Advisers ‘blindsided’ by Gross departure as Pimco faces rebuilding

Bond behemoth has opportunity to recast its image, but analysts and advisers predict significant outflows. Plus: Pimco's pitiful year. How bad will it get?

Bill Gross’ departure from Pimco not only reshuffles the investment management industry, it casts serious doubt on the dominance of the company he co-founded in 1971 and oversaw as it grew to manage nearly $2 trillion for everyone from big pension funds to individual investors.

Mr. Gross set the tone at Pimco as its chief investment officer. He was its top star and, in addition to overseeing all of the firm’s investment operations, the 70-year-old also personally managed $328 billion in funds, including the world’s largest bond fund Pimco Total Return (PTTAX).

Now, with his abrupt departure to Janus Capital Group Inc., the future of those funds may be in question. The tenure and stability of top fund managers is often a top-of-mind consideration for the researchers, consultants and platform gatekeepers who choose which investments to recommend or make available to financial advisers.

(Don’t miss: Bill Gross’ terrible, horrible, no good, very bad year)

Russel Kinnel, Morningstar’s director of manager research, said Friday it is placing all of its rated Pimco funds under review “while we assess the impact of today’s announcement.” Morgan Stanley Wealth Management, the largest U.S. brokerage by number of advisers, said it was monitoring the situation and had not yet come to a decision on whether to place Pimco funds on “watch.”

“When management changes of this type occur, it’s customary for LPL to put the fund company on a watch list,” said Betsy Weinberger, spokeswoman LPL Financial, the largest independent broker-dealer.
And Calpers, the largest U.S. public pension fund, said it was evaluating its Pimco mandate but would not make any immediate changes.

Several advisers described themselves as having been “blindsided” by the announcement, including Karissa A. McDonough, director of fixed-income strategy at People’s United Bank Wealth Management, which manages more than $5 billion and makes extensive use of Pimco funds.

“It’s never pleasant to come in and be hit with this news,” Ms. McDonough said. “Even though Pimco has moved away from dependence on Bill Gross, the fact is, for that firm, he was the investment strategy.”

Ms. McDonough’s firm has been reducing its exposure to Pimco in recent months, replacing about 25% of Pimco allocations to a competitor, the Goldman Strategic Income Fund (GSZAX). The firm is also recommending that clients switch to the Fidelity Total Bond Fund (FTBFX).

As of Friday, People’s United still had about $300 million invested in Pimco funds and Ms. McDonough said she was evaluating whether to maintain those holdings.

Shortly after Janus Capital announced Mr. Gross’ hiring, analysts at Sanford C. Bernstein & Co., a research firm, predicted outflows of 10% to 30% from Pimco’s funds as a result of his exit.

(Related: S&P Capital IQ’s Todd Rosenbluth on what Gross’ departure means for Pimco’s funds)

That would only add suffering to an already punishing year. Pimco lost $63 billion in the 12-month period ended Aug. 31 as Mr. Gross turned in spotty performance. The sudden and surprising departure of Mr. Gross’ co-CIO and heir apparent, Mohamed A. El-Erian, in March didn’t help.

Investor withdrawals notwithstanding, Pimco now has a chance to reshape its own image. For years, the firm has worked to develop the prominence of other bond managers and it’s made several pushes — with mixed results — to develop other investment disciplines, including stocks and alternatives.

But the spotlight remained, sometimes awkwardly, on the firm’s off-the-cuff star manager. In recent months, Pimco weathered a steady stream of negative publicity, detailing Mr. Gross’ sometimes-abrasive manner and his unique mannerisms.

Just this week came reports his Total Return exchange-traded fund (BOND) is being investigated by the Securities and Exchange Commission over allegations it may have relied on lofty valuations, which plumped up performance.

“While we are grateful for everything Bill contributed to building our firm and delivering value to Pimco’s clients, over the course of this year it became increasingly clear that the firm’s leadership and Bill have fundamental difference about how to take Pimco forward,” Pimco chief executive Douglas M. Hodge said in a statement.

A successor to Mr. Gross has yet to be named, although media reports indicate that deputy chief investment officer Daniel Ivascyn has the inside track.

“That’s the cycle of nature — at some point the young lions decide it’s time for the senior lion to go,” said David Young, a former Pimco executive who now is chief executive of Anfield Capital Management in Newport Beach, Calif.

He said Mr. Gross is going to “eviscerate” his former employer.

“He’s going to pick off the best people,” said Mr. Young. “He knows who they are, and he’s going to take them. But we’re not dancing. It’s a shame. A lot of my really good friends are going to have six to 12 months in a full-force defense of Pimco.”

Pimco, which also is based in Newport Beach, Calif., did not respond to multiple requests for comment by telephone and e-mail.

The departure of Mr. Gross should teach advisers and their consultants a lesson about how little they know about how their clients’ money is being managed, according to investment consultant Tom Brakke.

“Of the hundreds of due-diligence reports that were written on Pimco up until El-Erian’s departure, how many of them talked about potential cultural conflict?” asked Mr. Brakke. “How can it be that we have all these eyes on an organization and that nobody got wind of the fact that there was something organizationally that wasn’t right?”

“If you can’t get that awareness,” he added, “you’re putting your faith in a process that doesn’t deliver the goods.”

Reporters Mason Braswell and Liz Skinner contributed to this story.