How the mighty have fallen. Earlier this month, the once towering Total Return Fund of Pacific Investment Management Co. hit a milestone. Mary Childs of Bloomberg News observed that PIMCO’s “flagship fund fell below $100 billion in assets for the first time in more than eight years, leaving it with about a third of the money it managed at its 2013 peak.”
Perhaps it is only a coincidence, but the collapse in assets under management followed the departure last September of founder and Chief Investment Officer Bill Gross. PIMCO did well for a while after the financial crisis and the firm more than doubled in size, while bonuses to the top executives and managers became enormous. However, investment performance eventually lagged, and after several tumultuous years Gross was fired in a palace coup.
There are hardly any peers to Bill Gross and PIMCO. The data set of star managers who captured so much attention and assets is almost nil. We are left with powerful anecdotes but few hard data points.
A modest pattern does seem to emerges, though, and it doesn’t seem to bode well for the fund that loses a superstar. Bear with me as I speculate, but it seems that once an ace manager departs, it is only a matter of time before the outsize reputation of that fund departs as well.
The closest person I can come up with to compare to Bill Gross is Fidelity’s Peter Lynch. He was one of the only rock-star fund managers who gracefully retired at the peak of his game. Running Fidelity’s Magellan fund for 13 years (from 1977 to 1990), Lynch averaged a 29.2 percent annual return before calling it quits. During the time he ran the fund, assets under management increased from $18 million to $14 billion. (And that was back when a billion dollars was real money.)
His initial successor, Morris Smith, only stayed for two years, and after a rocky start, posted good results, outperforming the Standard & Poor’s 500 Index. Assets under management increased almost 50 percent to $20 billion during his tenure. Smith was replaced by Jeffrey Vinik, whose stewardship of the Magellan fund wasn’t especially successful for investors. It did however, work out splendidly for Vinik, and pretty well for Fidelity.
Vinik ran the fund from July 1992 to June 1996. Magellan’s assets ballooned to $50 billion. But the returns suffered, underperforming the S&P 500 in every year but one.