Gross’ new heir apparent post-El-Erian

His older brother, Ed, might be the U.K. Chancellor of the Exchequer if the Labour Party wins the next election. His father is a pioneer of alternatives to using animals in medical experiments.

Two of the biggest funds he managed for Pimco beat more than 90% of peers in the past three years.
He thinks the European Central Bank may turn to quantitative easing by buying corporate bonds within a year. And he sees some emerging-markets assets, especially Mexico’s debt and some of Brazil’s local currency bonds, as offering value after the recent rout.

“As a team, I think we navigated the European crisis well,” Mr. Balls said in an interview at Pimco’s office in London. “One of the attractions of coming to Pimco is that it has a strong macro process. I’m more of a macro, top-down person than a rocket scientist.”

Mr. Balls has emerged as part of a new generation of top executives at Pimco, the $1.9 trillion bond firm that’s revisiting its leadership plans after former chief executive Mohamed El-Erian quit in January. Mr. El-Erian shared the role of co-chief investment officer with Mr. Gross and was once considered his heir-apparent.
SIX DEPUTIES
Mr. Gross in January named Mr. Balls a deputy CIO along with Dan Ivascyn, Mark Kiesel, Virginie Maisonneuve, Scott Mather and Mihir Worah as part of the biggest management shakeup in Pimco’s history.

Mr. Balls must help restore investor confidence in a firm that’s seeking to stem record withdrawals from its main fund and expand beyond traditional U.S. bonds as the 30-year fixed income rally comes to an end.
“The restructuring is a crucial and positive step, but the key question is whether there will be real delegation and decentralization, or will it still be controlled by Bill Gross,” Thomas Seidl, an analyst at Sanford C. Bernstein Ltd., who covers Pimco parent Allianz SE, said March 26.

Mr. Gross said the new arrangement will work better for clients.

“The structure will make our investment process more strategic, with more balance between the deputy chief investment officers, who are all empowered to operate more in their respective areas,” Mr. Gross wrote in an e-mail March 27.

Mr. Balls was born in Norwich, the English city that’s home to Colman’s mustard. He grew up in Nottingham, where his father, medical cell biologist Michael Balls, was a university professor. He remains a staunch supporter of Norwich City Football Club.

Like his father and brother, Mr. Balls went to Oxford University where he studied philosophy, politics, and economics. He received a master’s degree from Harvard University in public administration in 1998 and worked as a journalist for the Financial Times for eight years, writing about central banks and macroeconomics. He said he often talked to Mr. El-Erian and Pimco economist Paul McCulley.
FISCHER SPEECHES
“I was always very interested in economics, markets, and politics and worked at a newspaper, rather than being a journalist first and foremost,” Mr. Balls said Feb. 27.

While working at the Financial Times, Mr. Balls said, in his free time he wrote speeches for Mr. Fischer, who was then a vice chairman at Citigroup Inc. The former governor of the Bank of Israel is awaiting confirmation to be a vice chairman of the Federal Reserve.

Mr. El-Erian and Mr. McCulley approached Mr. Balls to see if he was interested in joining Pimco. Invited to “meet a couple of people” for a potential job at Pimco’s Newport Beach, Calif., headquarters on his way to a family Thanksgiving in 2005, the columnist emerged from nine hours of interviews with 15 people, including Mr. Gross, headed for a new career as a strategist.

Mr. Balls said the transition from journalism to finance was smoother than he expected.

“When I moved to Pimco, I was dealing with the same issues but a very different end product,” he said. “Pimco’s investment process involves a real focus on macroeconomics and top-down analysis.”

Mr. Balls became a money manager in April 2008, five months before Lehman Brothers Holdings Inc. filed the biggest bankruptcy in U.S. history. He said the demise of the 158-year- old investment bank had a major impact on the way he approached the debt situation in the euro area.

“What Lehman showed you is that policy makers can just lose control of the situation,” Mr. Balls said. “If one country, one central bank, one government and one banking system couldn’t prevent an event like that, then it is very clear that 17 countries are going to have coordination problems on an altogether different scale.”
ITALY, SPAIN
Mr. Balls and his colleagues looked at Europe’s peripheral countries as if they were emerging economies. Pimco unloaded nearly all of its European sovereign debt early in 2009, before the Greek government revealed that its budget deficit was twice as big as the previous administration had disclosed, igniting a bond selloff. Yields on bonds issued by Spain, Italy, Portugal, Greece and Ireland rose to euro-era highs.
Mr. Balls said that’s one of the best calls he and his team made. The firm turned a profit by buying devalued Italian and Spanish securities before European Central Bank president Mario Draghi in July 2012 pledged to do “whatever it takes” to safeguard the euro.

Pimco remains overweight Italian and Spanish bonds, he said. That means it owns more securities compared with the weighting in benchmarks.

Pimco’s Euro Long Average Duration Fund, which Mr. Balls has managed since February 2009, returned 12.2% over the past three years, beating 98% of competitors. Another fund he manages, Pimco GIS Euro Bond Fund, gained 6.9% and outperformed 91% of its peers over the same period.

Mr. Balls, who oversees European and Asian investments for Pimco from London, said the ECB may resort to quantitative easing to avoid deflation.

“Deflation risk is real, not just in the peripheral countries but there is a risk in core countries as well,” he said. “It is not the baseline but there is a good chance in the next six to 12 months that policymakers will do asset purchases.”

Mr. El-Erian’s departure and the ascent of Mr. Balls and the other new executives comes at a crucial time for Pimco. Mr. Gross’s $236 billion Total Return Fund suffered redemptions of $41.1 billion last year, losing its title as the world’s biggest mutual fund in October to an index fund managed by the Vanguard Group Inc., according to Morningstar Inc.

The Pimco fund’s return fell 1.9% in 2013, trailing 65 percent of its peers, according to data compiled by Bloomberg. Returns are still among the best in the industry over the long run, with the fund beating 96% of its peers over the past 15 years, according to Chicago-based Morningstar.

15 MENTIONS
Mr. Balls declined to comment about Mr. El-Erian’s departure, while mentioning the fund manager fondly at least 15 times during the 90-minute interview. Mr. Balls said the former chief executive worked closely with Mr. Gross in decentralizing the decision-making process that led to the restructuring, and Mr. Balls’s promotion, earlier this year.

Mr. Balls said investors can expect continuity in the way the firm manages client’s money.
“Pimco has a strong investment process and that is not going to change,” Mr. Balls said. “Mohamed had a very important role, but one thing about Pimco is that it has a real depth of talent. Bill has an incredible ability to look through complexity and to focus on the key factors that matter in terms of investment outlook and strategy.”

Morningstar disagrees. The Chicago-based research firm downgraded Pimco’s stewardship grade to C, from B, March 18, citing in part “a higher degree of uncertainty around the firm’s recent personnel changes.” The highest grade is an A and the worst is an F.

“As the company becomes bigger and more complicated, we want to decentralize some of the decision-making outside of the investment committee,” Mr. Balls said. “We’ve been making those changes in recent years. Bill wants a very clear focus on investment and this is a good way to organize.”
(Bloomberg News)

Related Topics: Pacific Investment Management Company (Pimco)