(Originally published here.)
The Wall Street Journal’s colorful account of managerial tensions at the Pacific Investment Management Co. has led Felix Salmon to argue that legendary bond investor Bill Gross should retire. According to Salmon, the article makes Gross out to be an egotistical tyrant whose “natural tenure at Pimco has come to an end.” I don’t buy it.
Salmon’s argument rests on a few unsupported claims about Pimco’s clients:
Pimco itself gets mandates not because it has the best performance, but more because it’s the ultra-safe choice: it can pass any conceivable due diligence test, it has been around for decades, and it has multiple layers of checks and balances. El-Erian knew exactly what his job was, in public and in private: to paint Pimco as a disciplined supertanker of an investment vehicle, with committees and open dissent and a well-tested procedure for arriving at investment decisions, which was much more robust and much more trustworthy than any individual could ever be. In other words, to move Pimco (or at least the 90% of Pimco which isn’t Gross’s Total Return Fund) as far as possible from idiosyncratic Bill Gross risk as possible. Gross is old, he’s erratic, and he’s generally not someone you want to park your money with on the quasi-permanent time horizon which is used by Pimco clients like sovereign wealth funds and foundations.
I can’t read the minds of Pimco’s clients, but this seems wrong. Every investor has a choice between allocating their money to active money managers who bet on the markets, such as Gross, and handing over their savings to index-hugging mutual funds that charge rock-bottom fees.
Institutional investors often argue that their long-time horizons give them greater flexibility to take risk compared with individual savers, which is one reason why they have embraced the private-equity and hedge-fund industries during the past 15 years or so. If institutional investors hire Pimco to run money for them, it isn’t because they are looking for a safe and conservative steward but a manager who can beat its benchmarks by betting aggressively on the markets.
For years, Bill Gross has been that manager. His flagship Total Return Fund has beaten the Barclays U.S. Aggregate bond index almost every year since inception. (Recent performance has been less exemplary than past years, but still good.) There simply isn’t an excuse for paying those kinds of fees unless you expect performance to materially differ from a standard buy-and-hold index. If anything, this performance helped subsidize the rest of the company by convincing investors that some of Pimco’s other products were also worth investing in.
Compare this to the track record of Mohamed El-Erian, who recently left Pimco, ostensibly because he couldn’t get along with Gross. El-Erian ran a few of Pimco’s smaller funds but he was most associated with Pimco’s Multi-Asset Fund, which opened at the end of 2008. Since then it has returned an average of 5.4 percent annually and has been ranked near the bottom of Lipper’s Global Flexible Portfolio Funds category. Traders I’ve spoken with who knew El-Erian say that while he was a thoughtful economist, he wasn’t a trader of Gross’s caliber.
Many successful businessmen tend to be eccentric characters. Bill Gross’s habit of giving his subordinates occasional “demerits” seems harmless compared with Steve Jobs’s noxious personality. I’d be shocked if clients hadn’t known about Gross’s quirks long before the recent Journal article. Pimco — as well as Allianz SE, its parent company — shouldn’t worry about the supposed reputational damage the recent news story has caused.
(Matthew C. Klein is a writer for Bloomberg View. Follow him on Twitter.)
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