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Retirement of 'bond king' Gross leaves asterisk and towering legacy

Eric Jacobson  |  05 Feb 2019Text size  Decrease  Increase  |  
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Janus has announced that Bill Gross, co-founder of PIMCO, and manager of Janus Henderson Global Unconstrained Bond (JUCIX) will retire from Janus, effective 1 March.

Gross made big headlines with his abrupt departure from PIMCO in 2014 and the nasty spat that followed. The saga created anxiety and uncertainty for investors, many of whom took their money and ran. It marked a low point for Gross's career and needlessly put at risk all that he had worked to build since helping found PIMCO in 1971.

Some observers expected massive inflows to follow Gross to Janus as investors fled PIMCO Total Return (PTTRX) in the months after his departure, but it wasn’t meant to be. Janus Henderson Unconstrained struggled to gain assets and suffered from poor performance under Gross's leadership. As of December 2018, the fund had less than US$1 billion in assets, with Janus reporting that Gross and his family members owned more than 50 per cent of its shares.

The game was never the same

The past few years were undeniably a blemish on Gross's record. On the other hand, he left a legacy as PIMCO's co-founder and longtime manager of bond behemoth PIMCO Total Return that is arguably unrivaled.

For one, Gross was a trailblazer when it came to managing bonds, and the industry eventually followed his lead. When he started, the standard playbook for managing fixed-income securities was basic, buy-and-hold, and focused on yield. That meant managers rarely looked to take advantage of illiquidity premiums, inefficiencies, or mispricings in the marketplace. By contrast, Gross used fundamental credit work to inform decisions to buy or sell bonds based on whether they looked cheap or expensive, often in the secondary market.

Sometimes that meant buying bonds that looked attractive because they were cheap, even if they didn't throw off the most yield, or avoiding those that threw off a lot of income but might have features that could put them at risk down the road. Gross's portfolios often had much lower yields, but his more holistic management style meant they almost always came out ahead in the long run.

Keeping an eye on the investor ball

Gross also made a critical decision to stick to investing while letting others handle the nuts and bolts of managing PIMCO. That may seem like a backburner issue, but it was an important component in the firm's long-term health. It may not have worked as well had Gross not also been a founder, but it gave him the freedom and flexibility to hone a process and infrastructure focused squarely on investing, while his influence still meant that others at the firm toiling to grow the business weren't free to engage in the kind of marketing and product development tactics that are de rigueur at other firms.

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Under the control of sales and marketing executives who viewed the provision of asset management as a product to sell like any other, numerous competitors looked for whatever edge they could find to attract assets. Often, that meant using aggressive strategies or gimmicks that would produce alluring results for a while, only to result in blowups when the comeuppance came. By the time the pain of 2008 rolled around, crushing investors in other funds that had previously looked like superstars, PIMCO's ability to sidestep the worst of it drove even more investors to the firm's door.

From soloist to maestro

Gross did suffer from an unwillingness to close strategies even when their assets ballooned, but he managed to keep PIMCO Total Return a strong competitor even after the fund became too big for most individual bond picks to move its performance needle. That meant evolving as an investor, and Gross managed the feat better than almost anyone else. He looked to PIMCO's various manager and analyst teams to populate his portfolios with their best ideas. But the larger those portfolios got, the more reliant they became on big-picture decisions such as which broad markets and sectors to overweight or underweight, or how much interest-rate sensitivity to take and where to do it on the yield curve.

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PIMCO's assets have since rebounded but they fell by as much as US$450bn after Gross left

Gross came to those decisions with the input of PIMCO's investment committee, at turns including generalist and specialist managers across the fixed-income landscape as well as economists looking at every data point and hanging on every word of central bankers across the globe. Whether he more often listened to their opinions or dominated the group's with his own, the efforts bore fruit, helping him to generate peer-busting returns even when fundamental bond-by-bond analysis became a less-effective tool. And though his taste for the media spotlight stoked an image of Gross as a seer of interest rates making giant bets on his convictions, his portfolios rarely went to extremes that would have meant big losses when he was wrong.

The proof is in the PIMCO

Whatever the drama of his departure, it's also a testament to Gross that PIMCO is still thriving. Despite having a legendary ego, he was willing to hire and surround himself with brilliance and talent. Even then he still took up most of the spotlight and he was notoriously difficult to work with, but he also managed to keep most of those talents around when their own success marked them as targets for recruitment by other firms. Gross made sure PIMCO was willing to pay top dollar when the siren songs of hedge funds and private equity firms made it difficult for other traditional asset managers to compete. His battles with them may have been at the root of his decision to resign, but the managers Gross hired and trained were there, ready, and up to the task when the time came. Dan Ivascyn succeeded him as group CIO, steadied the ship, and has since presided over a period of notable stability and investment success.

PIMCO's ability to survive and thrive notwithstanding, Gross's decision to leave how and when he did was another lesson in how not to handle a transition. The firm had people in place to step up when he left, but Gross had done little to prepare investors for his reckless departure. PIMCO's assets have since rebounded above their earlier levels, but they fell by as much as US$450 billion after he left. That could have easily hurt investors and led to an exodus of managers if the firm hadn't managed through it as well as it did. But while there's no question that history leaves an asterisk next to Bill Gross's name, nor is there a question that he played an invaluable role in raising the bar for fixed-income managers, thereby having an impact on more than just his own investors.

Eric Jacobson is a senior manager research analyst for Morningstar. He has a position in the following securities mentioned above: PTTRX. 

is a senior manager research analyst for Morningstar.

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