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Pimco rehiring a former top exec to quell uproar over CEO resignation

BusinessFinanceMutual FundsMoney and Monetary PolicyFinancial MarketsPersonal FinanceMorningstar Incorporated
Pimco rehires Paul McCulley to fill new chief economist position
'Perceptions about Pimco have changed in the wake of El-Erian's departure,' analyst says
Pimco's Total Return fund is up 3.3% this year, but still trails 71% of bond-fund peers

Pacific Investment Management Co. is rehiring a former top executive in its latest bid to overcome the furor still lingering from the surprise resignation of its chief executive early this year.

The Newport Beach bond fund giant said Tuesday that Paul McCulley, a highly regarded former executive, will return to the firm in the newly created position of chief economist.

McCulley's return marks the latest management change since the messy exit of Mohamed El-Erian, who announced his resignation in January. McCulley is expected to work up to 100 days a year.

El-Erian's unexpected departure and subsequent revelations about tension between him and Pimco co-founder and bond manager Bill Gross trained an unpleasant spotlight on the inner workings of the company.

Its internal machinations are important to millions of Americans mainly because Pimco's flagship Total Return fund is a staple in 401(k) retirement accounts.

Pimco, one of the biggest and most influential investment firms in the world, quickly restocked its executive and investment ranks in the aftermath of El-Erian's exit.

But powerful clients such as pension-fund managers remained unsettled by the loss of the chief executive, who was seen as a balance to Gross.

Pimco is known for its pressure-cooker atmosphere, and El-Erian and Gross had clashed openly, according to reports in the parting's aftermath.

"Perceptions about Pimco have changed in the wake of El-Erian's departure," said Jeff Tjornehoj, a senior analyst at Lipper, the mutual fund research firm.

"Bringing in a well-known name who has a deep background in economics, as Mohamed had, will certainly go a long way toward easing fears that Pimco has lost its way," Tjornehoj said.

The El-Erian saga drew extra attention because it came at a time when Gross' historically superlative investment performance had fallen off. El-Erian's departure exacerbated doubts about Pimco's ability to recapture the investment touch that made it a Goliath of the mutual-fund industry.

The Total Return fund — the world's largest bond fund, which is managed by Gross — lost 1.9% of its value last year, only its third money-losing year since 1988, according to Morningstar Inc. The fund has gained 3.3% this year, but is still trailing 71% of its bond-fund peers.

The fund has fared better over the last five years, but far from the eye-popping returns for which it once was known. Over that time, it is trailing 42% of its peers.

The middling performance has unsettled individual and professional investors.

Investors yanked a net $40 billion from the Total Return fund last year and an additional $11 billion so far this year, according to Morningstar. Its assets, once approaching $293 billion, have fallen to about $230 billion.

Pimco is hoping that large clients will see McCulley as a steadying hand who can help defuse the Pimco drama, Tjornehoj said.

"They would not have brought him back if it would not have placated some clients," Tjornehoj said. "Having a strong executive presence from the past as a brand ambassador definitely helps the rebuilding of the Pimco brand."

McCulley began at Pimco in 1990 but left two years later to become chief economist for the Americas for UBS.

He returned to Pimco as a portfolio manager in 1999, and became head of the firm's short-term bond desk. He retired from Pimco in late 2010 to join a think tank.

McCulley, 57, will serve on Pimco's influential investment committee, which sets broad policy for the firm's mutual funds.

"Paul is an experienced and respected thought leader on macroeconomic issues and central banks and he will be an important contributor to our investment process," Gross said. "During his previous years at Pimco, he played an instrumental role in anticipating and understanding economic dynamics that led to the global financial crisis."

Aside from the challenges at Pimco itself, the outlook for the firm's signature bond investing is clouded by changes in the financial markets, particularly the expected increase in interest rates that could weigh heavily on bond investment returns in coming years.

Pimco has tried to branch into stock investing, but so far has met with limited success.

walter.hamilton@latimes.com

Copyright © 2014, Los Angeles Times
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