Bill Gross speaks out on Pimco exit, vows to regain crown at Janus Capital Group

In an InvestmentNews exclusive, The Bond King explains 'constructive obsession' with defeating rivals; answers advisers' burning questions

Oct 6, 2014 @ 12:01 am

By Trevor Hunnicutt

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(Figge Photography)

The Bond King is in exile, but he doesn't intend to stay there for long.

In fact, when Bill Gross sits down this morning at his new desk at Janus Capital Group Inc.'s new office in Newport Beach, Calif., with his usual Starbucks coffee and peanut butter sandwich, he will likely have one thing on his mind: eating Pimco's lunch.

“I'm in it to whip the pants off anybody competing on the same football field,” Mr. Gross told InvestmentNews in one of his first interviews since abruptly leaving Pimco, which he co-founded in 1971 and transformed into one of the world's largest bond shops, with more than $2 trillion in assets.

Mr. Gross' competitive animus remains as strong as ever, if not stronger. Whether propelled by the desire to reclaim his legacy or blatant bloodlust for his former employer, the 70-year-old is intent on getting back to the top of his game. In fact, he refers to his desire to beat his rivals as a “constructive obsession.”

“You know those adages about smelling the roses and chasing butterflies,” Mr. Gross said. “The markets are my butterflies and my roses. When I go to work Monday, I'll be smelling the roses.”

It's an understatement to say his journey from Pimco to Janus — where he will oversee a fund that had less than $13 million in assets a month ago — has been rocky. In the past year, Mr. Gross, who by all accounts is a strong-willed and mercurial leader, found himself locking horns with Pimco's executive committee over the company's direction.

In January, Pimco's chief executive and Mr. Gross' heir apparent, Mohamed El-Erian, abruptly announced that he was quitting in March, amid speculation of tension between the two men.

(More: Timeline of the tumultuous 2014 for Gross and Pimco)

When Mr. El-Erian left, Pimco overhauled management, naming six deputy chief investment officers. But Mr. Gross' investment performance continued to lag competitors, and investors began pulling assets out of his funds.

“The markets are my butterflies and my roses. When I go to work Monday, I'll be smelling the roses.”

At some point, Mr. Gross began talking to some of those competitors about joining them. In addition to Janus, he reportedly met with archrival DoubleLine Capital CEO and CIO Jeffrey Gundlach to discuss moving to the Los Angeles-based firm.

The drama reached a climax on the afternoon of Thursday, Sept. 25, when Mr. Gross picked up his phone and asked Janus CEO Richard Weil “if he still wanted me.”

Mr. Gross joined Janus the next day.

For a former Navy man who finds solace in routine — a peanut butter sandwich every day for lunch, an exercise break at 10 a.m. each morning, parking in the same place and getting coffee from the same Starbucks — he'll have to work hard to maintain a semblance of regularity at Janus Capital Group.

“I slapped my face with my hand or cold water and said, 'Life just goes this way … You get older and institutions change, and this is a great opportunity for a fresh start,'” Mr. Gross recalled.

He refers only obliquely to the trying months preceding his sudden departure.

“My preference would be to do the same routine, though in a smaller way, but that wasn't possible at Pimco,” he said. “They sort of forced my hand, and although I thought I gave them lots of opportunity to downscale me and do anything they wanted to do, I finally saw the light and said, 'Hey, the routine's got to change.'

“It was a pretty quick decision because things were moving quickly at Pimco and — you know their story — I don't want to go into it.”

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(Figge Photography)

The company doesn't want to go into it, either. A spokesman for Pimco did not respond to a request for comment.

Mr. Gross's wife, Sue, was the one who convinced him that ending his Pimco career did not mean he had to retire.

“The real boss in the family is my wife,” he said. “She didn't want me hanging around the house all day and said, 'You don't want to retire; you'll regret it.' So I listened to her.”

Industry watchers are bemused, if not befuddled, by the turn of events.

“It looks like he's gone from a confident, assured position at the top of his firm and among his peers and, over the last one and a half years, to having fallen or disappeared entirely,” said Jeff Tjornehoj, head of U.S. research at Lipper.

But not everyone is counting Mr. Gross out.

“In a business where legends come and go, he's probably the most endurable of all,” said John Bogle, a peer of Mr. Gross' who also founded an investing firm in the 1970s, the Vanguard Group Inc. “The rush to judgment is usually a big mistake in investing.”

Mr. Gross takes on the new role with a much tighter circle of confidants and colleagues.

“It was a pretty quick decision because things were moving quickly at Pimco and — you know their story — I don't want to go into it.”

He was motivated to head to Janus partly because of his relationship with Mr. Weil, a former lawyer who took over the firm in 2010 after holding senior roles at Pimco, and with Myron Scholes, a superstar academic and Nobel laureate who worked with Mr. Gross as a Pimco board member in the 1980s. Mr. Weil's wife, Britney, was previously Mr. Gross' executive assistant.

Mr. Weil declined to comment on Mr. Gross' role at Janus.

“I'm not going to be hiring; I'm not going to be firing,” Mr. Gross said. “That's one of the things that I'm relieving myself of … so thank goodness that's over. I'm going to have an investing thrust as opposed to an executive thrust.”

Mr. Gross, whose successors asserted that he had relied on their support in producing his successful track record, said he now will be able to be more nimble in navigating the markets.

“Having a lot of people doesn't necessarily produce an efficient decision-making process,” he said. “Sometimes it jams up the works.”

Mr. Gross expects to manage about $100 million on Monday, thanks to new investor flows, in his Janus Global Unconstrained Bond Fund (JUCAX). He said he would have “five or six” people on his team, including a trader and a credit analyst, and another portfolio manager.

“The unconstrained aspect gives me freedom, gives Janus freedom, to do an end-around relative to a bond bear market,” Mr. Gross said. “If interest rates are going up and bond prices are going down, we don't own carry or yield in the form of maturity.”

Several advisers and analysts said they will wait to see if the new operation matches what he brought to bear at Pimco.

“Why rush into it?” said Sumit Desai, a researcher at Morningstar Inc. “Maybe it makes sense to … see what kind of strategy it is, what kind of resources he has, make sure everything is in place before giving him any significant amount of money. This is obviously a very stark difference from the resources and support he had at Pimco.”

Mr. Gross, who will be free of the Barclays Capital Aggregate Bond Index that governed his investment choices at the flagship Total Return Fund (PTTAX), says he'll be able to invest more in sovereign debt, emerging markets, higher-yield credit and currencies, and can even take on “a small amount” of stock risk.

“I don't think it'll be any different to the extent that the expectation of risk and reward from the investor base is the same,” he said. “That means emphasize duration a lot less and emphasize other aspects of return, such as credit and currency and volatility risk, as opposed to simply maturity.”

Bringing in assets to Janus will be much harder than driving assets out of Pimco, which reported that $23.5 billion drained out of the Total Return Fund in September month — a record high for one month. An unscientific online survey conducted last Tuesday by the consulting firm kasina found that half of advisers with clients invested in Pimco were considering moving money out of it. Just 16% were considering moving to Janus.

Recent redemptions included some from clients of Evensky & Katz/Foldes Financial. It has used Pimco funds for over 15 years but retains a “very modest” stake after withdrawing about $100 million Friday, according to CIO Lane M. Jones.

The firm is not rushing to Janus.

“I would not consider it for at least a year to get some real idea of what's going on there with him,” Mr. Jones said. “He is in his 70s.”

“I know my epitaph will always include something about the last 12 months, and that's too bad,” he said. “I hope I'm good for Janus and Janus is good for me.”

No one seems more aware of that than Mr. Gross, who points to Jerry Rice, a wide receiver who played 20 seasons in the National Football League before retiring in 2004. Widely regarded as the greatest wide receiver in NFL history, Mr. Rice was known for his work ethic and for doubling up on his physical training as he got older.

“That's what I have to do,” Mr. Gross said. “I have to double and triple the amount of reading I do on weekends to make sure that a 70-year-old mind doesn't turn into a semisenile 80-year-old mind.”

Mr. Gross is aware that his legacy has been tarnished in recent years by underperformance and what he calls mischaracterizations of his leadership style.

“My legacy in terms of performance hasn't been diminished — one bad year doesn't do that,” he said. But he added that he has been unfairly portrayed as “some type of angry bird” as opposed to a rational human being.

“I know my epitaph will always include something about the last 12 months, and that's too bad,” he said. “I hope I'm good for Janus and Janus is good for me.” ■

(More insight: All our coverage of Bill Gross' next chapter)

Prior to our conversation with Bill Gross, we asked financial advisers what they would ask Mr. Gross if given the opportunity. Here's a handful of the questions we received along with Mr. Gross' answers.

At 70 years old why'd you decide not to retire? Why'd you decide to pursue an entire new opportunity?
Janet Briaud, Founder, Briaud Financial Advisors

“First of all, I have this competitive aspect, and competing against myself isn't that much fun. I like to compete against other players in the big leagues. If it's the Cavaliers or the Knicks, or other big-time players. Sitting at home managing my portfolio, it's nice to see it grown and nice to make money — although I don't need it. It's not the same as competing against any firm in the universe to come out No. 1.

Second of all, this is the part where some of your listeners may understand. The real boss in the family is my wife, Sue. She really doesn't want me hanging around the house all day. She'd known me for 30 years and she knows what I need. She says, “You don't want to retire, you'll regret it.” So I listened to her. For all of those reasons, it's going to be good to put on a tie and come in early in the morning as opposed to sleeping in until 8 o'clock in the morning and wondering what the hell I'm I going to do.”

Will it be easier or harder to execute your strategies at a smaller fund than a huge one?
Michael Kitces, Partner and Director of Planning Research, Pinnacle Advisory Group

“It's a slam dunk — a Martian would know that a smaller amount of money can be moved more nimbly than a much larger size of money. And that's one of the benefits of coming to Janus. Not because they are smaller, but because at least at the beginning, the amount of money will be much more manageable from the standpoint of strategy.”

When you start managing money on Monday, what's the first thing you are going to do?
Doug Flynn and Rich Zito, Partners, Flynn-Zito Wealth Management

“I'm going to look at that over the weekend based on where we ended Friday night. Some of the things I'll do, I might have done yesterday because markets are moving. Your beginning portfolio should reflect prices, attitudes, risks and assessments. So, Monday morning will be a function of Sunday and Saturday. Sometimes, I watch the football games while at the same time looking at my Bloomberg screens and seeing where the best risks and reward strategies are. The first thing I'll do on Monday is execute what I did on Saturday and Sunday and we'll go from there.”

Do you anticipate creating any new funds at Janus that replicate the mandates of prior Pimco funds that you had managed?
Neal Solomon, Managing Director, WealthPro

“That's [CEO Dick Weil's] decision. I think he's got things in the works — he's got ideas. He recognizes this as an opportunity to hit the gas pedal in an intelligent way — not just throw stuff on the wall. But I'm sure he'll come up with innovative products that can take advantage of what I bring to the table and what Myron [Scholes, chief investment strategist], and Enrique [Chang, chief investment officer, equities and asset allocation] and others on the bond side can do. So it's definitely an opportunity and I don't think he'll miss much in the next few months. I don't intend to be a part of that. I told him that this is your company — I'm just in Newport Beach and let me know what you want me to do.”

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