March 8 (Bloomberg) -- Bill Gross, musing on his legacy in an April investment outlook, contended that the real test of his greatness as an investor would be his ability to adapt to a new era of shrinking bond market returns.
Almost a year later, the bond king is stumbling.
Gross’s largest fund, the $236 billion Pimco Total Return, has trailed peers for two of the past three calendar years. Clients pulled money from the world’s largest bond fund for a 10th straight month in February even as investors tiptoed back into bonds. In the midst of this, the 69-year-old has been entangled in an ugly split from his former heir apparent Mohamed El-Erian, with allegations of phone surveillance and public humiliations, that has painted a picture of Gross as an autocratic leader struggling to maintain his composure.
The departure of El-Erian and other top executives in the past year has become a distraction at a critical time for Pacific Investment Management Co., the Newport Beach, California firm he co-founded in 1971 and built into the world’s largest fixed-income manager amid a three-decade rally in bonds. As rising interest rates worldwide have prompted investors to flee bond strategies over the past year, Gross’s ability to improve returns is crucial for Pimco to reverse client redemptions.
“This clearly has the potential for being distracting,” said Michael Rosen, CIO at Angeles Investment Advisors LLC, a Santa Monica, California-based consultant to institutions. “We prefer our portfolio managers to simply manage portfolios and not spend time thinking about what’s being said in the media.”
Gross’s Pimco Total Return Fund has declined 0.5 percent in the past year, trailing 76 percent of rivals and underperforming the Barclays U.S. Aggregate Index, according to data compiled by Bloomberg. This year, the fund has advanced 1.8 percent, ahead of 56 percent of peers.
Gross in April wrote an investment outlook where he examined his legacy as an investor, and said his returns and those of investors such as Warren Buffett, Dan Fuss and George Soros were helped by investing in an era of expanding credit that started in the early 1970s, when gold was de-linked from the dollar.
“Perhaps, however, it was the epoch that made the man as opposed to the man that made the epoch,” he wrote.
The billionaire’s introspection came just as bond markets entered a period of turmoil after former Federal Reserve Chairman Ben S. Bernanke signaled in May that the central bank would start unwinding its unprecedented asset purchases. Investors responded by pulling a record $9.6 billion from Pimco Total Return in June, according to data from Morningstar Inc.
Tensions between Gross and El-Erian mounted around that time as performance stumbled and withdrawals continued, according to two people familiar with the firm who asked not to be identified because the matter is private. During an investment committee meeting in June to set guidelines for funds, Gross lashed out at El-Erian, the people said.
In front of more than a dozen of the firm’s top investment executives, Gross said he had a 41-year track record of investing excellence, then turned to El-Erian and asked what he could point to, said the people.
El-Erian on Jan. 21 announced his resignation from Pimco. He declined to comment on the meeting.
“Well, I think Mohamed’s investment record stands for itself as does mine and I would invite any reader to draw their own individual comparisons through publicly released performance numbers,” Gross said in an e-mailed statement March 2. “Collectively, however, we are world class, winners of more Morningstar Manager of the Year awards than any other firm by far. Pimco stands alone in my opinion and in the opinion of millions of other investors.”
The Wall Street Journal first reported details of the June meeting in its Feb. 25 edition. The newspaper, citing people it didn’t identify, said that Gross and El-Erian disagreed over trading strategy, personnel decisions, new products and Gross’s treatment of employees.
“We are considering reducing exposure to Pimco and having those conversations with our investment committee right now,” said Harold Evensky of Coral Gables, Florida-based Evensky and Katz Wealth Management, which invests in Pimco Total Return and other funds. “No matter how good someone is, with all that hype and disruption, combined with the headwinds in fixed income, that could have an impact on everyone’s ability to pay attention to their daily job.”
Gross later told Reuters that he had evidence El-Erian is trying to “undermine” him by talking to the media about conflicts at Pimco, according to a March 6 story published on the news organization’s website. Gross said El-Erian “wrote” the article published in the Wall Street Journal and “indicated” he had been monitoring El-Erian’s phone calls, Reuters reported.
A spokesman for Pimco told Reuters that Gross didn’t make the statements attributed to him, and that he “categorically denies” that his firm listened in on El-Erian’s phone calls. Mark Porterfield, a spokesman for Pimco, declined to comment on the Reuters story when contacted by Bloomberg News, as did Petra Brandes, a spokeswoman for Pimco’s parent Allianz SE. Reuters stands by the fairness and accuracy of its story, Heather Carpenter, a spokeswoman, said in an e-mail.
“This is an astoundingly incorrect claim about a thoroughly reported article that was in the best tradition of The Wall Street Journal,” Colleen Schwartz, a spokeswoman for Dow Jones, which publishes the Wall Street Journal, said in an e-mailed statement.
Pimco suffered record redemptions of $41.1 billion in the Total Return Fund last year, based on data from Morningstar. Clients pulled a net $1.6 billion from the fund in February, according to Pimco, even as investors put $3.5 billion into all bond mutual funds last month, according to estimates from Investment Company Institute.
The redemptions don’t include institutional accounts. Pimco’s assets under management have declined to $1.91 trillion as of Dec. 31, from a peak of $2.04 trillion as of March 31.
“The most important thing in this business is performance,” said Thomas Seidl, an analyst at Sanford Bernstein who covers Pimco parent Allianz. “If Pimco had good performance, people wouldn’t care about the noise so much.”
Richard Salmen, a certified financial planner at Topeka, Kansas-based G Trust Financial Partners, who’s been investing with Pimco for about 15 years, said he would pull money on behalf of clients from the firm’s high yield and all-asset funds if their three- or five-year returns started to decline, or if there were portfolio manager changes following the leadership shakeup.
“It does make me stop and think a little bit harder, but it doesn’t cause a knee-jerk reaction to not own Pimco funds,” Salmen said in an interview.
Gross’s returns are still among the best in the industry over the long run. Pimco Total Return Fund beat 96 percent of peers over the past 15 years, according to Morningstar. By his own standards, that may not be enough unless he can adapt to a changing market.
“Am I a great investor?” Gross wrote in his April investment outlook. “No, not yet.”
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