Sept. 11 (Bloomberg) -- Mohamed El-Erian unexpectedly resigned as head of Harvard University's $34.9 billion endowment fund to return to Pacific Investment Management Co., manager of the world's largest bond fund, as co-chief executive officer.

The 49-year-old executive, who led Harvard Management Co. to its best results in seven years after taking over in February 2006, said in a statement that he was returning to Newport Beach, California-based Pimco to be closer to family members.

Harvard recruited El-Erian to fill the void left in September 2005 by the departure of 15-year investment chief Jack Meyer, who took almost three dozen Harvard officials to start a Boston-based hedge fund. El-Erian rebuilt the staff and guided the fund to a 23 percent gain in the fiscal year ended June 30, adding $5.7 billion to the world's biggest university endowment.

``It's a huge loss for Harvard,'' said Ken Rogoff, a Harvard economics professor and former chief economist at the International Monetary Fund, where El-Erian worked 15 years, in an interview. ``He is just incredibly impressive and dynamic and a brilliant person. I'm sure it won't be easy to find a replacement.''

At Pimco, El-Erian will be co-chief executive officer and co-chief investment officer, starting in January, the fund said in a statement. El-Erian, a former managing director and senior portfolio manager at Pimco, will share the CEO position with Bill Thompson and the top investment job with company founder Bill Gross, 63.

Pimco Succession

Thompson said neither he nor Gross plans to step down ``at this time'' and both were elected to five-year terms by Pimco's managing directors. Pimco manages $693 billion in assets, 20 times as much as Harvard, including the $103 billion Pimco Total Return bond fund.

``It's a boon that they were able to get him to come back,'' said Paul Herbert, senior mutual fund analyst at Morningstar Inc. in Chicago, who covers Pimco. ``While he was there folks had wondered if he might be a successor on the investment side for Bill Gross. Maybe this is a bit of an indication that when Gross finally intends to step down.''

El-Erian earned $2.3 million the five months of fiscal year 2006 that he was employed by Harvard Management, the most recent information available.

``If Pimco wants somebody, they can get them,'' Herbert said. ``Obviously, he was making a lot of money working at Harvard but they can get somebody if they want them.''

Search for Replacement

El-Erian and Harvard President Drew Faust weren't available for comment, Harvard spokesman John Longbrake said. El-Erian also didn't respond to e-mailed messages.

``Mohamed has done an impressive job guiding and reorganizing Harvard Management Co., and we will miss his leadership,'' said James F. Rothenberg, treasurer of Harvard University and chairman of the fund's board. ``In addition to achieving excellent investment returns, he has led ambitious efforts to rebuild HMC during his time as CEO.''

Rothenberg said in the statement that a search for El- Erian's replacement will begin promptly. Harvard Management, founded in 1974, invests about half of the school's endowment and oversees external managers who handle the remainder.

El-Erian's return last year beat Harvard's five-year average of 18.4 percent and the 12.3 percent average over the same period for endowments and foundations with more than $1 billion in assets, according to Wilshire Associates. The fiscal 2007 performance was the Harvard fund's best since 2000 and the fourth-best since the management company's founding.

Emerging Markets

``Obviously we would prefer that he stay longer, but HMC is in great shape,'' Longbrake said in an e-mail. ``In 18 short months, HMC has completed the transition and rebuilding phase and established conditions for sustaining superior returns over time.''

El-Erian was considered one of the world's most influential emerging-markets managers when he was hired by then-Harvard President Lawrence Summers. El-Erian had been a Pimco managing director for more than six years, overseeing $28 billion in the bonds of developing nations and their companies.

El-Erian is the son of an Egyptian diplomat and is fluent in Arabic, English and French. An economist, he received bachelor's and master's degrees from Cambridge University in England, and a second master's and a doctorate from Oxford University.

IMF Background

At the IMF, El-Erian rose through the ranks to become a deputy director. He left in 1997 and was a managing director at Salomon Smith Barney until joining Pimco, a unit of Munich-based insurer Allianz AG. El-Erian's name was put forward in 2004 to be the IMF's managing director.

Meyer left Harvard to form Boston-based investment firm Convexity Capital Management LP, taking more than 30 Harvard managers and other employees with him. The departures included almost all of Harvard Management's internal bond investors.

El-Erian said he wouldn't let Harvard become overly reliant on a single team or strategy again. He cut the fund's traditional dependence on bonds, shifting more assets to buyout funds and non-U.S. markets. He also hired senior managers from Stanford University, Deutsche Bank AG and elsewhere.

``Harvard has been fortunate to have someone as skillful and effective as Mohamed El-Erian responsible for the management of our endowment,'' Faust, Harvard's president since July 1, said in the school's statement.

El-Erian reached outside Harvard to hire several executives, including Harvard Management's first chief financial officer, the head of a new foreign-exchange unit, a U.S. bond director and a compliance officer.

`Institutional Anchors'

In an interview last December, El-Erian said the reorganization would establish ``strong institutional anchors'' to help smooth any transition ``should something happen to one of the senior staff or should a portfolio management team leave.''

Under Meyer, Harvard managers were criticized by alumni groups and scrutinized in the media for their compensation. In the fiscal year 2003, bond managers Maurice Samuels and David Mittelman earned a combined $69.2 million. Both joined Meyer at Convexity. Several officials left Harvard Management to form their own investment shops.

Besides Meyer, Harvard Management's alumni include Jonathon Jacobson, who formed the hedge-fund firm Highfields Capital Management LP; Michael Eisenson of Charlesbank Capital Partners LLC; and Jeff Larson, founder of Sowood Capital Management LP, all in Boston.

To contact the reporters on this story: Matthew Keenan in Boston at mkeenan6@bloomberg.net; Brian K. Sullivan in Boston at Bsullivan10@bloomberg.net.

Last Updated: September 11, 2007 18:43 EDT