Pimco Chief Economist McCulley Exits as Gross Era Ending

Paul McCulley is leaving Pacific Investment Management Co. less than a year after rejoining the firm, a departure that further diminishes the influence of co-founder Bill Gross at the $1.68 trillion money manager.

McCulley is stepping down from his role as a managing director and the chief economist, a position he said he accepted last year to work side-by-side with Gross. His last day at the Newport Beach, California-based firm will be Feb. 28.

“My mission here is complete,” he said in a statement. “I will continue doing the things I love in other spaces, possibly in the academic arena. Pimco will always be Camelot in my heart.”

McCulley’s exit further reduces the ranks of Gross loyalists in the wake of his abrupt departure Sept. 26 to manage a small fund at Janus Capital Group Inc. Pimco’s new management and investment team are seeking to reassure clients after a year of record redemptions and co-chief investment officers Gross and Mohamed El-Erian left.

In the past year, the manager of the world’s biggest bond mutual fund has hired 28 senior professionals, including Gene Sperling, a former economic adviser to two U.S. presidents, and Nobel laureate Michael Spence as consultants on economic policy. Joachim Fels, former chief economist at Morgan Stanley, was named global economic adviser, the firm said last week.

Record Outflows

Gross’s exit exacerbated already-record outflows, sparking more than $91.5 billion in client redemptions from the Pimco Total Return Fund, the firm’s biggest fund that Gross oversaw until the day he left.

Since then, Pimco has lost other managing directors, with the departure of Saumil Parikh, and as John M. Miller, Brian Baker, and Suhail Dada retire.

McCulley, who appeared at the Tiger 21 group’s conference this week on behalf of Pimco, first joined the firm in 1990 as an account manager. He left two years later for UBS Warburg, where he served as chief economist for the Americas. He returned to Pimco in 1999 as a portfolio manager and also served as head of the firm’s short-term desk.

In the late 1990s, McCulley was named several times as a member of the Institutional Investor All-America Fixed Income Research Team. He has an undergraduate degree from Grinnell College in Iowa and a master’s in business administration from Columbia University in New York.

Financial Crisis

In 2007, he coined the term shadow banking to describe financing sources outside traditional deposit-taking banks. Gross credits McCulley with helping navigate Pimco through the financial crisis and the aftermath of Lehman Brothers Holdings Inc.’s fall. The Pimco Total Return Fund more than doubled from $132 billion at the end of 2008 after its returns beat 82 percent of rivals that year.

“He was instrumental in pointing Pimco to the Minsky moment,” Gross said about McCulley in an e-mail, referring to the term inspired by economist Hyman Minsky that describes a sudden market collapse following the exhaustion of credit. “Without his knowledge of the financial system and how it might react should a Lehman event take place, Pimco would not have fared as well.”

Nor would the Total Return Fund have grown to $293 billion, its peak in April 2013, Gross said, adding “he will be missed more than they know.”

Public Speaker

McCulley retired in 2010 to work as a public speaker, researcher and writer at think tank Global Interdependence Center. After leaving the firm, he grew his hair and beard out. He trimmed both back to corporate standards in August 2013, five months before he and Gross started talking about his return.

He rejoined in May for his third stint, as the firm struggled to stem outflows and reconcile its increasingly diverging management, saying he’s known Gross for a quarter of a century, and has worked “side by side” with the famed manager who co-founded the firm in 1971.

“Paul returned to Pimco last May after being recruited by Bill Gross, with whom he had a close friendship and association for more than 20 years,” Daniel Ivascyn, the firm’s group chief investment officer, said in a statement Friday. “We understand and respect Paul’s decision to step down. He is a great friend of our firm and our people, and we wish him great happiness.”

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