For every action there is an equal and opposite reaction.
So when ‘Bond King’ Bill Gross, founder of the biggest bond firm in the world, PIMCO, said he was stepping down from his empire to head to smaller firm Janus Capital, the shock waves could be felt all over Wall Street.
“When you bought the PIMCO funds that Gross managed you were buying the manager,” said Charles Sizemore, of Dallas-based Sizemore Capital Management. “That was your sleep at night assurance right there — that you had Bill Gross managing your money.”
While Gross’ long term performance is legendary, lately his investors have been losing sleep. In August his flagship fund, the PIMCO Total Return Fund, saw its 16th straight months of outflows. Cumulatively, investors had pulled $US68 billion out of the fund at that point.
Things were choppy on the management side of Gross’ role as well. In January his heir apparent and co-CIO Mohamed El-Erian stepped down from the firm abruptly. Stories started leaking about Gross’ showboat management style. Employees were unhappy, and he was taking all of the credit for PIMCO’s success, they said.
Even publicly, Gross’ behaviour became odd. In June he took the stage at the Morningstar Investment conference in a pair of sunglasses, walking on to Carlos Santanna and Rob Thomas’ ‘Smooth.’ Reports say the employees at PIMCO said ‘it’s either him or us.’
Finally, this week, the Wall Street Journal reported that regulators have been investigating Gross’ flagship Total Return ETF. They are trying to decide whether PIMCO undervalued assets within the security to make returns appear larger.
Something had to give.
“He’s getting up there in age and he doesn’t need the money, and he doesn’t need the prestige,” Sizemore pointed out. “He just wants to be left alone to trade bonds.”
And indeed that is the impression Gross and Janus gave in their press release, when Gross said that he was leaving to escape the “complexities” of management.
Sizemore says he has a small position in Gross’ Total Return ETF, but he’ll likely slowly liquidate it. As for what Gross will be doing at Janus — “I would definitely be interested in looking at it,” said Sizemore.
Not all of that money will go to Janus, though, says another institutional money manager.
“I would assume the money will flow to DoubleLine and other recent top performers,” he said. “I think it’s a longer term positive for PIMCO but in the near term it will be painful as they form a new identity and outflows continue.”
Other managers are concerned about what this news will do to the bond market, not the firms themselves.
“I don’t know if I would characterise it as good or bad for any of them,” said Brian Kelly of Connecticut’s Brian Kelly Capital. “Bill Gross certainly has a following so he’ll bring some assets, but what I’ll be watching are the ripple effects in the high yield market.”
Kelly thinks that PIMCO redemptions may harm a market that has already been suffering from a lack of liquidity as investors exit. There’s also a high correlation between performance in the space and retail investor withdrawals from the space.
“I’m wondering…’Does this [news] spook the retail investor?’,” said Kelly.
The PIMCO High Income Fund is down 8% on the news Gross left — so perhaps it does.
“I wouldn’t bet on this being the catalyst for people to move out of bonds,” an institutional money manager told Business Insider. “I think some will, but probably a decent bit flows to other funds.”
And when that happens maybe Wall Street will crown a new Bond King.