After more than 43 years at PIMCO, Bill Gross’s departure from the firm he founded has left advisors wondering whether their clients should continue with the "Bond King," or stay with his old firm, now that the playing field has changed.
Some advisors say that Gross, and his erratic behavior before leaving, hurt his credibility and PIMCO's. Yet, many agree that he was instrumental to the firm's success, and that without him, the fate of the PIMCO Total Return Fund is uncertain.
“Bill Gross was the fund,” says Ron Rhoades, an assistant professor at the State University of New York's Alfred State Financial Planning Program. “Very few fixed income managers have a long history of guessing right on fixed income market changes, fairly consistently, over a long period of time.”
'VERY, VERY CLOUDY'
Without Bill Gross there is no reason to stay with PIMCO’s bond funds, Rhoades says. “The future for PIMCO is, as a result, very, very cloudy.”
Rhoades also notes that for advisors, following Gross to Janus may not be so much a “no-brainer.” A lot will depend on the fees of any Janus funds which Gross might run. Many advisors also won't forget that Gross' departure came after his flagship fund suffered its 16th straight month of outflows, and amid an SEC probe into whether one of the firm's ETFs artificially inflated returns.
Since January, investors have pulled $25 billion from the PIMCO Total Return Fund, and $6 billion from the PIMCO Unconstrained Bond Fund, according to Morningstar data as of the end of August. And since Gross left, published reports claimed PIMCO suffered another $10 billion in withdrawals.
'ROCK STAR' RISK
Dan Sondhelm, a vice president and marketing consultant at SunStar Strategic, says Gross' exit could be a wakeup call for the asset management industry, on why a fund should not be defined by one person. Sondhelm, who works with 40 asset managers on distribution and marketing strategies, suggests fund companies consider having a strong second-in-command managing key products, who should take on more speaking roles at industry conferences so advisors know the name.
"There is definitely a risk to having a star leading a strategy, and in this case a rock star," says Sondhelm. "You can still have a star but make sure there is a strong number two, or design it as a team."
Dean Harman, founder of Harman Wealth Management in The Woodlands, Texas, has gotten to know Gross well over the years through business meetings, and has tremendous respect for his skills as a fund manager. He also is impressed by Daniel Ivascyn, PIMCO's new group chief investment officer, who was appointed to the job in the wake of his boss' departure. While Harman's firm doesn't have holdings in Gross's Total Return mutual fund, they do use some of Pimco's equity strategies run by Ivascyn.
"He is a sharp guy and a strong manager," says Harman of Ivascyn. "PIMCO is so well known to be this big bond shop but they have some other great offerings. This could be an opportunity for other sides of the business to shine."
Harman adds that many advisors like himself will invest in funds based on their strategies, more than who the investment manager is. He says the Total Return fund got to be "too big" for even someone as established as Gross, and thinks his new position at Janus could open new offerings.
"Gross' move to Janus may be a great fit for advisors since he will be able to incorporate some of his best ideas and not be constrained by size," says Harman. "He is one of the greatest investment minds of modern times."
CHECK THE COMPETITION
Gross’s departure is likely good news for PIMCO competitors, Rhoades says, as many advisors may decide to look to low cost ETFs and bond mutual funds instead, such as those from Vanguard. Others may choose to go with Dimensional Funds Advisors, which uses a floating maturity strategy in several of its bond funds.
Of the top 10 bond mutual funds in 2014 as of Aug. 31, four are from Vanguard led by the Vanguard Total Bond Market II Index Fund with $8.4 billion estimated net flows year to date. Other firms with high-performing bond funds include Goldman Sachs, BlackRock and T. Rowe Price.
PIMCO in its entirety manages $1.9 trillion, while the PIMCO Total Return Fund long headed by Gross manages about 12% of the full amount of $220 billion. The new fund he’s heading at Janus, meanwhile, is $13 million.
Jacob Sybrowsky, associate dean at Utah Valley University, urges advisors to not take a rash approach and instead "be vigilant" and monitor new developments.
“The problem with taking a bold reaction is that PIMCO has a good track record with solid data, and we understand how PIMCO is graded," says Sybrowsky. "If advisors pulled out of PIMCO and rushed to Janus, they’d be flooding into a fund that is not as well understood."
PIMCO, meanwhile, was to have executives speak with advisors at wirehouses like Morgan Stanley and Merrill Lynch, to make the case for continued investment with the firm's products.
“We have built a deep bench of talent with extensive investment and leadership experience, including more than 240 portfolio managers globally, and our outstanding team around the world gives us the scale, talent, expertise and commitment to manage this transition," said PIMCO CEO Douglas Hodge, in the firm's official release after Gross' departure.
"We will continue to add and promote talent at all levels to help us drive our firm forward," Hodge added. "We are energized and fully focused on serving our clients today and into the future.”
Sybrowsky emphasized that while PIMCO has lost assets since Gross left, it is too soon to say if the money manager is going downhill. At the same time, he noted the move is a big coup for Janus.
"If I were Janus, ‘We got Bill Gross,' is like saying, 'We got Michael Jordan,'" says Sybrowsky. "I think Janus will get a boost. They brought in a guy who is a little crazy, but still a rock star."
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