El-Erian resignation raising questions about Pimco

But with Gross still in charge of investment strategy, advisers doubt impact on reputation, fund flows

Jan 22, 2014 @ 2:32 pm

By Jeff Benjamin

+ Zoom
(Bloomberg News)

Less than 24 hours after news broke that Mohamed El-Erian is resigning as chief executive of Pacific Investment Management Co., the financial advice industry remains abuzz with speculation about what happened at the fifth-biggest U.S. money management firm.

Even as speculation ranges from whether the highly regarded and high-profile economic strategist was forced out or simply burned out, the general consensus is that Mr. El-Erian's departure will not hurt Pimco's reputation or asset management prowess.

“The news was an incredible surprise, and we have a number of clients with investments in Pimco funds,” said Richard Konrad, managing partner at Value Architects Asset Management.

“But at the same time, the issue of talent within the Pimco organization is unquestionable,” he added. “Even without [Mr. El-Erian], the essence of the firm remains, along with a track record that has been established over many years.”

(See which Pimco portfolio manager made the list of Morningstar Inc.'s fund managers of the year.)

Pimco's parent company, Allianz SE, announced late yesterday that Mr. El-Erian, 55, will be stepping down from his dual roles as chief executive and co-chief investment officer in mid-March.

Douglas Hodge, the firm's operating chief, will become CEO, and money managers Andrew Balls and Daniel Ivascyn will become deputy investment chiefs, overseeing the firm's $1.97 trillion in assets alongside Bill Gross, who will remain CIO.

Mr. El-Erian did not respond to direct requests for comment, nor did Pimco's in-house spokesman.

Without more details from either the company or Mr. El-Erian, the market is left with speculation that automatically begins with the horrible 2013 experienced by a firm regarded as a formidable fixed-income operation.

By Morningstar's calculations, Pimco's open-end mutual fund lineup suffered more than $30 billion in net outflows last year. That compares with $62.7 billion worth of net inflows in 2012.

Pimco's taxable bond funds, representing the largest share of the firm's mutual fund business, suffered net outflows of more than $44 billion last year. The fixed-income funds had $55.4 billion in net inflows in 2012.

Performancewise, the Pimco funds on average finished the year in the 63rd percentile, which compares to the 43rd percentile in 2012, and the 42nd percentile in 2011.

“I wasn't surprised by the resignation announcement because even though [Mr. El-Erian] is obviously a smart guy, it's pretty clear that Bill Gross is leading things,” said Gerard Klingman, president and founder of Klingman and Associates.

“I would say, it's no big shock and it's no big loss for Pimco, because I don't think his role was that crucial and I don't think he was spending a lot of time on strategic planning,” he added. “It is certainly possible that he was forced out, but I can only speculate on that point.”

Mr. El-Erian will stay on the international executive committee of Allianz and advise the management board of Europe's biggest insurer on global economic and policy issues, reporting directly to CEO Michael Diekman, according to the company's statement.

Mr. El-Erian “will soon be no longer a part of Pimco and will be operating essentially in an advisory capacity,” according to Todd Rosenbluth, director of mutual fund research at S&P Capital IQ.

“Leadership changes happen when high-profile fund companies struggle, and 2013 was a rough year for Pimco, so I'm sure everything was reviewed,” he added.

Mr. Rosenbluth cited the $3.5 billion Pimco Global Advantage Strategy Fund (PGSAX) and the $2.3 billion Pimco Global Multi-Asset Fund (PGMAX) as the funds most closely associated with Mr. El-Erian.

The Advantage Strategy Fund declined by 3% last year and finished in the 53rd percentile of the world bond category. The Global Multi-Asset Fund fell 8.9% last year and finished in the 94th percentile of the tactical allocation category.

“He was part of Pimco's investment committee that set strategy, and for a firm that sets strategy from the top down, that is an important role,” Mr. Rosenbluth said. “It's hard for me to find a good comparison across the fund industry of somebody at that level stepping down.”

Jeff Tjornehoj, head of Americas research at Lipper Inc., interpreted Mr. El-Erian's departure as a formalizing of a professional evolution.

“It sounds as if he's moving into a role of very much what he has been doing, as the economist on staff,” he said. “He will now be more like a one-man think tank.”

In terms of Mr. El-Erian being forced out or being asked to fall on the sword, Mr. Tjornehoj believes that would be oversimplifying matters.

“I don't see how anyone could pin the outflows and the performance issues on El-Erian,” he said. “I'm sure he's been a significant voice at Pimco, but he's not alone there.”

Whether Mr. El-Erian was asked to leave or not, Theodore Feight, owner of Creative Financial Design, believes it was an opportunistic move.

“I can understand why he's leaving because the next few years, the bond industry will be in strife,” he said. “Once a company starts losing assets, it has an effect on what a company can do.”

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