The Bond King is Back … Sort Of
After a rough 2013 from both a performance and public relations standpoint, Pacific Investment Management Co., the big asset manager better known as PIMCO, is on a roll.
Many of its funds are outperforming their benchmarks and once again posting cash inflows after a disastrous bet in the bond market and some awkward public moments on the part of the firm’s mercurial founder, William Gross.
The 70-year-old Gross, long known as one of the bond market’s best investors, even received a strong vote of confidence last week from the management team at its parent company, German insurance giant Allianz, for which PIMCO manages roughly $1.97 trillion in global assets.
Allianz CFO Dieter Wemmer said in a statement following second-quarter earnings that he was happy with the rebound – and Gross’s management of the Newport Beach, California-based firm. "The key for future results is the investment performance, which is at a very high level: 89% of Pimco's assets under management outperformed their benchmarks on a three-year basis," Mr. Wemmer said.
“This is certainly a good sign for the firm as a whole,” said Barry Fennell, senior research analyst at data provider Lipper. “I do think that it’s true that they (Allianz management) have faith in [Gross’s] ability to manage the firm,” he added.
Still questions linger about management overall and Gross in particular. In 2013, disagreements became common between Gross and Mohamed El-Erian, PIMCO’s then chief executive and heir apparent. Those loyal to Gross attributed the rift to poor performance of the funds run by El-Erian, while others said it had more to do with Gross’s imperious management style.
Gross’s performance was lacking as well; he made a bad call on interest rates, leading to losses and investors yanking money from PIMCO’s top funds, including the massive PIMCO Total Return Fund. El-Erian resigned in January, bringing additional pressure from shareholders for management changes as PIMCO’s performance suffered.
Since El-Erian’s departure, PIMCO has installed six deputy chief investment officers to fill El-Erian's role, and investors seem to like the decision so far.
“It does seem as if the six-person investment committee has given investors a little bit more comfort with the fact that other senior portfolio managers are in place at the firm and are getting more responsibilities,” Lipper’s Fennell said. “The whole situation with Mohamed leaving gave large investors like pension funds some pause to think about whether they have too much allocated to the fund.”
PIMCO is known for focusing on fixed-income securities, such as government and corporate bonds, although it has been broadening its offerings as of late. Gross is considered one of the bond market’s top forecasters, earning him the nickname “the bond king.”
But in March, the company’s newly-appointed chief executive Douglas Hodge said there was an “urgency” to diversify into equities following a year of painful outflows from its fixed-income funds as clients look for ways to protect themselves from rising interest rates. Indeed, PIMCO’s Total Return Fund logged a record $41.1 billion outflow last year.
Gross, despite his expertise in the fixed-income market, has even said the asset manager is committed to shifting from a U.S.-oriented bond firm to a diversified asset manager.
A spokesman for PIMCO didn’t return telephone calls and requests from FOX Business to speak to Gross.
Despite recent troubles, PIMCO’s growth has been extraordinary in recent years. The firm rode the bond-market rally that began when the Federal Reserve began purchasing long-term Treasury bonds in March 2009—with the Total Return Fund seeing assets grow from $144 billion in March 2009 to $252 billion in March 2012.
The Fed’s massive purchases of bonds to ignite U.S. economic growth also spurred PIMCO’s performance; its Total Return Fund spiked nearly 14% in 2009 while the benchmark only returned 6%.
But investors began pulling money from the fund in May of last year when the Fed first signaled it would unwind stimulus measures and bonds came under pressure. Gross bet the so-called tapering of the Fed’s bond purchases would halt the bond rally. It didn’t, as 30-year bond yields continued to drop.
After Gross’s bearish bond price call proved incorrect, investors pulled cash out of PIMCO’s top funds. In fact, the Total Return Fund posted a -1.92% return in 2013, a drastic turnaround from the 10% return in 2012 and the first year the fund posted a negative return since 1999. That was still better than its benchmark Barclays Capital U.S. Aggregate Bond Index, which had a -2.02% return. Still, it was a far cry from the 30% surge in U.S. equity prices.
Then came some major public relations miss-steps: In April, Gross dedicated the first half of his widely-followed investment outlook letter to his dead cat, “Bob.”
“Treasure your pets and all living things. Eventually we all stop living,” he said in the letter. Gross’s odd behavior continued at Morningstar's annual investor conference in Chicago in June when he went on stage to a cover of “Smooth” by Carlos Santana wearing sunglasses.
These performances may have served as a passing laugh on Wall Street had it not been for the continued underperformance of his fund. Gross’s bets on shorter-term debt have continued to hurt him this year, with the Total Return Fund trailing 91% of its peers in July when it posted a negative 0.52% return, according to Morningstar.
Longer term, Gross and his funds remain winners—which is why many investors remain committed to PIMCO and Gross’s leadership of the firm. The Total Return Fund has posted an annualized gain of 6.8% on average over the past 15 years, beating 96% of its peers. Nine of the firm’s 15 largest mutual funds are beating at least 75% of their peers so far this year, according to data from Morningstar.
In the second quarter of this year, the Total Return Fund posted a total return of 2.37%, compared with a return of 2.04% from its benchmark, outpacing 77% of its rivals in that span, according to Morningstar. The fund is still trailing 77% of its peers for the year.
Gross, who has said he doesn’t plan on leaving the firm any time soon, doesn’t manage any of the funds that are outperforming their benchmarks.