Wednesday, January 22, 2014

What's Wrong With PIMCO?

The timing and tenor of Mohamed El-Erian's resignation as CEO and Co-Chief Investment Officer of Allianz's Pimco are certainly a bit strange.

One newspaper article somehow correlates this event with the massive $41 billion outflow of funds from Pimco's Total Return Fund in 2013. Unfortunately, there are only two things wrong with this assertion. The outflow had nothing to do with the management of the fund.  Rather, it had everything to do with the ending of a twelve year bull market in bonds sometime in mid-2012 according to some observers; since most investors react late to market inflection points, it took the relentless beating of the drums about rising interest rates from the Fed's unconventional monetary policies for the stampede to be at full power during 2013. Second, this fund, along with several others which follow the same strategy, e.g. Harbor Bond, are all run by Co-Chief Investment Officer Bill Gross.

Much as Mr. El-Erian has been the public face of Pimco on broader global economic issues, Mr. Gross has been the face of Pimco to Wall Street and the markets.  Where there was overlap, the key firm messages, such as the "New Normal," and "Shake hands with Uncle Sam" were put forward by both executives.

One wonders where the drive to get Pimco into equities came from.  Perhaps it was from Pimco's owner, Allianz.  That would make sense, as every market observer knew that the bull market for bonds would end, and the long-term market for global equities was one in which Allianz should be represented.  Logically, it could have been done through leveraging the research, market reach, and brand recognition of Pimco.

The move into equities was clumsy, slow and seemed to lack any overarching themes.  Why another equity mutual fund sponsor?  Why is your approach going to be better than hundreds of others? Can Pimco attract and retain equity research and portfolio management talent?

The hiring of Neel Kashkari, former banker and right hand man for Tim Geithner's bank bailout operations, was clearly a marquee hire.  There were lots of press releases and a fund or two were launched, but none of it made any sense. The funds were overpriced, and their styles were opaque, somewhat black box with a promise of research.  The availability of the funds through supermarkets wasn't clear. The funds clearly lacked any track record, which complicated their marketing. This whole, poorly conceived adventure was a total failure.  Mr. Kashkari is now running for Governor of California.  Who was the architect? I don't think that it was Mr. El-Erian, but he probably had responsibility for its implementation.

I have devotedly read Bill Gross' investment letters for about the same number of decades I've read those of Warren Buffett.  I've also seen him in action a few times at meetings, and I feel I have some understanding of his personality as far as markets go.  I just don't see his hand in the equity venture.

Mr. El-Erian is much more a "big picture" Davos-style thinker, and his recent appointment to a Presidential panel on big picture issues suggests that having two high-powered spokespeople for a bond house is probably overkill.  Mr. Gross, in contrast to Mr. El-Erian is a hands on, savvy, highly respected investor with a deep understanding of bond markets, equity markets and their interaction with global economics.

It was Bill Gross, the ultimate bond market investor, who long ago saw the folly and the house of cards which was behind the equity performance of General Electric, viz. its reliance on GE Capital for its earnings. As I read all the Pollyannaish equity research on GE's stock, I learned a lot from the perspective of Bill Gross, who was a lone bearish voice on the equity at the time.  Mr. El-Erian's own equity management record at Pimco was mediocre with a small amount of capital.

On the other hand, the same questions that are aimed at Warren Buffett could be aimed at Bill Gross?  What about executive succession?  The funds are too big to be run by one person forever.  I don't think that Mr. Gross even has his Charlie Munger.

So, I would say the questions for the future are:

  1. Will Pimco remain a bond house forever?  What if anything was learned from the first debacle?
  2. What about management succession for Mr. Gross?

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