Coverage: Gross departure puts PIMCO on defensive

A lot has been written since the bombshell news of Bill Gross’s departure from Pimco, the company he founded and built into a bond powerhouse. Now the money is flowing out, and Pimco is trying to hang onto as much of it as possible.

Mary Childs wrote for Bloomberg that even executives at Pimco’s parent company had no idea what was coming:

Even the executives at Allianz SE (ALV) didn’t know.

It was 2:28 p.m. in Munich on Sept. 26, and Bill Gross, in charge of $2 trillion as chief investment officer at Pacific Investment Management Co., had just announced that he was joining Janus Capital Group Inc. (JNS), a struggling stock fund manager. With Allianz shares starting to slump, the German insurer called its U.S. asset management arm to confirm that the most influential bond manager had just quit.

Pimco, based in Newport Beach, California, hadn’t known either, according to people familiar with both firms.

Gross, 70, had left the bond giant he helped found 43 years earlier without telling its executives, a last act of defiance by a great investor whose strained relationship with his lieutenants had brought him to the verge of being ousted. As shares of Allianz fell the most in almost three years and Pimco traders worked to contain the fallout of his departure — the news sparked a selloff in markets for Treasuries, credit derivative indexes and the Mexican peso — the billionaire was on a plane to Denver, where Janus is based.

The Wall Street Journal story by Gregory Zuckerman and Kirsten Grind reported that executives were hitting the phones to settle investors:

Executives at Pacific Investment Management Co. hit the phones Monday in a campaign to persuade clients to stick with the firm, even as Wall Street traders placed bets against its holdings, seeking to exploit the sudden departure of co-founder Bill Gross.

Pimco executives, among them Chief Executive Douglas Hodge and the firm’s new portfolio-management team, hosted a string of calls with financial advisers at Wall Street firms, including Merrill Lynch and Morgan Stanley, to explain why the firm will thrive despite Mr. Gross’s exit, according to people familiar with the matter.

“We’re energized, we’re prepared and we’re strong,” Mr. Hodge said to a group of Morgan Stanley financial advisers Monday afternoon on a teleconference, according to a person familiar with the matter.

In Miami, Pimco Executive Vice President Joseph Deane had been previously invited to talk to a gathering of about 300 Morgan Stanley advisers about fixed-income markets. Instead, after a question from a financial adviser about how Pimco was handling Mr. Gross’s departure, he made the case that they should remain loyal to the firm because Pimco has smarter employees than those at rivals, according to a person in attendance.

The Economist cited three reasons for Gross’s departure, including his poor management:

There appear to be three main reasons behind Mr Gross’s abrupt exit. The immediate cause was his abrasive management style. He had long planned to hand the reins to Mohamed El-Erian, a globetrotting economist who had worked for the IMF, managed Harvard’s endowment and chaired Barack Obama’s Global Development Council. But in January Mr El-Erian, who served as PIMCO’s co-chief investment officer, abruptly resigned. Although the firm’s leadership repeatedly encouraged Mr Gross to promote a more collegial atmosphere, he alienated many senior executives, in one instance by criticising some by name in a large group e-mail. After that, many of them allegedly threatened to resign if he remained in charge.

Moreover, Mr Gross’s public behaviour has grown increasingly peculiar of late. He has always been quirky—his public investment commentaries usually include long digressions on topics such as his late cat, and he once led an impromptu conga line on the PIMCO trading floor. He gave a speech at an investment conference earlier this year that struck many as unbecoming of a man to whom savers had entrusted nearly half a trillion dollars. He delivered it in sunglasses, compared himself with Justin Bieber, a 20-year-old pop star known for behaving badly, and told journalists to repeat that he was “the kindest, bravest, warmest, most wonderful human being you’ve met in your life.”

Such mis-steps might have been forgiven had Mr Gross’s charmed streak as an investor continued. But over the past three years, several misjudgements have caused his funds to lag.

Forbes reporter Maggie McGrath said that the real winner might be Janus and its fixed income funds:

“We think Janus’ fixed income segment may grow to $65 to $70 billion versus $31 billion as of June 30, 2014, due to higher net flows over the next few years related to new products launched by Bill Gross,” wrote Credit Suisse analyst Craig Siegenthaler in a note on Friday. As a result of this potential influx of money, Siegenthaler raised Janus’ earnings forecast to $1.02 per share in full-year 2015 earnings (up from 96 cents per share) and to $1.23 per share for full-year 2016 earnings (up from $1.03 per share). Siegenthaler also raised Janus’ price target from $14 per share to $17.25.

Moody’s analyst Neal Epstein was a little less bullish on Janus’ prospects, writing in a note on Monday that “it will take a considerable amount of time and success for any new product to make a meaningful contribution to Janus’ overall financial picture.” Epstein also said that “financially, Janus’ fortunes remain tied to its traditional equity funds, which have suffered from weak performance and remain in outflows,” and so Gross’ arrival does not significantly change his view on the company.

It’s worth noting that the fund that Gross ran, the PIMCO Total Return Fund, logged its 16th straight month of outflows in August as interest rate concerns continued to weigh on investors, so any outflows going forward won’t mark a complete reversal of the Total Return Fund’s prior behavior. Gross’ departure merely offers a new reason for investors to pull out of PIMCO — though it could increase the rate at which investors move their money.

Gross definitely has rock star status in the investing world, so it makes sense that people would move money to follow him. It’s possible that investors will have more options for well-run bond funds. Or it’s possible that Bill Gross is having issues and his erratic behavior will continue at Janus.