Bill Gross has drawn droves of investors for years to watch his appearances on financial TV shows, but so far he is no magnet for his former colleagues at Pimco.
No one from Pacific Investment Management Co. has joined the deposed 70-year-old ‘bond king’ as he sets up shop at rival Janus Capital Group, at least so far as the fund-watchers at investment researcher Morningstar Inc. can tell.
Morningstar analysts downgraded several of their ratings for Pimco last week, demoting the flagship Total Return Fund from gold to bronze.
They said Wednesday that the remaining managers at Pimco are skilled and accomplished, but would bear watching because investment strategy decisions have now been spread more widely.
That creates “the risk that some managers are over-stressed with their new duties,” said Michael Herbst, Morningstar’s director of manager research.
The watch also is on for any additional defections from Pimco to Janus, something that has happened in other instances of star traders departing for new firms.
In a notable case, dozens of staffers at Los Angeles money-management giant TCW Group quickly followed ousted executive Jeffrey Gundlach five years ago when he formed his own L.A. firm, DoubleLine Capital.
Gross, who had helped get Pimco started in 1971 and was chief investment officer of the Newport Beach bond-trading giant, bailed out abruptly on Sept. 26 to manage a small, free-wheeling bond fund at a new office that Janus, based in Denver, opened two blocks away from Pimco’s office tower.
Morningstar senior analyst Sarah Bush said the Janus fund is designed to be “high risk, high rewards,” allowing for large holdings of U.S. corporate junk bonds and foreign debt securities.
Herbst said on a conference call with investors that the lack of an exodus following Gross has produced a “palpable sense of relief from some people at Pimco.”
According to reports, Gross was about to be fired when he quit Pimco after a series of clashes with other executives.
His heir-apparent, Mohamed El-Erian, Pimco’s co-chief investment officer and chief executive, had made his own abrupt exit in January, though he remained an adviser to Allianz SE, Pimco’s parent firm in Germany.
Pimco’s flagship Total Return Fund, which had been managed personally by Gross, saw $67 billion in outflows from April 2013 through last August as investors digested the turmoil in the executive ranks. One trustee of the fund called the returns “mediocre.”
The fund, now at about $200 billion, suffered from a wrong-way bet by Gross in 2011 on the market for U.S. Treasuries, and it started to lag its peers again in the second half of last year.
Investors withdrew an additional $23.5 billion in September, mostly at the end of the month when news of Gross’ departure broke. Morningstar said redemptions totaled $10 billion on the Friday he quit, followed by $5 billion in withdrawals each on the following Monday and Tuesday, the last days of the month.
Of that $20-billion outflow in three days, $66.4 million — about a third of 1% — wound up at the Janus Unconstrained Bond Fund that Gross now manages, Morningstar said.
The Janus fund had just $13 million in assets before Gross’ arrival, contrasted with the Pimco Total Return Fund, which topped out at more than $292 billion last year.
Gross told the trade publication InvestmentNews that he expected to have $100 million to manage when he started trading this week and that his team of five or six people would include a trader, a credit analyst and another portfolio manager.
Morningstar’s Bush said major beneficiaries of the Pimco outflow include three big rivals that, like the Pimco Total Return, are classified as intermediate-term bond funds: Metropolitan West Total Return, which is part of the TCW family, DoubleLine Total Return and BlackRock Strategic Income Opportunities.
As the $20 billion flowed out of Pimco Total Return in the three days following the Gross bombshell, the MetWest fund saw inflows of $1.5 billion, the DoubleLine fund’s assets increased by $852 million and the BlackRock fund gained $332 million. Heavy inflows into those funds continued through Monday this week, Morningstar reported.
Responding to questions about the effects of the outflows on Pimco, Morningstar analysts said the Total Return Fund was sufficiently liquid to pay off investors withdrawing funds for the foreseeable future.
They also said the decline in fee revenue as the fund shrinks did not appear to have affected Pimco’s ability to hang onto the exceptionally talented employees.
“There is no indication the outflows have affected Pimco’s ability to compensate people,” Herbst said, though he described the situation as “something to watch.”
“We have seen similar situations at other firms, where outflows eventually affected their ability to attract and retain talent,” he said. “You can bet a lot of people at Pimco are getting a lot of calls from headhunters. If the outflows continue, those people may take the calls more seriously.”