what’s going on at Pimco

1.  It’s important to understand that although investment management companies can have immense revenues and profits, and may employ hundreds or thousands of people, many have management structures more like an old-fashioned corner candy store than an industrial conglomerate.

There’s a Chief Investment Officer who has a history of superior investment performance, and who is sort of like the star player on a basketball team.  He/she manages the portfolios and may (or may not) supervise other, lesser, investment professionals.  And there’s a CEO/Chief Marketing Officer, who handles the acquisition/retention of clients, administration–and everything else.

In the PIMCO case, the CIO is the bond market’s equivalent of Michael Jordan, Bill Gross.  Bonds are its main product.

2.  Mr. Gross is fast approaching 70.  Although he may still be sharp as a tack and healthy as a horse, this is ten years past the age when clients–who, after all, may be staking their own careers on Mr. Gross’s prowess–begin to worry about the management company’s succession plan.  Deutsche Bank, PIMCO’s parent, may have a concern or two as well.

3.  Until recently, interest rates in the US had been on a steady downward course for thirty years, meaning (in hindsight) a bond manager would have been most successful by setting up an aggressive portfolio and holding to it through thick and thin.  That is much harder to do in practice than the last sentence might suggest (think:  the collapse of Long Term Capital Management).  Bill Gross has done the best job over this period.

Still, it seems to me (even though I’m an equity manager) that the bond market has changed.  Mr. Gross himself has on several occasions declared the long bond bull run to be over.  Yet, as far as I can see, he has still committed himself to put up the big numbers he achieved when the rules of the game were more supportive.  The result has been big bets, greater volatility and so-so returns.

4.  All these issue have come to a head with the recent resignation of Mohamed El-Erian, the presumed successor to Mr. Gross.  Mr. El-Erian, the marketing face of PIMCO, was always a curious choice to take the reins from Mr. Gross, in my view.  The fact that he spent so much time marketing implied to me that he was not well-integrated into the portfolio management process.  And the only independent portfolio management experience Mr. El-Erian has had, that I’m aware of, was a short stint at Harvard that ended badly.  I would have pegged him as CEO/Chief Marketing Officer, not CIO.  Yet clients didn’t seem to mind.

Where to from here?

Let’s ignore the gossipy press commentary about conflict between Mr. Gross and Mr. El-Erian, or the former’s reported references to the latter’s lack of investment experience (makes you wonder how he was chosen to succeed Mr. Gross).

–PIMCO appears to have addressed the succession issue with the promotion of a number of successful in-house forty-something portfolio managers.

–That leaves the performance issue.  The prudent course of action would be to try to stabilize performance by reducing risk (read:  get close to the index) and aiming to be slightly north of middle of the pack.  Not very ego-satisfying for Mr. Gross, but the right thing to do.   But that might be like telling MJ not to shoot the basketball.   Let’s see if that can happen.




the shakeup at Pimco

Pimco shakeup

Last week bond management giant Pimco announced a number of high-level promotions.  But the biggest headline was the resignation of its well-known market commentator Mohamed El-Erian.  Mr. El-Erian, who will remain a consultant to Pimco’s parent, the German insurance company Allianz, had been touted as the heir to Bill Gross (who is Pimco’s version of Warren Buffett) when he was hired back from Harvard in 2007.


foundering equity business

A small part of this is an effort to revitalize the equity business Pimco launched several years.  It hasn’t had notable success so far.  Maybe this area didn’t have the strongest leadership.  But Pimco’s main overall marketing message continues to be that bonds are a better choice than stocks.  Hard to sell a product when your own company is telling potential customers to stay away.

who succeeds Bill Gross?

The main issue, however, is Mr. Gross himself, who will be 70 years old on his next birthday.

When a star manager reaches, say 60, the first question any potential pension client (prompted by the pension consulting firm he hires) asks in a due diligence interview will invariably be “Who is your successor?”  The client, who is spending hundreds of thousands of dollars on the search for a new manager, has two worries:  what happens if the star retires?, and what happens if the star stays on but (think: any aging sports figure) begins operating at only a fraction of his former speed?

While the manager’s performance remains stellar, this may not be a serious obstacle.  But if it begins to become merely ordinary, as seems to be the case today with Pimco, the age/successor becomes key.

That’s how I read last week’s news.  The promotion to deputy CIO of two bond managers with long practical investment experience and visible track records attributable to them says to me that clients weren’t happy with the idea of Mr. El-Erian as Mr. Gross’s successor.

Three possible reasons:

1.  Mr. El-Erian is in his mid-50s.  If Mr. Gross were to work for another five years (he’s tweeted he’s up for another 40!), then the age question recurs, only with Mr. El-Erian as the subject.  So to have a credible succession story Pimco needs forty-somethings.

2.  Mr. El-Erian’s credentials are unusual.  He’s an expert on emerging markets debt, which makes up only a tiny fraction of the total bond universe.  He worked for two years as the CIO of Harvard’s endowment, where it isn’t clear whether he had a positive or negative effect on returns.  The scanty press reports I’ve read suggest the latter.  Since his return to Pimco, Mr. El-Erian’s main role seems to have been as the public marketing face of the firm, where his professorial demeanor and/or his Pimco connection make him vary popular with financial talk show hosts.

It could be that Mr. El-Erian doesn’t have a long enough, or strong enough, identifiable track record as a portfolio manager for clients to take a chance on him.

3.  It might also be that one or more of the the forty-somethings–who have strong track records identified with them–were about to leave, either to start their own firms or to join a rival.   Their motivation to depart would be that the door to advancement was closed at Pimco by Mr. El-Erian’s presence.   If so, Pimco would have been compelled to choose between them and Mr. El-Erian.

Of course, it’s possible that…

4.  … Mr. El-Erian is leaving Pimco voluntarily.  But the lack of detail he’s providing about his future plans suggests otherwise.