Firing PIMCO in the Post-Gross World?

What we have witnessed since the Janus announcement of Bill Gross’s exit from PIMCO to Janus Capital on September 26th is that many retail customers within the first 3 days have jumped ship and sold their investments in the PIMCO flagship fund – the Total Return Fund. I doubt that most of these investors or their brokers and advisers have a prudent process for evaluating their investment decisions. I suggest that most of these investors and advisers have simply reacted rather than taking the necessary time to investigate and draw an informed decision. Being a co-fiduciary in advising and overseeing retirement plan assets, we understand clearly that, in discharging our responsibilities in the sole interest of plan participants, we must develop a process, among other things, to prudently select and monitor investments and investment managers. As such, when a manger leaves a fund that is on a plan investment menu, we simply look to the plan’s written investment policy for guidance.

Questions have been raised about the management at PIMCO and of the Total Return Fund, the perceived liquidity challenge in the case of an exodus en masse, the “brain drain” of talents leaving PIMCO to join Bill Gross or other asset managers, and the negative impact on other funds and sub-advised assets throughout the PIMCO franchise; just to name a few. Although the investment policy or process may differ from client to client, in addressing the manager change issue at PIMCO, we have the following thoughts at this time:

1. Do not treat Bill Gross and PIMCO as a special case no matter how one views Bill Gross. We should follow the same process and procedures used in addressing any investment strategies when the lead manager exits.
2. PIMCO has a well-developed investment process that is centered around its secular and cyclical forums. These forums invite global experts to inform PIMCO on specific issues, challenges and views while promoting PIMCO managers and analysts to debate their own views. These deliberate and thought provoking events form the final PIMCO global macro views through a Socratic process. Bill Gross was a prominent participant, but it was not in his professional best interest to ensure that his view was the final view even if it is contrary to the consensus view derived from each forum. These PIMCO defining forums are to continue post-Bill Gross; I suggest perhaps with even greater vigor.
3. PIMCO’s bottom-up fundamental research globally through their network of local analysts is not affected and is expected to continue its contributions on a firm wide and fund level.
4. At its peak, the PIMCO Total Return Bond fund had almost $293 billion in assets. Although Bill Gross was the bigger than life manager and had the final say as to how each dollar of assets would be invested, the fund’s performance was a direct result of Bill Gross’ reliance on the top down (secular and cyclical forum derived views) and bottom up analytical views. Certainly, Bill Gross’ judgment, conviction and timing regarding each trade is unique to him, but it is very difficult to separate him from the PIMCO process that he helped to cement in delivering alpha.
5. The well-publicized team of three seasoned PIMCO managers, Scott Mather (since 1998), Mark Kiesel (since 1996) and Mihir Worah (since 2001), will succeed Bill Gross as the new portfolio management team. They have all done well in their individual management capacities as portfolio managers for their funds and investment strategies. In fact, these “new” managers have contributed to the bottom up security selections and ideas for many years with Bill Gross at the helm.
6. Since the departure of Mohammed El-Erian earlier this year, PIMCO has made material changes to its investment committee where Bill Gross was the de factor CIO. The original investment committee was restructured and 6 deputy CIOs were named. The purpose of the change was recognition that the office of the CIO should include more opinions and diversity as the firm has grown significantly and branched out to non-fixed income solutions. After Bill Gross’ exit, the naming of Daniel Ivascyn as the Group Chief Investment Officer andAndrew Balls, Mark Kiesel, Virginie Maisonneuve, Scott Mather and Mihir Worah as co-Chief Investment Officers is a natural progression to the ascension process that was initiated since Mohammed El-Erian was the co-CIO and co-CEO with Bill Gross.
7. Liquidity management for the Total Return Bond has been brought up by many as a concern as investors head for the exit. This is a concern on two levels. The first being how the new managers will manage the flow, and the second is the managers’ time being devoted to these extraordinary activities or distracted from the day-to-day operations of the fund. Being a $200 billion plus fund, the daily flow management and the dislocation created in the fixed income market during the 2008 financial crisis have trained PIMCO to be an astute liquidity manager. This does not appear to be an issue (i.e. dislocation) for the fund even during the initial reaction days to Bill Gross’ exit. Barring a significant and sharp rise in unforeseen liquidation from the fund and coupled with a global financial or banking event, PIMCO’s existing and fortified daily liquidity management process should hold up well.

This discussion should not be perceived in any way as diminishing the significant contribution by Bill Gross to PIMCO and the Total Return Fund. However, it is also important to recognize that PIMCO is more than one man, and one should not discount the investment process and the human capital that has been and remains at PIMCO.

A prudent process to monitor an investment option or manager requires patience and information. The element of time cannot be rushed or abridged. PIMCO, and especially the Total Return Fund, should be on every fiduciary’s or investor’s watch list. We should seek and obtain as much (factual) information as available to assess the organization. Since PIMCO serves as a sub-advisor to about 40 open-end mutual funds, we should also research and understand what actions they take in affirming or removing PIMCO as a sub-adviser and why. Each mutual fund has its fiduciary duty to serve in the best interest of its shareholders, and in a mutual fund environment, it is a matter of public record.

In conclusion, from our due diligence process thus far, we are assured that the investment process at PIMCO remains unchanged and the core intellectual capital at PIMCO has not altered. Until data and facts inform us that the exit of Bill Gross sufficiently affects the investment monitoring criteria to justify one or more PIMCO funds being removed, we are staying the course and keeping a close watch. Investors and fiduciaries may come to different conclusions based on similar facts and circumstances but it is the prudent process that best decisions are most likely generated.