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Why Bill Gross Left PIMCO to Join Janus: PIMCO to See Outflows?

The move of the Bond King, or bond investor extraordinaire William Hunt "Bill" Gross, from Pacific Investment Management Company (:PIMCO) to join Janus Capital Group (JNS) was looked as shocking. No matter how media reports suggest the shocking move of Gross as the ‘return to his first love’, splitting from his co-founded PIMCO after a four-decade stay must have been tough. Reports suggest, Gross’ exit was a result of mounting tensions in Pimco that was becoming a tough task for Gross. Gross was perhaps on the verge of getting sacked.

In recent times, Gross had threatened to quit when PIMCO’s executive committee themselves reportedly felt that he should move out. Deputy Chief Investment Officer Dan Ivascyn was to be the successor and PIMCO’s German parent Allianz SE had approved the move. However, it was Gross himself who announced his move to Janus.

There were rumors that Gross and top PIMCO brass had some hostility related to the company’s future move after Gross’s probable successor Mohamed El-Erian resigned in January. Douglas Hodge, PIMCO chief executive, stated: “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 differences about how to take PIMCO forward.”

Hodge had praised Gross some months back saying Gross brings “more value for more investors than anyone in the history of our industry”. However now, the Wall Street Journal reported that Hodge said that there is ‘sense of relief at the firm following Mr. Gross’s departure’.

PIMCO versus Janus

The comparison does not make much sense when we take into consideration the market capitalizations of the two firms. Janus is said to be only one-tenth the size of PIMCO. Janus has a market capitalization of $2 billion. This is said to be identical with the estimated personal wealth of Gross.

However, following the announcement of Gross joining Janus, its shares soared 43% before the opening bell. This jump in Janus’ shares equaled to about $899 million worth of additional market capitalizations – thanks to Gross.

Size Matters

Pimco only grew larger and larger, demanding surging amount of time from Gross. That restricted him from doing what he does best – bond investing. Gross’ flagship PIMCO Total Return Fund’s assets under management stand at $221.6 billion. On the other hand, the Janus Unconstrained Bond A (JUCAX), which Gross will be managing, has $12.9 million worth of assets under management. Interestingly though, JUCAX has an absolute return strategy that almost mirrors the style of PIMCO’s Total Return Fund.

Gross is looking forward to manage the JUCAX fund which was incepted on May 27, 2014. He did acknowledge the small-size advantage and also the fact that he will again get to manage his client’s assets.

He stated: “I look forward to returning my full focus to the fixed income markets and investing, giving up many of the complexities that go with managing a large, complicated organization. I chose Janus as my next home because of my long standing relationship with and respect for CEO Dick Weil and my desire to get back to spending the bulk of my day managing client assets.”

Public Relations Work Took a Toll

Following El-Erian’s exit earlier this year, Gross was required to keep up with the surging public relations works. Considered to have become the figurehead, he had to travel across the globe speaking and attending industry events and economic summits. There again, his time for managing client assets was chopped.

In an interview to Bloomberg Businessweek earlier this year, Gross had termed the press attention to have “been like a near-death experience, an emotional blow. Whenever I read the newspaper, I say to myself, ‘At least my wife loves me.’ ”

Separately, Gross was criticized for his peculiar public behavior. According to The Economist: “His public investment commentaries usually include long digressions on topics such as his late cat, and he once led an impromptu conga line on the PIMCO trading floor. He gave a speech at an investment conference earlier this year that struck many as unbecoming of a man to whom savers had entrusted nearly half a trillion dollars.”

Gross had in fact worn sunglasses while addressing and asked journalists to see him as “the kindest, bravest, warmest, most wonderful human being you’ve met in your life.” Gross had also compared himself with the young pop-star Justin Bieber.

Scratchy Management

Gross was blamed to have alienated senior executives despite PIMCO’s top brass urging him to maintain a friendly atmosphere. His abrasive style of management was evident when he shot out a scornful mail to top executives at PIMCO. Gross also took names, criticizing some senior executives. Following the mail, many of the senior executives were said to have threatened to quit if Gross in his position.

Meanwhile, the U.S. Securities and Exchange Commission (SEC.TO) is investigating Pimco for allegedly inflating the Gross-managed PIMCO Total Return ETF’s (BOND) returns.

The Wall Street Journal and CNBC had reported that Gross had showed "increasingly erratic behavior" and was to be sacked.

Total Return Fund Suffered 16 Months of Outflow

Total Return Fund, world's largest bond fund, saw outflows for 16 straight months that began last year due. The fund’s performance hit a nadir in two decades when it dropped 1.9% in 2013. Gross’ misjudgment has also been blamed for the dismal returns. Gross had forecasted in 2011 that US government bonds would decline after the central bank ends the quantitative easing plan. However, that was not the case but by that time Gross had significantly shed Treasuries from PIMCO Total Return Fund’s portfolio. The fund had then ended in the bottom 15% of the peer group.

What Happens to PIMCO Funds

While Credit Suisse predicts that Janus may see its fixed income segment see growth of $65-$70 billion against $31 billion as of June 30, PIMCO on the other hand may suffer billions of dollars of outflow. Janus’s shares got their best one-day gain in 45 years following the announcement of Gross joining them. PIMCO’s parent company Allianz SE suffered their biggest decline since Dec 2011.

Certain market experts seem bearish on PIMCO. There is also uncertainty about PIMCO’s earnings as we need to wait and see how many investors leave PIMCO to join flow out from PIMCO to land up most likely in Janus. Uncertainty about potential capital outflows and management reshuffling will probably lead to outflows in the tens of billions from PTTRX.

Douglas Hodge said that PIMCO is ready for client redemptions. He said that withdrawals are expected “with any transition of a senior person.” PIMCO may be selling assets to catch up with investor redemption. Probably, PIMCO may also lose it leadership as the fixed-income manager. However, Hodge said that the Pimco Total Return fund and others have significant liquidity to sustain investor redemptions. California Public Employees' Retirement System (Calpers), a big client, is said to be staying with PIMCO.

PIMCO Total Return Institutional fund currently carries a Zacks Mutual Fund Rank #3 (Hold). It has lost 1.1% in one month, offsetting the year-to-date gains to 1.7% now. This is significantly lower than other PIMCO funds that carry a favorable Zacks Mutual Fund Rank #1 (Strong Buy).

PIMCO Real Estate Real Return Strategy P (PETPX), PIMCO Extended Duration Institutional (PEDIX), PIMCO Long-Term U.S. Government Fund Institutional (PGOVX) all carry a Zacks Mutual Fund Rank #1 and have returned 20.9%, 27.5% and 14.9% year to date, respectively.

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