massive redemptions at PIMCO? …I don’t think so

Late last week, bond guru Bill Gross, founder and public face of PIMCO, resigned from that firm to go to work for a much smaller rival, Janus.  This has led to speculation that the departure of Gross, who crafted the superior long-term record of the PIMCO flagship Total Return bond fund, would cause the loss of as much as 30% of the $1.8 trillion PIMCO has under management.

I don’t think the outflows will be anywhere near this bad, for a number of reasons:

1.  PIMCO deals in load funds, meaning that retail investors must pay a fee to buy them.  Two consequences:

–owners find the fact of the fee, not necessarily the size of it, a psychological barrier to sale.

–the load-fund client typically places a sell order through his broker.  The fact he can’t just go online in the middle of the night and redeem is another barrier to sale.  When called, the financial adviser can make reasoned arguments that persuade the client to hold on.  The broker may also convince the client to move to another bond fund in the PIMCO family, so that money leaves the Total Return fund but stays in the group.

What’s to stop a broker from using the Gross departure to call all his clients and tell them to take their money from PIMCO and place it with a different family of load funds–thereby generating another commission for him/her?  Generally speaking, such churning is illegal.  The transactions might even be stopped by the broker’s own firm.  Worse yet for the broker, this kind of call is pretty transparent as a fee grab.  It might also invite questions about where the broker was when the Gross performance began to deteriorate.

2.  My experience in the equity area is that while no-load funds can lose a third of their assets to redemptions in a market downturn.  Under 5% losses have been the norm with the load funds I’ve run.  Even smaller for 401k or other retirement assets.

3.  Money has already been leaving PIMCO for some time.

–Bill Gross’s performance has been bad for an extended period.

–He’s been acting like a loose cannon.

–Mohamed El-Erian’s leaving PIMCO was particularly damaging.  I think most people recognize that Mr. El-Erian is a professional marketer, not an investor.  But he was being paid a fortune to replace Gross as the public face of PIMCO.  Why leave a sweet job like that  ..unless the inside view was frighteningly bad?

At some point, however, PIMCO will have lost all the customers who are prone to quick flight.

PIMCO will try hard to get clients to stay.  It will presumably concede that it waited much too long to rein Mr. Gross.    But, it will argue, a seasoned portfolio manager at PIMCO, Dan Ivascyn, has now taken over the Total Return fund.  Supported by the firm’s broad deep research and investment staff of more than 700 professionals, Ivascyn will stabilize performance.  So the worst is now over.  In fact, Gross’s departure may have been a blessing in disguise.

4.  Arithmetic.  About $500 million of PIMCO’s assets come from its parent, Allianz.  Presumably, none of that will leave.  Third-party assets total about $1.3 trillion.  A loss of 30% of total assets would mean a loss of over 40% of third-party assets.  That would be beyond anything I’ve ever seen in the load world/

5.  Although individuals are prone to panic, institutions act at a more measured pace.  It would certainly be difficult to persuade institutional clients to add more money now, but it should be easier to persuade them to allow the assets they now have at PIMCO to remain, while keeping the firm on a short leash.

In sum, I can see that in the wake of the Gross departure, PIMCO could easily lose 10% of the third-party assets it has today.  I think, however, that the high-end figures are being put out for shock value and without much thought.

thinking (some more) about PIMCO

Pacific Investment Management Company (PIMCO) built itself into a bond market juggernaut over the past forty+ years, thanks to a soaring bond market, savvy marketing and the superior fixed income management skills of now-septuagenarian Bill Gross.

I’m an admirer of PIMCO’s organizational success.  But, at the same time, I can’t help thinking that the firm’s “New Normal” campaign of the past several years is mostly marketing hype–and wrongheaded, at that.  No matter what the economic or market conditions, the PIMCO conclusion is “Avoid stocks and buy more bonds!!!”  For all but the most risk-averse investors, that’s bad advice.  A first-rank firm should be better than that.

This is not what I want to write about, however.  I just want to declare that I have a vaguely anti-PIMCO point of view.

PIMCO has been having problems recently.  Mr. Gross has been underperforming.  Clients–even long-term clients–have begun to head for the door.  So, too, Mr. Gross’s putative successor, Mohamed El-Erian, who resigned from the firm citing irreconcilable differences between himself and Mr. Gross.  Press reports suggest Mr. Gross had been beating Mr. El-Erian over the head with his lack of actual portfolio management experience as a reason for dismissing his questions and concerns.

Great gossipy stuff   …but not what should concern us as investors.

Mr. El-Erian may not be an accomplished portfolio manager, but that doesn’t mean he isn’t a very shrewd individual.  What would make him a high-profile, high-prestige, high-paying job, instead of just hunkering down, busying himself with his considerable marketing responsibilities and waiting Mr. Gross out?

El-Erian’s decision to leave, I imagine, came when he realized that this strategy wouldn’t work.  Mr. Gross’s behavior wouldn’t change.  And it could well have consequences that would tarnish Mr. El-Erian’s image, as well.  After all, although apparently powerless, he was the co-Chief Investment Officer.

I imagine that because Mr. Gross has had such phenomenal success for so long with an aggressive strategy, he sees no reason to adopt a more conservative approach–even though, intellectually at least, he knows that the great bull market in bonds in the US that rewarded that behavior is over.  So he continues to take extra risk.  But that translates only into extra volatility in today’s world, not extra return.  Think:  Jon Corzine, or any number of prominent hedge fund managers.

Growth stock investors went through a similar existential crisis as the Internet bubble imploded in 2000, so it wouldn’t be surprising to me if this were the case with risk-oriented bond investors today.

 

My point (finally!):  we know about Mr. Gross.  How many invisible clones does he have, however, running banks’ bond trading desks, fixed income hedge funds or private equity operations?  …what fallout will occur as/when underperformance forces all of them to change tack?  Will it be six months of really ugly bond returns?  How much will spill over into the equity markets?