Pimco bond fund guru Bill Gross defects to rival Janus Capital
Bill Gross, the unconventional but wildly successful money manager who helped build Pacific Investment Management Co. into a financial juggernaut, shook up the staid bond industry Friday by jumping ship to a rival firm.
A yoga-practicing billionaire who doesn’t own a cellphone, the 70-year-old Gross — known as the bond king — left the Newport Beach company amid clashes with other executives and declining returns.
The turmoil includes a federal investigation, the earlier departure of Pimco’s high-profile chief executive and an outflow of billions of dollars from the firm’s signature bond fund — the largest of its kind and a staple in Americans’ 401(k) retirement plans.
“In the asset management world, accumulating negative headlines and controversy is not good for business,” said Russel Kinnel, director of manager research at fund tracking firm Morningstar Inc.
Gross joined Janus Capital Group Inc., where he will manage a recently launched global bond fund, Janus said Friday. He’ll be based out of a new company office in Newport Beach.
“Bill Gross has an exemplary track record with decades of success, and he will offer an exceptional approach to navigating today’s increasingly risky markets with a focus on macro, unconstrained strategies,” Janus CEO Richard M. Weil said.
Gross, who had been chief investment officer of Pimco but also helped run the firm, said he looked forward to “giving up many of the complexities that go with managing a large, complicated organization.”
The fund he’ll be managing, the Global Unconstrained Bond Fund, is tiny compared with the one he’s leaving. It has just $12.9 million in assets compared with the $221 billion in Pimco’s Total Return Fund.
In all, Pimco manages $2 trillion in assets. In a terse statement, Pimco CEO Douglas Hodge said Gross had resigned over “fundamental differences” about the direction of the company.
The departure comes as Gross and Pimco have seen returns sag and clients leave. Losing bets on interest-rate trends caused the flagship Pimco Total Return Fund to do so poorly in 2011 that Gross apologized to investors. Last year, the fund, managed personally by Gross, lost 1.92% and trailed more than 70% of its peers. It continues to lag behind the overall bond market this year.
Total Return investors began pulling out money in May 2013, and the fund’s assets have since fallen more than $70 billion, although it’s still the largest of all bond funds, with assets of more than $220 billion.
Many on Wall Street believe Gross still has the magic touch: Janus stock soared 43% on Friday, while shares in Allianz, the German financial giant that owns Pimco, slumped 6%. Gross’ move also shook the bond market. Investors sold off Treasury notes out of fear Pimco’s clients would flee its funds.
His replacement will be Daniel Ivascyn, whose $38-billion Pimco Income Fund has beaten 99% of its rivals over the last five years. Ivascyn, 44, an expert trader of mortgage bonds, had been among six Pimco deputy investment chiefs; the other five were named chief investment officers in their areas of expertise.
Three of the deputies — Mihir Worah, Mark Kiesel and Scott Mather — will fill Gross’ key position managing the Pimco Total Return Fund.
Gross comes to Janus with a legendary history — and a lot of baggage.
“He is probably one of a very small number of active mutual fund managers whose name people know,” said Todd Rosenbluth, director of mutual fund research at S&P Capital IQ. “Gross will be a positive for Janus. It makes them a much more relevant fixed income manager.”
He took an unlikely path to the elite ranks of finance, honing his knack for numbers at Las Vegas blackjack tables after earning a psychology degree from Duke University. Gross spent 16 hours a day counting cards, turning $200 into $10,000 and getting kicked out of several casinos.
After joining the Navy and serving in Vietnam, Gross enrolled in UCLA’s business school. He co-founded Pimco in 1971 and built the company into such a powerhouse that critics worried it controlled too much of the bond market.
In 2010, Morningstar named him bond fund manager of the decade, noting that “no other fund manager made more money for people than Bill Gross.” Investors in the Total Return Fund range from holders of small 401(k) retirement accounts to the world’s biggest institutional investors.
Gross was once mentioned as a possible replacement for Lawrence H. Summers as President Obama’s top economic advisor.
He became a frequent television commentator, making him an unlikely celebrity from the world of fixed income securities.
As Pimco boomed, the sometimes awkward Gross held forth on financial programs not only about bonds but global economic trends, Wall Street and even politics.
He generally worked without a coat and tie in the vast Newport Beach trading room that Wall Street knew as “The Beach.”
The turmoil at Pimco surfaced last year. In January, Pimco’s high-profile chief executive and co-chief investment officer, Mohamed A. El-Erian, abruptly left the firm.
The exit of El-Erian, Gross’ heir apparent, was followed by reports the two had clashed, at times publicly, along with descriptions of Gross’ intimidating management style, erratic behavior and monitoring of El-Erian’s phone calls.
The reports prompted a longtime trustee for the Pimco bond funds, prominent Southern California businessman William J. Popejoy, to break the code of silence that generally prevails on boards overseeing mutual funds. In a March interview with The Times, Popejoy criticized what he said was Gross’ “bullying” management style.
Noting that Gross sold most of his stake in Pimco when Allianz bought a majority share in 1999, Popejoy said Gross had become “an employee” of the company who didn’t deserve his reported $200-million annual salary. He called the recent performance of the Total Return Fund, which Gross managed, “mediocre.”
Then this week came news that the Securities and Exchange Commission was investigating whether the returns at a smaller fund, also managed by Gross, had been improperly inflated.
Tales of eccentric behavior have dogged Gross for years. In June, he appeared on stage at an investor conference wearing sunglasses and proceeded to compare himself to Justin Bieber. In numerous investor letters, he veered off on tangents about his dead cat, his hatred of crows and the pleasure of a sneeze.
“There’s nothing like a good sneeze; maybe a hot shower or an ice cream sandwich, but no — nothing else even comes close,” Gross wrote in May. “A sneeze is, to be candid, sort of half erotic.”
Some investors were hopeful that Gross’ departure would calm the leadership turmoil at the firm and boost returns.
“I’m not surprised that there’s a change, because something had to happen,” said Dryden Pence, chief investment officer at Pence Wealth Management in Newport Beach. “There’s been a lot of drama for a while, and just when you’d think it was going to die down, it started up again.”
The firm has between $10 million and $50 million in Pimco funds, and will consider investing more with Gross gone, Pence said.
“There’s no doubt that Bill Gross is a stunningly brilliant man who has done wonders for investors for decades,” he said. “But Pimco has a lot of stunningly brilliant people. We’re more likely to increase our assets with Pimco now that this confusion is cleared up.”
Jeff Gundlach, chief executive at L.A. investment firm Doubleline Capital, said Gross contacted him last week, asking about a job.
“He seemed angry, a little bit, but composed,” said Gundlach, who had a well-publicized split with Los Angeles investment giant TCW Group Inc. in 2009.
He invited Gross to his house, and they met for three hours, he said.
Gundlach said all the turmoil around Pimco would lead more investors to pull out their money.
Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Penn., said Pimco will have to assure its clients that the firm has stabilized, while Gross will need to rejuvenate his reputation.
“This is a sea change,” Egan said. “Bill has been on top of the fixed income market for the past 30 years.”
Times staff writers Andrew Khouri and Andrea Chang contributed to this report.
