Public pensions put Pimco on watch after Gross exit

Fund managers looking for signs of stability at both Pimco and Janus following dramatic move

Oct 13, 2014 @ 12:27 pm

By Pensions & Investments

The departure of William H. Gross from Pacific Investment Management Co. might end up cutting deeper into his personal reputation than into the $1.87 trillion in assets under management at the firm he was synonymous with for 40 years.

Mr. Gross' “departure showed great disregard for clients and colleagues,” said Robert A. DiMeo, managing director of investment consultant DiMeo Schneider & Associates. “He's a brilliant man. He's part of a star system, but he didn't do it (investment management) alone. There are many bright and talented people at Pimco for whom he really showed disregard in his abrupt departure.”

Two other consultants, who requested anonymity, said their concern about Mr. Gross' recent conduct would prevent them from recommending their clients invest with him at Janus.

“Despite his long-term track record as a brilliant investor, his recent behavior has been alarming,” said one consultant. “There was too much irrational behavior. I would need to see some stability (over the next 12 to 18 months) by Mr. Gross before I could recommend my clients invest with him.”

The second consultant called Mr. Gross “a very talented investor,” but said his firm would not recommend institutional clients give Mr. Gross money to manage. “His departure (from Pimco) was pretty rough and sudden,” he said.

“We feel it's important to treat other people with respect, and running out the door of a firm in a flash is not something that's right. I don't see institutional money flowing his way.”

Mr. DiMeo said his firm is giving clients “a universal sell recommendation” to terminate Pimco, and they are doing so. He didn't identify clients or amounts being shifted. But he did say his clients, particularly on the defined contribution side, had “over $1 billion” in Pimco's Total Return Fund.

“Pimco has plenty of capable people remaining at the firm,” Mr. DiMeo said. But “there are plenty of (other) attractive fixed-income (managers) that don't come with the drama (Pimco) has.” He mentioned Dodge & Cox and Baird Advisors as two examples.

To be sure, the drama Mr. DiMeo referred to is costing Pimco some assets under management. Still, Pensions & Investments found just $29.4 billion of institutional assets in play among 35 Pimco clients interviewed.

Other consultants said Mr. Gross' sudden move to Janus resolved a long-standing key-man risk at Pimco, especially after the departure of former CEO and Co-Chief Investment Officer Mohamed El-Erian early this year.

In a memorandum to clients, Wurts & Associates Inc., a Seattle-based investment consulting firm, said Pimco “continues on a tumultuous period of professional turnover,” pointing to the departure announced in January of Mr. El-Erian and Mr. Gross' departure, announced Sept. 26.

“The near-term impact on the Total Return Fund of potential redemptions may lead some investors to determine that their core exposure to fixed income should be derived from a product and a manager without the problems that Pimco is currently experiencing,” the Wurts memo said.

Charles Van Vleet, assistant treasurer and CIO at Textron Inc., R.I., said Mr. Gross' departure “in some ways is very positive. It's been a terrible distraction to what I think is a broad and deep bench of professionals who have shown themselves to be exemplary at picking bonds.”

Textron, which has $132 million in Pimco's Total Return Fund out of $10 billion in total retirement assets, has not noticed any unusual activity among participants, Mr. Van Vleet said.

Mr. Van Vleet cautioned against picking an asset manager based on its star staff: “If you're even in a fund because of a star, then you shouldn't be there.”

KEY TOPICS

Tokihiko Shimizu, director-general of the research department for the ¥127.3 trillion ($1.2 trillion) Government Pension Investment Fund, Tokyo, said the departure of Mr. Gross, coming on top of changes earlier this year in Pimco's investment leadership structure, will be key topics at the GPIF investment team's next comprehensive review of the fund's external managers, around the middle of 2015.

“Bill Gross leaving is a big issue,” but ultimately the GPIF's response will be determined by its judgments on whether the quality of the firm's leadership and investment management have suffered following his departure, said Mr. Shimizu.

While Mr. Gross was clearly a “key person” at Pimco, for the GPIF, Tomoya Masanao, a managing director in Pimco's Tokyo office and head of portfolio management in Japan, “is also a very important guy,” added Mr. Shimizu.

Pimco managed roughly ¥1 trillion for the GPIF as of March 31, the end of its fiscal year. Some ¥609 billion was in active international bonds and ¥420 billion in active domestic bonds.

Meanwhile, J. Brittan Nelson, investment analyst at defined contribution plan investment consultant Cammack Retirement Group, said the firm put Pimco on watch when Mr. Gross left. Two clients on their own terminated Pimco, expressing concerns about the organization and the impact of redemptions on the Total Return Fund, Mr. Brittan said, declining to identify them.

Among pension fund executives interviewed by P&I, only the Florida State Board of Administration, Imperial County Employees' Retirement System, and the Austin (Texas) Firefighters' Relief & Retirement Fund said they are moving money from the Newport Beach, Calif.-based manager.

FSBA executives said the board is pulling much of the $3 billion Pimco manages for the Florida Retirement System's defined benefit and 401(a) plans, whose assets FSBA oversees. The FSBA is terminating accounts of $535.9 million in Pimco's Total Return Fund and $493.9 million in the Inflation Response Multi-Asset Strategy Fund. In addition, the FSBA will “significantly reduce” a $1.9 billion Pimco core fixed-income portfolio.

The $683 million Imperial County pension fund terminated Pimco, which had managed $84 million in a total return strategy because of Mr. Gross' departure, said Regina Rodrigues, assistant retirement administrator.

The $790 million Austin Firefighters pension fund is withdrawing its $80 million investment in the Total Return Fund, said William Stefka, administrator.

Austin fund officials had been looking to reduce holdings in the mutual fund for some time because of performance and the size of the investment. The departure of Mr. Gross contributed to that decision, Mr. Stefka said.

ScholarShare, California's 529 college savings plan, Sacramento, dropped Pimco's Total Return Fund, which managed $262 million for the $6 billion plan, because of Mr. Gross' departure.

The plan also put on watch the Pimco Income Fund, which holds $111.3 million for the plan, and the Pimco Real Return Fund, which holds $92.8 million.

Pension Consulting Alliance, the plan's investment consultant, recommended “transitioning these (three) mandates to new management” or “at minimum,” putting them on watch because of the departure.

Mark Porterfield, Pimco spokesman, didn't respond to three requests for comment.

Long-term relationships that go beyond Mr. Gross, and Pimco's size, have most pension funds taking a wait-and-see stance.

The Teachers' Retirement System of the State of Illinois has $3 billion with Pimco in nine strategies — all fixed-income, credit or global tactical asset allocation approaches — representing about 6.6% of total fund assets.

Although Pimco has been on the fund's watch list because of Mr. El-Erian's departure, Illinois Teachers' staff has “no plans to terminate the relationship,” Richard W. Ingram, executive director, said.

The $294.2 billion California Public Employees' Retirement System, Sacramento, is monitoring Pimco because of Mr. Gross' surprise announcement. CalPERS has $1 billion in a Pimco international bond strategy.

Pimco is one of three core-plus bond managers for the $2.2 billion Phoenix City Employees' Retirement System. Greg Fitchet, investment officer, said he and investment consultant RVK Inc., Portland, Ore., plan to recommend to the board at its Oct. 16 meeting to keep Pimco, which manages a total of $313 million — $165 million in its all asset strategy and $148 million in core-plus bonds.

GOING ON WATCH

The $14.1 billion Hawaii Employees' Retirement System, likely will put Pimco on watch at its Oct. 20 board meeting because of the recent departure of Mr. Gross, said CIO Vijoy Chattergy. Pimco manages between $550 million and $560 million in core-plus fixed income for the Hawaii pension fund, a relationship that dates to the 1970s.

At least 24 Pimco clients interviewed are reviewing their Pimco investments, possibly putting the firm on watch, but not making immediate changes.

The $12 billion Orange County Employees Retirement System, plans to review Pimco at its Oct. 29 investment committee meeting. The pension fund has a total of $1.3 billion in seven Pimco strategies.

But officials aren't looking to follow Mr. Gross. “We at OCERS have a long-term and effective working relationship with Pimco,” CIO Gerard Miller said.

“Pimco has a deep and strong bench, and we are not immediately concerned about short-term portfolio impacts.”

This story is by the staff of sister publication Pensions & Investments. It was written by Barry B. Burr, with reports from Douglas Appell, Rick Baert, Hazel Bradford, Randy Diamond, Arleen Jacobius, Meaghan Kilroy, Rob Kozlowski, Robert Steyer and Christine Williamson.

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