Pacific Investment Management Co. is becoming less dependent on Bill Gross, preparing for an eventual future without the world’s best-known bond investor and adding pressure on its rising stars to live up to his legacy.
Gross is overseeing a smaller share of Pimco’s mutual-fund assets and pulling in less of its cash. His $289 billion Pimco Total Return Fund (PTTRX) 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 before that, Morningstar Inc. (MORN:US) estimates. The portion of mutual-fund assets run by Gross fell to 63 percent as of March 31 from 84 percent a decade ago.
For the $2 trillion Newport Beach, California-based firm, diversifying from funds overseen by its 69-year-old co-founder is critical as interest rates approach zero and investors move beyond traditional U.S. bond funds to capture higher returns. Among the firm’s rising stars are fixed-income managers Daniel Ivascyn of Pimco Income, Chris Dialynas of Pimco Unconstrained Bond Fund and Mark Kiesel, global head of corporate bonds. An expansion into stocks is proving more challenging amid mediocre returns and the departure of Pimco’s equities chief.
“Pimco has tried to downplay Gross and build an institutional brand,” said Burton Greenwald, a consultant based in Philadelphia. “If your appeal is based on a single personality your assets are at risk.”
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Gross, who started the firm in 1971 with two other co- founders, has become almost synonymous with the Pimco name over the past four decades, earning the nickname “The Bond King” in media outlets and Morningstar’s award as fixed-income manager of the decade in January 2010.
Pimco Total Return, the world’s largest mutual fund, beat 97 percent of peers in the 2000s by averaging annual gains of 7.7 percent. The fund outperformed 86 percent of rivals in the past three years, according to data compiled by Bloomberg.
Gross manages 25 U.S. mutual funds with combined assets of $373 billion, including the $24.6 billion Pimco Low Duration Fund and the $7.8 billion Harbor Bond Fund. Gross also oversees an exchange-traded fund following a similar strategy to the Total Return mutual fund. The ETF has grown to $5.1 billion since opening in February 2012.
Total Return took in $21.5 billion in the last two years, just ahead of the $19.7 billion for the much smaller, $26.4 billion Pimco Income, the firm’s No. 2 fund in deposits. Pimco Unconstrained Bond Fund, which has $24.2 billion in assets, got $7.8 billion, and Pimco Emerging Local Bond Fund (PELBX) received deposits of $6.9 billion, bringing its assets to $14.9 billion as of March 29.
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 years ahead.
“All of us, even the old guys like Buffett, Soros, Fuss, yeah -- me too, have cut our teeth during perhaps a most advantageous period of time, the most attractive epoch, that an investor could experience,” he wrote. “Perhaps it was the epoch that made the man.”
Gross wasn’t hinting at retirement and “hopes” to be around for 40 more years, he said in an April 4 interview with Bloomberg Television.
For a company that has relied on a single manager like Pimco, any change can be risky. When Los Angeles-based fund manager TCW Group Inc. 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.
Pimco, a unit of German insurer Allianz SE (ALV), 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. Pimco will keep thriving because of the investment structure Gross created years ago, El-Erian said.
“Bill’s focus and energy continue to drive our firm today,” El-Erian said in an e-mail. “The firm’s extraordinary team of investment professionals exemplify the values and discipline that Bill has instilled in the organization for over 40 years, enabling Pimco’s ongoing evolution.”
El-Erian, 54, has expanded Pimco’s offerings, adding ETFs, equity products, multiasset and alternative funds. The company has introduced 108 funds worldwide since 2010 as it makes the leap from U.S.-oriented bond firm to worldwide asset manager.
Pimco managers without Gross’s name recognition are winning attention for their accomplishments. Ivascyn, 43, was named in the May issue of Bloomberg Markets magazine as the top U.S. bond manager for his performance over one, three and five years. Kiesel, 43, was cited in January as Morningstar’s top fixed- income manager for 2012.
Pimco Income outperformed Total Return in the two years through March, gaining an annualized 13 percent, compared with 7 percent for Gross’s fund. Ivascyn’s fund has another lure with interest rates near record lows: a 5.3 percent yield, compared with Total Return’s 2.9 percent.
“There is an insatiable amount of money out there looking for income, and people are also interested in asset allocation,” said Avi Nachmany, director of research at New York-based consulting firm Strategic Insight. “They want funds that are more flexible and more global.”
Ivascyn, in a March interview, attributed his results to timely investments in bank loans and mortgage debt without U.S. government backing. Newcomers to the fund “need to be comfortable with lower returns going forward,” he said.
Dialynas’s Unconstrained Bond Fund (PUBAX), a flexible portfolio with no benchmark, appeals to investors seeking lower duration, or sensitivity to changes in interest rates, on the assumption that rising rates will cut the returns delivered during a 30- year rally. The fund has a duration of about 1.2 years, versus 4.7 years for Pimco Total Return.
Financial adviser Kurt Brouwer started putting money into the fund last year. Brouwer, who oversees $1 billion as chairman of Brouwer & Janachowsky Inc. in Tiburon, California, and has invested in Total Return since it opened in 1987, is directing less to Gross’s fund “to reduce the overall duration of our clients’ portfolios,” he said in a telephone interview.
“People are looking for funds that may provide more juice,” said Anna Dunn, head of research at Alpha Capital Management in Atlanta, whose $180 million in assets includes shares of the Pimco Real Return Fund. “They are also looking for protection.”
Kiesel oversees about $130 billion in funds and separate accounts, including the $10.9 billion Pimco Investment Grade Corporate Bond Fund. The firm began investing heavily in the bonds of building-materials and appliance companies such as Weyerhaeuser Co. and Whirlpool Corp. (WHR) in a bet on a U.S. housing rebound a year and a half ago, Kiesel said in a March interview. Kiesel put his own money on the line last May, buying a Newport Beach house after selling in 2006 when he decided the real estate bubble was set to burst.
Fund of funds manager Rob Arnott, who buys Pimco funds on a bigger scale than almost anyone, hasn’t allocated much to Total Return lately. An independent adviser, his two mutual funds of funds control a combined $68 billion. All Asset All Authority and All Asset both beat 99 percent of the competition over the past five years, according to data compiled by Bloomberg.
Arnott, 58, uses the money to invest in everything from emerging-market and high-yield bonds to strategies that provide stock exposure. All Asset All Authority Fund (PAUIX)’s position in Total Return fell to less than 2.5 percent as of Dec. 31 from 11 percent as of Sept. 30, 2010.
The funds allocate based on the relative valuation of asset classes, said John West, director and product specialist at Research Affiliates LLC, the Newport Beach-based firm where Arnott is chairman.
Pimco’s equities push, meanwhile, remains a challenge. The firm branched into stocks when it opened the EqS Pathfinder Fund in April 2010 to invest in deep-value securities. Today, Pimco has about $10 billion in its stock funds and separate accounts, or less than 1 percent of assets, as of January.
Pimco’s largest stock fund, the $2 billion Pimco EqS Pathfinder Fund, trailed 88 percent of rivals funds over the past three years, according to data compiled by Bloomberg.
The effort to build a stock business took a blow in January when Neel Kashkari, a former senior adviser to Treasury Secretary Henry Paulson who joined in 2009 to help oversee stocks, said he was leaving to consider a public service career.
“Their attempt to gain more visibility as an equity provider has backfired,” said Geoff Bobroff, a fund-industry consultant based in East Greenwich, Rhode Island.
Still, investment professionals say they like the breadth of Pimco’s choices.
“They have such a robust menu,” Kenneth Sleeper, manager of the $803 million Sierra Core Retirement Fund (SIRRX) said in a telephone interview. Sleeper’s fund, which beat 99 percent of peers in the past five years, has holdings in seven Pimco funds and invests with other firms too.
The shift from Gross may be inevitable, said Russel Kinnel, director of mutual-fund research at Morningstar. Total Return accounts for more than 25 percent of all the money in U.S. intermediate-term bond mutual funds, he said.
“There aren’t many people left to buy it,” Kinnel said.
Gross fueled Pimco’s growth in the 2000s, when stocks lost 1 percent a year amid two bear markets and bonds gained 6.3 percent. He dodged subprime-mortgage-backed securities ahead of the U.S. housing collapse, beating 99 percent of peers in 2007.
Investors poured a record $50 billion into Total Return in 2009, when it overtook Capital Group Cos. Growth Fund of America in assets. Gross kept his fund “at the top of its category, making investors a lot of money,” Morningstar wrote in naming him manager of the decade.
Gross missed a 2011 rally in Treasuries, a year he called a “stinker” as his fund trailed 70 percent of rivals, according to data compiled by Bloomberg. Total Return had almost $5 billion in redemptions that year. Deposits resumed as he beat 95 percent of peers in 2012.
Gross, whose fund is beating 88 percent of rivals this year, raised Total Return’s Treasuries to 33 percent of assets last month, the highest level since July. He has been advising investors to buy government debt, including inflation-linked securities, as the Bank of Japan earlier this month became the latest central bank to announce unprecedented stimulus measures.
Gross’s reputation is still drawing investors to the firm, said Nancy Koehn, a professor at the Harvard Business School who focuses on corporate leaders.
“But that 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,” Koehn said in a telephone interview.
Deep bench or no, a departure by Gross would force customers to reassess Total Return’s prospects.
Ronald Sugameli, chief investment officer of Wellesley, Massachusetts-based Weston Financial Group Inc., whose $1.7 billion includes holdings in Total Return, said his firm would “seriously review” its position if Gross left.
“There probably will never be another Bill Gross,” said Steven Roge, a portfolio manager with Bohemia, New York-based R.W. Roge & Co., whose $200 million in assets includes $17 million in Pimco Total Return.
Still, high-profile exits aren’t always disastrous, he said. When legendary stock picker Michael Price stepped down as portfolio manager at Mutual Global Discovery in 1998, Roge 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,” Roge said. “We made a mistake.”
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