Having ridden charismatic leaders to bond-market dominance, Pacific Investment Management Co. is now switching to bland.
Reeling from Friday's messy departure of its co-founder and public face, Bill Gross, the Newport Beach firm is counting on a radical shift to a team-oriented management approach to stem a worrisome -- and accelerating -- outflow of investments from its signature Total Return Fund.
Pimco elevated Daniel Ivascyn, a relatively unknown insider, to replace Gross as chief investment officer over the $2-trillion fixed-income giant. It also named three other insiders to co-manage the Total Return Fund that Gross headed by himself.
Pimco has been steadily promoting the fund that Ivascyn has been running, the $50-billion Income Fund, since the beginning of the month, according to a person familiar with the matter.
The moves follow months of internal turmoil at the firm, which included the messy resignation of Pimco's chief executive, Mohamed El-Erian, in January.
"Most people who invested in Total Return invested because of Bill Gross," says Michael Rosen, principal and chief investment advisor at Angeles Investment Advisors, based in Santa Monica. "If he's no longer there, the reason to invest there goes away, if that was your thesis."
Pimco will have to craft a new pitch for investors, Rosen said: "We have a deep team, we have lots of smart people, we will turn this around. … And frankly, the old guy was hurting more than he was helping.'"
Indeed, the Pimco crisis presents something of a paradox: Investors had been dissatisfied with Gross' performance in recent years (Total Return has lagged behind benchmarks and rival funds), and were already deserting the fund at a steady pace. And yet, his departure turned a steady outflow into a gusher, totaling $10 billion just since Gross left, a figure that could total as much as $100 billion, according to the Wall Street Journal, citing a person familiar with the matter.
The fund has suffered 16 straight months of steady redemptions that saw the fund assets under management drop from $293 billion in early 2013 to $222 billion as of the end of last month, according to Morningstar Inc.
Monthly redemptions had typically totaled $3 billion to $4 billion in recent months. The firm will report its fund flows publicly at the end of the month.
"Yes, people were concerned," says Todd Rosenbluth, director of ETF & Mutual Fund Research at S&P Capital IQ. "But one of the things that you could hang your hat on, if you were an investor, is that [Gross has] been doing this a long time. ... When the Band-Aid was ripped off, it causes a lot of anxiety."
The next few weeks will be critical for Pimco, which will be emphasizing performance over personalities to keep investors in the funds, but that presupposes investors stick around long enough to give the new team time to prove itself.
Its challenges will be compounded as the bond market heads from a period of persistently low interest rates, which had produced a long-running bull market for bonds, to one of rising rates. That would force funds to take more defensive positions, making it difficult to outperform past results.
"Some investors are going to exit without giving management a chance," Rosenbluth says. "And some may wait a few months and still may choose to exit."
But most analysts believe Pimco can withstand a large amount of withdrawals without unduly affecting performance, or the bond market overall, and that the firm would benefit from having the long-running turmoil surrounding Gross come to an end.
"The positive is that it's a more sustainable long-term business model, more team-oriented," says Jon Hale, director of manager research at Morningstar. "... They've got an organizational structure ... already in place and they're just going to do what they've been doing without the drama of having Bill Gross sitting on top of the whole thing."