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From the Archives: Pimco’s battling brains

Mohamed El-Erian, left, Pimco's chief executive, presides over a meeting of the nine-member investment committee -- basically, the firm's brain trust, which makes major investment decisions
(Don Bartletti / Los Angeles Times)

Mutual fund giant Pacific Investment Management Co. hires some of the brightest minds in finance. Then it forces them to prove their smarts every week.

The Newport Beach company is best known for its celebrated fund manager, Bill Gross, whose prescient investment picks over the years turned Pimco into the world’s most powerful bond firm with $1 trillion under management, including the industry’s largest mutual fund, Pimco Total Return.

LATEST NEWS:'Bond king’ Bill Gross leaves Pimco

But behind the scenes, Pimco has sought to craft a meritocracy in which its 125 portfolio managers have wide latitude to pitch their ideas and -- most important -- to challenge the firm’s investments and one another.

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At the heart of the system is a weekly meeting where portfolio managers square off in hours-long debates that are a cross between Socratic dialogue and bare-knuckled slugfest.

“The group is not shy,” said Mohamed El-Erian, Pimco’s chief executive. “When someone says something that someone disagrees with, they immediately say, ‘I disagree with that.’ There isn’t an ‘Oh, I’m going to be ultra-polite to you even though you’re saying something silly.’ ”

For up-and-coming employees, that means coveted opportunities to shine before their high-wattage superiors, but also pressure to show they belong.

For the firm, it means leaving no stone unturned in the hunt for the best investments. Every investment decision and economic projection is second-guessed. Scuffed egos are a small price for results.

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Veteran portfolio manager Marc Seidner went through the gantlet on a recent morning as he pitched an idea to 15 colleagues seated around a rectangular table in a conference room off Pimco’s vast trading floor.

The debate was mannerly and threaded with the technical jargon inherent to Wall Street. But the upshot was clear: Seidner’s co-workers gutted his arguments with surgical precision.

El-Erian ended the discussion after 20 minutes, saying he didn’t want to embarrass Seidner, whose head slumped in resignation.

“You have to have a pretty thick skin to work here,” Seidner said later. “You should expect to come in here three or four times out of 10 and get beat up.”

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Debates are crucial

Investment debates are commonplace at mutual-fund firms, but they’re the lifeblood of Pimco -- and central to its strategy for maintaining its perch atop the investment world.

Unlike stock investing, in which divining the fortunes of individual companies is paramount, bond managers must decipher entire economies and stay on top of elusive trends in interest rates. Erring even slightly can prove costly in an industry in which the gap between success and failure is measured in fractions of a percentage point.

LATEST NEWS:'Bond king’ Bill Gross leaves Pimco

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By virtue of its size, Pimco is a huge force in the credit markets and, by extension, is an important cog in the global economy’s recovery from the recession. Pimco also carries the retirement hopes of millions of Americans who are counting on its investment foresight to help finance their golden years.

But with the company’s success comes increasing pressure to guard against the sort of poor investments and complacency that have beset highflying investment firms in the past.

That task is complicated by the possibility that the years-long bull market in bonds could be drawing to a close, done in by chronically low yields and heavy government borrowing that threatens to trigger inflation.

“The bond market has had its best days,” Gross said.

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No wallflowers

To keep up its game, Pimco relies on a democratic management style -- but one that sifts future stars from may-never-bes with steely efficiency.

Up-and-comers aren’t expected to win every argument, but they can’t be bashful.

“You can’t be a wallflower and a pushover and ultimately succeed here,” Gross said.

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The company ranks each of its 1,328 employees every six months. The top 10% are groomed for advancement. Bottom-dwellers get mentoring, and many turn themselves around. Those who can’t typically head elsewhere.

The capstone to this process is Pimco’s Economic Forum, which brings portfolio managers from around the world together three times a year. They are split into four teams according to geographic region and asked to make 12-month economic projections. The team with the best presentations at the three meetings is awarded the William H. Gross Cup at a fourth gathering in May.

The three people who outshone the rest in earlier sessions get cash prizes -- not to mention the priceless envy of their peers.

Even seasoned investment pros feel pressure.

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Seidner, a lean 43-year-old with more than two decades’ experience, is a highly respected bond manager who became friends with El-Erian when both worked at Harvard University’s endowment a few years ago. But that doesn’t count for much around the conference table.

“There is no credit given for time served elsewhere,” Seidner said. “From Day One the process is to prove oneself.”

Brain trust meets

That’s evident on this day as the nine-member investment committee -- basically, the firm’s brain trust, which makes major investment policy decisions -- holds its weekly meeting with a “shadow” committee charged with challenging its basic economic assumptions.

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(The Times was allowed to observe the meeting on the condition that it not divulge specific investments.)

Fifteen men and one woman sit around the conference table. Three wall-mounted TVs pipe in video feeds from the firm’s London and Munich offices. A fourth is tuned to CNBC, where the hyperventilating Jim Cramer marks a sharp contrast to Pimco’s deliberate approach.

Reflecting the early-morning hours forced by the East Coast market schedule, several people nibble sandwiches as the 10 a.m. meeting begins. One man twirls a pen around his thumb. Another grips a miniature baseball.

As the discussion turns to the financial upheaval in Greece, the group looks to Lupin Rahman.

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The only woman present, the young fund manager is an emerging-markets expert who joined the company two years ago after stints at the World Bank and the International Monetary Fund.

Rahman is coming off one of her best weeks at Pimco.

A few days earlier, Rahman gave the committee an hour-long presentation on her investment suggestions -- an honor for a young manager.

Every quarter, each of Pimco’s 125 portfolio managers submit investment ideas. The five or so with the best suggestions get to pitch them to the committee.

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“When I go into the investment committee I don’t feel I’m a woman or from Bangladesh,” Rahman said. “It’s about being able to think on the spot and being prepared to think about all the scenarios that you should.”

Relentless questions

Presiding over the meeting was El-Erian.

The 51-year-old has a bushy mustache and the intellectual mien of a graduate from Oxford University, from which he holds a doctorate in economics.

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After spending 15 years at the IMF, El-Erian was a star emerging-markets fund manager at Pimco. He spent two years running Harvard’s endowment before returning to Pimco in late 2007.

El-Erian conducts the meeting like a professor trying to tease information out of students.

“Anybody wish to disagree with the hypothesis that I just put forward?” he asks at one point. His goal is simple, he said later.

“When your job is to deliver investment performance, it means you have to stay ahead of the crowd, and that means you question all the time,” he said. “You don’t take things for granted.”

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Seated to El-Erian’s right is Gross, the elder statesman of the bond-fund industry.

A co-founder of the firm four decades ago, Gross’s Total Return fund has yielded a 7.3% average annual return over the last decade, putting it in the top 5% of bond funds, according to Morningstar Inc. The fund tracker named Gross its fixed-income manager of the decade in January.

A ubiquitous media presence recognizable by the signature unknotted tie that he drapes over his shirt collar, Gross is typically soft-spoken. But he grows animated when dissatisfied with an answer from a younger colleague.

“That isn’t what I asked,” Gross snapped at one point to a London-based manager. “You tend to obfuscate immediately in terms of what I ask.”

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No one has a higher stake in these meetings than Gross, who acknowledges the pressure to maintain Pimco’s standing. Even if he bests his rivals, Gross worries that individual investors could be disappointed by lower absolute returns in coming years, which he estimates will be 4% to 6%.

“I feel daily and year after year the pressure to live up to the reputation that precedes Pimco and me as an investor,” Gross said.

Thus, the need for Pimco fund managers to think through every move they make -- and be willing to take the unpopular position if that’s what’s needed to spark discussion.

Seidner, whose recommendation was dismantled this day, is philosophical afterward.

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“I don’t view it as a loss,” he said. “In the end you win by debating.”

walter.hamilton@latimes.com

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