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.