’s arrows: implications for the EU
Japan’s Shinzo Abe began his three economic arrow campaign–intended to rescue his country from a quarter-century of economic malaise, shortly after taking office in December 2012.
The arrows consisted in:
–sharp depreciation of the currency
–massive deficit spending, and
–supposed structural reform of a highly government-protected and increasingly inefficient industrial base.
I’ve thought from the outset that Mr. Abe would not be able to muster the political courage/clout to fire a meaningful third arrow. Unfortunately, this has proven to be the case so far. As a result, the “arrows” have given a huge economic gift to the entrenched industries of yesterday that dot the Japanese landscape, at the cost of lowering the living standards of the average Japanese citizen and a massive decrease in national wealth.
Demographically, the EU resembles the Japan of ten or fifteen years ago. Each member country has a profound belief in its own exceptionalism that derives from its geographical and cultural heritage. Economically, Europe has also seen a generation of political/cultural elites staunchly defending the status quo, lining their own pockets while living standards for the average citizen deteriorate and the industrial/financial national wealth is frittered away.
The easy comment–one I’ve made a number of times–is that the EU, and more specifically Continental Europe, is a new instance of the Japanese disease slowly starting to unfold.
However, though the heavy betting has to be that the Continent will follow down the same path blazed by Japan, could the economic result be different from that of the Land of Wa?
Maybe so.
–For one thing, Europe has the fate of Japan as a cautionary tale.
–Europe also has the example/leadership of Germany.
–Organized labor is a distinct political force in Europe, rather than simply an arm of management, as in the case in Japan. This can present its own set of problems, but at least there’s a voice at the bargaining table demanding that increased profits be shared with workers.
–The least well-functioning parts of Europe have already substantially reformed themselves once in the recent past, when they vied for entry into the euro–although admittedly backsliding occurred almost instantaneously after admission.
I think the place to look for signs of deviation from the Japan road map is Italy, where Prime Minister Renzi is attempting to make basic economic improvements.
investment significance?
I think there’s at least a short-term opportunity to profit from holding European multinationals. Whether this is simply a “trade,” meaning we have to be seriously looking to exit in maybe a year, or more than this will depend on Europe’s ability to break the grip of the status quo. Watch Italy.