PIMCO’s Got Bigger Problems Than The Tabloid Drama We’ve Been Reading About Lately

Bill Gross
Bill Gross PIMCO / YouTube

Since reports of Bill Gross’ issues with co-CEO Mohamed El-Erian surfaced last month, it seems like the media has made it its mission to air PIMCO’s dirty laundry.

It makes you wonder if PIMCO’s investors watching this drama are getting skittish.

Sure, all of this drama has little to do with investment philosophy. But the distraction can’t be helping PIMCO’s analysts do their jobs.

What would you do if these were the stories coming out about your money manager?

The Wall Street Journal reported that it was Gross’ management style that drove El-Erian away, and that he doesn’t even like employees looking him directly in the eye.

Reuters‘ story on Thursday may have been even worse for Gross. “You’re on his [El-Erian’s] side,” he said to reporter Jennifer Ablan. “Great, he’s got you, too, wrapped around his charming right finger.”

If you talk to the wealth managers that allocate funds to the $US2 trillion AUM mutual fund, though, there are two distinct issues at PIMCO: this El-Erian-Gross drama and the fund’s performance.

It is the latter that makes them move their money first.

“Since the events have unfolded, because we only had 5% [invested with PIMCO], it hasn’t caused us to do anything,” said one money manager. “But I think if we had more we would have sold down.”

Over the several months, the manager said he’s drawn his allocation to PIMCO down to 5% from 20%-25% of his bond portfolio.

The money that was once Gross’ is now in the hands of competing bond firms like DoubleLine Funds, Jeff Gundlach’s firm with about $US47 billion in assets under management.

This is how money managers think about it. We now live in a low interest rate world — one that coincided with the end of the 30-year bull market for bonds. This is an environment where you want a steady hand at the helm. Instead, however, investors say Bill Gross has just been plain wrong about the market.

So citing a sickly bond market, poor returns, and longer-than-desired holding periods, investors have been taking money out of PIMCO for months.

In February, alone they took $1.6 billion from the PIMCO Total Return Fund, which Gross manages himself, and that’s the least amount they have withdrawn since May 2013. In 2013, investors redeemed a total of $US41.1 billion from the fund.

Gundlach’s DoubleLine, on the other hand, saw inflows of $US252 million in February into the institutional share class of the fund.

So far this year, Total Return has returned 1.9%, lagging 59% of its peers.

“I think there’s a combination of things that should have people concerned,” said one institutional investor. “First, the macro perspectives of Gross have been shaky the last few years including the recent Chinese Renminbi tweet, and the US Treasury ‘mea culpa’. Everyone has times that they’re wrong, but the concern might be more process versus outcome.”

A year ago, Paul Schatz of Connecticut’s Heritage Capital pulled his firm’s money from PIMCO entirely, citing these issues. Now his money’s with smaller bond fund managers, like Dan Fuss’ Loomis Sayles.

Watching this drama between Gross and El-Erian makes Schatz even gladder he did it. Without El-Erian, it seems there’s no clear plan for succession.

Worse still, he says this conflict is showing that Gross is an example of a financial industry phenomena that Schatz affectionately refers to as “a cowboy.”

“What’s becoming apparent is that Bill Gross is just a one-man shop,” he said.

El-Erian was not only the heir apparent, it seems, but also a “ying to the yang kind of a calming influence at an massive firm,” he continued. “Maybe I’m an outlier but I think it’s far more deep problem. It really calls into question the culture and structure of the firm.”

Other institutional money managers have said that this succession issue makes them “uncomfortable” putting their money with PIMCO as well.

That said, there is a long term bull argument for Gross, and it goes like this: Every money manager takes his lumps, and for Gross those lumps — in the market, in his own strategy, and in his personal/professional life, are all converging.

“My gut reaction is ‘this too will pass’. He’s [Gross] survived bull markets and bear markets,” said Charles Sizemore, CEO of Dallas-based wealth management firm Sizemore Capital Management LLC. “I would not so much worry that his performance is going to slip. What I would worry about is if you’re investing in a fund and lot of people are pulling money out of it — it’s not good to be invested in a fund with big outflows.”

Why? Outflows bring out nasty tax issues and troublesome asset sales. There is, however, a way to still invest with Gross without having to deal with mutual fund outflow issues.

“If you still like Gross and you think this is just a temporary rough patch, I would say stick with the [PIMCO] ETFs, the mutual funds outflows aren’t going to be an issue with that,” said Sizemore.

Either way, consensus is that things are going to be ugly for at (the very) least the near time.

Can you handle that?