Pimco Prepares for Life After Bill Gross
Pacific Investment Management Co. is becoming less dependent on Bill Gross, its 69-year-old co-founder, as it prepares for an eventual future without him. Gross, who started the firm in 1971 with two others, has become almost synonymous with Pimco over the past four decades, earning the nickname “The Bond King.” The $2 trillion firm is grooming younger managers and venturing into equities as investors move beyond traditional U.S. bond funds to capture higher returns. “Pimco has tried to downplay Gross and build an institutional brand,” says Burton Greenwald, an industry consultant in Philadelphia. “If your appeal is based on a single personality, your assets are at risk.”
Any change can be risky for a company that relies on a single manager. When fund manager TCW Group fired Jeffrey Gundlach as investment chief in December 2009, clients yanked about $25 billion, almost a fourth of the firm’s assets. Twenty months later, his old TCW Total Return Bond Fund had shrunk by more than half. He is now head of money manager DoubleLine Capital.
Pimco, owned by German insurer Allianz, has been working to reduce that risk, hiring Mohamed El-Erian in 2008 to become chief executive officer and share the chief investment officer role with Gross. El-Erian, who writes investment commentaries and often appears on television, has expanded Pimco’s offerings, adding exchange-traded funds as well as equity, multiasset, and alternative-asset funds. The company has introduced 108 funds worldwide since 2010. “Bill’s focus and energy continue to drive our firm today,” El-Erian said in an e-mail.
Gross fueled Pimco’s growth in the 2000s. He posted average returns of 7.7 percent a year for the decade, beating the performance of 97 percent of similar funds. In 2009, Pimco Total Return pulled in a record $50 billion from investors and overtook Growth Fund of America to become the world’s largest mutual fund. Gross kept his fund “at the top of its category, making investors a lot of money,” Morningstar wrote in January 2010 when it named him manager of the decade.
As the company expands, Gross is overseeing a smaller share of Pimco’s mutual fund assets and pulling in less of its cash. Total Return got 19 percent of Pimco’s new mutual fund deposits in the two years ended March 31, down from 42 percent in the prior period and 79 percent in the period before that, Morningstar estimates. The portion of mutual fund assets run by Gross fell to 63 percent as of March 31, from 84 percent a decade ago. The shift may be inevitable, says Russel Kinnel, director of mutual fund research at Morningstar. With $289 billion in assets, Total Return accounts for more than 25 percent of all the money in U.S. intermediate-term bond mutual funds, he says, and “there aren’t many people left to buy it.”
Other Pimco managers are winning attention for their performance. Daniel Ivascyn of Pimco Income, with $26.4 billion in assets, was the top U.S. bond manager based on his returns over the past one, three, and five years, according to Bloomberg Markets. Mark Kiesel, who oversees about $130 billion in funds and managed accounts at Pimco, was cited in January as Morningstar’s top fixed-income manager for 2012.
Gross’s reputation still draws investors to the firm, says Nancy Koehn, a professor at Harvard Business School who focuses on business leaders. “But the fact that they are willing to let other people at Pimco handle their money means they trust those other managers can deliver the way Gross does,” she says.
Recently, Gross has become more reflective in his monthly online commentaries. In the April outlook, called “A Man in the Mirror,” he suggested that the careers of the great investors of the past three or four decades were fueled by an expansion of credit that may be coming to an end, and that investing may become more difficult in the years ahead. He wrote that “old guys” including himself, Warren Buffett, and George Soros, “have cut our teeth during perhaps a most advantageous period of time, the most attractive epoch, that an investor could experience. Perhaps it was the epoch that made the man.” Gross isn’t thinking about retirement. “Sixty-nine years old is the new fifty-nine!” he wrote in an e-mail.
“There probably will never be another Bill Gross,” says Steven Rogé, a portfolio manager at R.W. Rogé, whose $200 million in assets includes $17 million in Pimco Total Return. Still, high-profile exits aren’t always disastrous, he says. When legendary stock picker Michael Price stepped down as portfolio manager at Mutual Global Discovery in 1998, Rogé sold his stake. Two years later, “a not-so-well-known guy named David Winters took over, and he turned out to be a phenomenal investor,” Rogé says. “We made a mistake.”