Mohamed El-Erian, widely viewed as the successor to Pacific Investment Management Co.’s Bill Gross, resigned after six years as the firm struggles to stem record redemptions from the world’s largest bond fund.
El-Erian, 55, will leave his dual roles of chief executive officer and co-chief investment officer in mid-March, according to a statement yesterday from Allianz SE, the Munich-based parent of Pimco. Douglas Hodge, the firm’s operating chief, will become CEO, and money managers Andrew Balls and Daniel Ivascyn will become deputy investment chiefs, overseeing the firm’s $1.97 trillion alongside CIO Gross.
“The time has come for me to step down as of mid-March,” El-Erian wrote in an internal memo sent to employees, which didn’t elaborate on the reason for the decision. “What happens longer-term is an open question. I have no plans as of now.”
El-Erian was the first Pimco manager to share the title of investment chief with Gross, a role that cemented his standing as the heir apparent to the firm’s 69-year-old founder. Responsible for transforming Pimco from a bond shop into a diversified fund manager, El-Erian spearheaded a push into stocks, a move Allianz CEO Michael Diekmann said in October was proving harder than he had expected. With clients pulling a record $41 billion from the $237 billion Pimco Total Return last year as interest rates rose, Pimco needs alternatives to traditional bonds to keep assets from shrinking.
“For Pimco, it is a disappointment,” Kurt Brouwer, chairman of Tiburon, California-based Brouwer & Janachowski Inc., who has invested in Pimco funds since the 1980s, said in a telephone interview. El-Erian “was brought in as the next generation of management and obviously it didn’t work out.”
El-Erian’s departure, coupled with the sabbatical taken by generalist money manager Chris Dialynas, means the firm’s investment committee that sets strategy guidelines will lose two of its permanent members. The committee incorporates Pimco’s world views into investment strategies for money managers. Gross, in a December interview posted on Pimco’s website, said a model portfolio established by the firm’s investment committee is the driving force behind the positioning of its funds.
“He’s definitely a loss to any company,” UBS AG Chairman Axel Weber said about El-Erian in an interview with Francine Lacqua at the World Economic Forum in Davos, Switzerland today, adding that he’s known him for “many years.” “Pimco had a tough year last year, there were outflows, and the whole asset management business has been very tough, in particular if you’re a bond investor.”
Under El-Erian, who made a name for himself investing in emerging-market debt early on in his career at Pimco, the bond firm more than tripled its assets under management as investors flocked to fixed income after the 2008 financial crisis. Money in non-traditional funds rose to 66 percent of Pimco’s assets from 56 percent when El-Erian became CEO, according to the internal memo to employees.
He is listed as manager of eight mutual funds with $10.2 billion, according to data compiled by Bloomberg, a fraction of the firm’s overall assets. His departure won’t prompt an exodus from Pimco funds, said Brouwer.
“As an investor this is not an issue for me,” Brouwer said. “I cannot imagine anyone saying, ‘I will not be in a Pimco fund because El-Erian is not there.’”
Gross brought El-Erian back to Pimco in 2007 following a stint running Harvard University’s endowment because he knew “Mohamed could fill an important part of the puzzle” in planning for succession, Gross said in a 2010 Bloomberg interview.
The Harvard endowment performed well for months after El-Erian left for Pimco in December 2007. It rose 8.6 percent while the S&P lost almost 15 percent in the fiscal year ended on June 30, 2008. Six months later, Harvard began to go into a financial tailspin and would pay banks almost $1 billion to terminate wrong-way bets on interest-rate swaps made prior to El-Erian’s arrival. The endowment fell 27.3 percent in fiscal 2009.
Pimco’s four main U.S. equity mutual funds collectively manage less than $5 billion in assets and have had mixed performance since the first one, Pimco EqS Pathfinder Fund, started in April 2010. Pimco Global-Multi Asset Fund, which opened in October 2008 to put to work the principles outlined in El-Erian’s book “When Markets Collide: Investment Strategies for the Age of the Global Economy,” has returned an annualized 6.2 percent in the past five years, trailing 82 percent of rivals, according to data compiled by Bloomberg.
In picking Hodge as CEO, Pimco is separating its day-to-day operations from its money-management function and leaving Gross firmly in charge of investment decisions. Unlike El-Erian, Hodge has not risen through the investment side of the firm. He joined Pimco in 1989 and previously led business in the Asia-Pacific region from Tokyo.
“Pimco’s fully engaged. Batteries 110% charged. I’m ready to go for another 40 years!” Gross wrote in a Twitter message yesterday.
Pimco as a whole had $30.4 billion in net redemptions during 2013, compared with net deposits of $62.7 billion in 2012, the biggest drop in organic growth among the 10 largest U.S. mutual-fund families, according to Morningstar Inc.
The appointment of Ivascyn and Balls as deputy CIOs elevates the position of the two money managers as clients are fleeing traditional bond funds and seeking ways to earn higher returns in the bond market.
Ivascyn beat peers in 2013, even as other Pimco managers struggled. His $29.9 billion Pimco Income Fund returned 4.8 percent, better than 97 percent of rivals, according to data compiled by Bloomberg. Over the past five years, the fund beat 99 percent of peers.
“He is my number one pick to succeed Bill Gross,” said Steven Roge, a money manager with Bohemia, New York-based R.W. Roge & Co., which oversees more than $220 million. “He has been their most successful investor.”
Morningstar last week named Ivascyn and co-manager Alfred T. Murata as its top fixed-income managers of the year for 2013, praising them for their strong performance last year and during bear markets in 2008 and 2011. Ivascyn manages money for 10 Pimco funds, according to data compiled by Bloomberg.
Andrew Balls, the brother of Ed Balls, treasury spokesman for the U.K. opposition Labour Party, is head of European fund management at Pimco. He is listed as a money manager on eight Pimco funds, according to data compiled by Bloomberg, including the $3.5 billion Pimco Global Advantage Strategy Bond Fund. The fund, whose lead manager was El-Erian, beat 49 percent of peers over the past three years, according to data compiled by Bloomberg.
El-Erian will stay on the international executive committee of Allianz and advise the management board of Europe’s biggest insurer on global economic and policy issues, reporting directly to CEO Diekmann, according to the statement.
“The fact that Allianz now appoints two deputy CIOs may indicate that Allianz sees a need to strengthen Pimco’s portfolio management decisions,” Sanford Bernstein analysts, including Thomas Seidl, wrote in a note to clients today. “We deem it unlikely that Mr. El-Erian will be a contender to replace Mr. Diekmann in 2015 as we understand he lacks experience in running a global insurance business and does not speak German. We would therefore not be surprised if he left the group in the not too distant future.”
Allianz fell 2 percent to 129.95 euros by 1:46 p.m. in German trading, valuing the company at 59.3 billion euros ($80.5 billion). The Bloomberg Europe Insurance Index, which tracks 24 companies, declined 0.6 percent.
El-Erian, the son of an Egyptian diplomat who’s fluent in English, French and Arabic, joined Pimco in 1999 as a senior member of the portfolio management and investment strategy group. He left in 2006 to serve as CEO of Harvard Management Co. and revamp the university’s endowment before rejoining Pimco in 2007. He also worked at the International Monetary Fund for 15 years, and served as a deputy director at the IMF from 1995 to 1997. El-Erian received a bachelor’s and master’s degree in economics from Cambridge University as well as a Ph.D. from Oxford University.
Along with Gross, he was responsible for popularizing the term “new normal” in 2009, which describes an era of lower returns, heightened government regulation, diminishing U.S. clout in the world economy and a bigger role for developing nations. Prior to that, the term was used in a May 2008 Bloomberg News article by Rich Miller and Matthew Benjamin. He regularly writes commentaries for newspapers and websites on topics ranging from the global economy to education, and is a frequent guest on television channels such as CNBC, CNN and Bloomberg Television.
“I have been extremely honored and fortunate to work alongside Bill Gross, who is one of the very best investors in the world,” El-Erian said in a statement. He said in a 2010 interview that unlike Gross, who often acts on his “amazing instinct,” he himself is a worrier by nature and deliberates over every decision.
El-Erian did not respond to an e-mail and a phone call seeking comment.
“Pimco is huge and every consultant on the planet has a proportion of clients that will have some exposure to them,” said Ian Toner, director of strategic research at Seattle-based consultant Wurts & Associates, which advises institutional investors on more than $74 billion in assets at Pimco and elsewhere. “That makes this one of the biggest investment-management stories of the year.”