A couple of weeks after his stunning departure from Pacific Investment Management Co., Bill Gross couldn’t disguise the hurt of having to leave the giant bond manager he had co-founded 43 years before. “Had there been a reasonable way to continue there, I would have stayed to my last breath,” Gross wrote in his inaugural “Investment Outlook” online client letter for his new employer, Janus Capital Group. “But slowly and with great hesitation, I came to realize that it was time for me to leave. It happens sometimes to founders!”
Gross is determined to have a second act, but what of PIMCO? Can a firm that was synonymous with its star manager survive his departure? No question looms larger for the firm and its German parent, insurer Allianz.
With $1.8 trillion in assets at the end of September, PIMCO is not about to disappear, but the firm has been badly bruised by a lengthy period of underperformance at its flagship Total Return Fund and from the months of internal feuding that culminated in Gross’s departure.
“At this point, we are advising our clients to divest from those strategies most associated with Bill Gross — namely, PIMCO Total Return — and we have a watch status on other PIMCO strategies, such as emerging-markets debt,” says Jeffrey MacLean, head of Wurts & Associates, a Seattle-based investment consulting firm that provides advice and outsourced CIO services on $76 billion in assets for pension funds, endowments and other investors.
PIMCO has been working overtime to stanch the outflows and present a new face — or rather, faces — to investors. At the head of the pack is Daniel Ivascyn, co-manager of the firm’s Unconstrained Bond Fund and the newly minted group CIO.
On the morning of September 29, the first business day after Gross’s resignation, Ivascyn and CEO Douglas Hodge joined the rest of the firm’s senior executives and all of its 240 portfolio managers in working the phones to reassure clients and persuade them to stay. “Clearly, our clients have questions for us, and we are all working as hard as we can, in as efficient a manner as possible, to reach out to them and tell what we believe is a very strong story regarding our investment process going forward,” Ivascyn tells Institutional Investor.
Ivascyn is supported by five sector-focused CIOs. Scott Mather, CIO of U.S. core strategies, came to PIMCO in 1998 from Goldman, Sachs & Co., where he traded mortgage-backed securities. He has arguably the toughest job, having taken over from Gross as lead portfolio manager of Total Return. The other two Total Return portfolio managers are Mark Kiesel, an 18-year PIMCO veteran whose title is CIO for global credit, and Mihir Worah, CIO for return and asset allocation, who joined the firm in 2001 from the University of California, Berkeley, where he did postdoctoral research in nuclear physics.
European portfolio management is headed by Andrew Balls, the firm’s London-based CIO for global fixed income, who joined PIMCO in 2006 after eight years as an economics correspondent and columnist at the Financial Times. Rounding out the CIO group is Virginie Maisonneuve, CIO for equities, also based in London. She joined the firm earlier this year with almost three decades of investment experience, most recently as head of global and international equities at Schroders. Maisonneuve may have nowhere to go but up: Equities account for less than 1 percent of total assets, despite a push by PIMCO two years ago to expand in the asset class.
Ivascyn and his co-CIOs emphasize that they oversaw 75 percent of PIMCO’s assets before Gross’s departure and that, unlike the deposed bond king’s, their performance over the past three years easily exceeded their benchmarks. Morningstar named Ivascyn and his Income Strategy Fund co-manager, Alfred Murata, as fixed-income managers of the year for 2013.
Ivascyn is a 44-year-old Massachusetts native who fondly recalls being part of “a nerdy bunch who would gather to do detailed fixed-income modeling” during his days at the University of Chicago Graduate School of Business. His low-key, collegial style is a notable departure for the firm. “Fixed income used to be boring, and we want to get back to that mind-set,” says Ivascyn, who joined PIMCO in 1998 from Bear Stearns Cos. “We tend to be investors, as opposed to show people.”
“PIMCO can’t do much to prevent a massive outflow other than an all-hands-on-deck approach that stresses a move away from Bill Gross’s investment decisions and management style,” says Adrian Miller, director of fixed-income strategy at GMP Securities.
The hardest sell will be limiting further redemptions at Total Return, which has lost $91 billion since April 2013. “It is no problem for us to rebalance,” insists Mather. “We are not changing our alpha objectives. And we have every reason to expect it will continue to be a core holding for so many investors in their fixed-income portfolios.”
Meanwhile, rival firms are wooing PIMCO clients. DoubleLine Capital had more than $800 million in inflows from former PIMCO clients in the three days following Gross’s departure. BlackRock took out a full-page ad in the New York Times on October 2 with the headline “Rethink Your Bonds.” And, of course, Gross himself would like to take some of his former clients over to Janus, where he has started an unconstrained bond fund with just $66 million.
Many large institutions are taking a wait-and-see attitude toward PIMCO. “We have no plans to make a change at this time,” says Joe DeAnda, spokesman for the California Public Employees’ Retirement System, the largest U.S. pension, which has about $1 billion of its $77 billion in fixed-income investments with PIMCO. “We are reviewing our holdings with PIMCO,” says Eric Sumberg, spokesman for the New York City Office of the Comptroller, which oversees five public pension funds with combined assets of $160.5 billion, including $7.1 billion managed by PIMCO.
Other consultants were already bearish on PIMCO before Gross quit. “We were telling our clients that there were more-compelling alternatives out there — funds with better short- and longer-term track records,” says Todd Rosenbluth, director of mutual fund research at New York–based S&P Capital IQ. “Gross’s departure is an added element of risk.”
See also our feature, “Allianz’s Gross Problem: More Than Just the Bond King.”