The news that PIMCO founder Bill Gross is departing for smaller rival fund group Janus Capital rippled through the financial industry Friday.
Experts say it could produce some short-term bumps in the bond market. Longer term, they see it as a likely win for Janus at PIMCO’s expense.
“Given all his issues over last year or so, his departure from PIMCO was not totally unexpected,” said Lou Harvey, president of ratings-provider Dalbar Inc., in an interview. “Something had to give, since there’d been so much tension in the recent past.”
The big surprise, though, is that Gross isn’t retiring, trying to spend more time with his family (like his former PIMCO colleague Mohamed El-Erian) or moving into philanthropy.
“He’s jumping right into Janus, which is not exactly an unknown entity in the investment community,” said Harvey. “It’s a bit of a slap in the face to PIMCO.”
Vanguard founder John Bogle seems to agree.
“I’m sure they are stunned,” he said earlier today on CNBC’s Squawk on the Street,” referring to PIMCO’s parent firm, Allianz. “I never heard this rumor about they might fire him. I don’t know how you fire Bill Gross. I wouldn’t dare do it, no matter who I was and how much power I had. He’s the real thing in an industry based on illusion, and largely on illusion.”
Illusion or not, Gross has the rock-star power a fund group like Janus, which is not one of the 10 largest fund families, needs to raise its assets under management. As of June 30, 2014, PIMCO had $1.97 trillion in assets under management, while Janus had $177.7 billion in assets, of which only $31.4 million were in fixed income.
“You have to see the value proposition to Janus” of bringing on Gross, Harvey said. “He can bring over his followers, so it’s more about an asset win vs. a performance win. He has a huge reputation and long list of followers, and many of them will follow him.”
How many of PIMCO’s retail, advisor, institutional and other clients are likely to move their money to Janus? The exact number isn’t what really counts, the Dalbar CEO explains. “If you get customers asking about whether they should [move assets to Janus], you have already won the game — even if only 20% of investors really move their assets.”
Bogle doesn’t want to overstate the case against PIMCO, but implies the group likely has at least a bit of a tough road ahead.
“It’s obviously not going to be good for PIMCO’s business,” he said, “I doubt that it will be all that harmful, [though] I could be wrong there.”
Bogle acknowledges that Gross could produce another rock-star show at Janus, albeit with a bump or two.
“Well, first of all, Bill is a young man. He’s 14 years younger than I am, but we do get a little erratic,” the Vanguard founder, 85, explained. “He’s very strong-minded, he’s very self-confident, and to make matters even worse he’s usually right, and that drives your adversaries nuts.”
Harvey, though, is more bullish on how Janus will fare with Gross on board.
“Though I don’t want to be a Gross groupie, we can say that he will get a five-year free ride,” he said. “Investors should give him another chance.”
“He is bringing a rock star reputation to Janus,” Harvey added. “Yes, it’s been reduced recently, but it’s still there. His true disciples will stick with him until the last minute.”
And that likely is bad news for PIMCO, some investment professionals say.
“It’s clear now that PIMCO is going to have problems, outflows,” said Nathan Sonnenberg, chief investment officer for Glassman Wealth Services in McLean, Va., in an interview. The “writing was clearly on the wall with the departure of El-Erian.”
Like other fund firms that have experienced serious challenges to its brand, PIMCO faces an uphill battle, explains Chip Roame, head of Tiburon Strategic Advisors, a consulting group.
“Reputational risk is extremely high in the investment management industry. I think a great case example would be the late trading fiasco back in 2003,” said Roame, in an interview. “Firms that get tarnished often struggle to recover.”
Risks around the core business model are “huge for investment managers,” he explains, because integrity, people and processes are what define investment management firms. “They don’t make a fungible product, just their advice,” Roame added.
Still, PIMCO may have what it takes to rebound. “PIMCO is a strong firm, so I would caution against generalizing,” shared Roame, who is hosting the 27th Tiburon CEO Summit in San Francisco in early October.
“PIMCO is deep,” the consultant added. “A year ago or so, they had named six deputy CIOs, which is solid stability. Clearly there was some issue with the prior co-CEO and Gross … [But] nobody is disputing whether Gross or PIMCO is a good manager; there just may be disagreements about their direction.”
Big Vs. Small Funds
Investment experts explain that high-profile moves, like the one Gross just made, are going to happen in a field in which large funds both attract lots of investor and media attention and confront the expectation that they must be highly stable.
“The larger the fund, so the rule goes, the more important the no-surprises philosophy is — and the less important outperformance becomes,” said Mercer Bullard, a law professor at the University of Mississippi, in an interview.
“We saw this with Fidelity and the expectation of a flagship fund moving from outperformance to no surprises,” Bullard explained.
Surprises in the portfolio management moves of Jeff Vinik, he says, raised concerns that the fund manager was a “gunslinger” and prompted his departure.
Investors and fund firms “do not want surprises with their big funds,” Bullard notes, “while they are looking for outlier-type performance from the midsize and small funds.”
Harvey, for one, thinks Janus investors will give Gross several years to prove himself.
Meanwhile, advisors and investors plan to stay tuned.
The new fund Gross is to run for Janus “will be a small fund, and he will be able to have some impact on the performance,” unlike at PIMCO, where Gross was involved with running the “huge” total return bond fund, points out Jonathan Krasney of Krasney Financial in Mendham, New Jersey.
“The only thing constant in this life is change,” the advisor said in an interview.
Emily Zulz contributed to this report.
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