(Bloomberg) -- Manny Roman was blunt: A lot of mutual funds stink.
"When you look at the mutual fund industry, when you look at the way they manage your 401(k)," a grinning Emmanuel "Manny" Roman told a TED Talk in London, "it's a really, really sad story."
Roman's performance didn't put off Dan Ivascyn, chief investment officer of Pimco, one of that industry's tarnished stars. After a nearly yearlong search, Ivascyn picked the hedge-fund veteran, who revived the fortunes of Man Group, to inherit the mantle at Pimco, a firm battling to escape the shadow of its famous co-founder-turned-rival Bill Gross.
The same-old just wasn't going to work anymore. "The industry is going through a tremendous period of change," Ivascyn said. "And then Pimco, of course, has gone through a tremendous period of change."
The turn to an outsider marks the latest twist in a struggle to regain footing after a steep decline. The flagship Pimco Total Return Fund — once the world's largest mutual fund — has shrunk 70% to $86 billion in the past three years, as performance lagged and money followed Gross out the door after his bitter September 2014 exit. Total assets are down 25%, to $1.5 trillion.
The size of Pimco, with almost 20 times the assets of Man Group, won't make a turnaround easy, said David McCann, an analyst with Numis Securities in London. "It's a much bigger business. To diversify that business and quickly, it is going to take a masterstroke."
Pressure to get the house in order is coming from insurer Allianz, Pimco's parent, which wants higher profits at a time that historically low interest rates have narrowed bond returns. Roman, 52, will face other challenges. The headcount has been thinned out by 10% since 2014, a blow to morale. Investors are moving to lower-cost, passively managed funds.
At Man Group, the largest publicly traded hedge fund firm, Roman spearheaded acquisitions while embracing new technology, data gathering and quantitative analysis. He'll start at Pimco in November, leaving London for the palm tree-lined streets of Newport Beach, California, two years after Gross jumped to Janus Capital Group, where he manages the $1.5 billion Janus Global Unconstrained Bond Fund.
'MEASURED, RESPONSIBLE CHANGE'
Pimco could grow through purchases, joint ventures or moves in alternative assets, such as hedge funds. It won't come at the cost of the fixed-income business that's been its bread and butter, according to Ivascyn. "We want this new CEO to come in and challenge convention, both industry convention and our own convention. Push us and make some change — but we want it to be measured, responsible change."
A Frenchman who practices yoga and meditation, a patron of art and literature, Roman wasn't an obvious choice. At a conference last year, he talked about the threat to active management — Pimco's forte — posed by indexed investing and automation. "Computers are much better at executing a transaction than human beings," he said. "It's cheaper, it's faster and the client is better off."
And in his 2013 TED talk, called "Skill vs. Luck," Roman ribbed mutual funds: "The self-gratifying comment is that the mutual-fund industry is the Little League — and all the smart people have gone into hedge funds."
Roman spent 18 years at Goldman Sachs Group, rising to co-head of the European equities division. He's "a perfectionist," said Michael Hintze, a former Goldman colleague who's now CEO of the hedge fund CQS. "He doesn't do anything by halves."
In 2005, Roman jumped to GLG Partners, where he was co-CEO until it was acquired five years later by Man Group. In 2012, he got the top job, when the firm was beset by volatility and withdrawals amid losses at one of its main funds. Assets rebounded, with $76.4 billion under management as of June 30. The firm attracted net inflows during its latest quarter despite losing money on investments.
Numis Securities' McCann, for one, isn't enamored by how the turnaround happened. "He hasn't actually delivered in cold, hard numbers that much," McCann said. Assets grew, "but most of that was purchased." Roman declined to comment.
At Pimco, Roman will replace Doug Hodge, CEO since Mohamed El-Erian resigned in January 2014; Hodge will stay as a managing director.
Ivascyn, who became CIO after Gross left, set up a committee last year to search for new executive talent. "We were going to go out and look for top notch people that could offer an external perspective," he said.
Pimco retained two recruiting firms that compiled lists of dozens of candidates. Roman made both rosters. Ivascyn didn't know him personally, though they both earned MBAs at the University of Chicago when the faculty included Nobel Prize winner Eugene Fama, who pioneered the efficient-market theory for stocks and bonds, an interest the two share.
But Ivascyn had hired others from Man Group, including two former Pimco managers who returned after joining the hedge fund, Jamil Baz and Sudi Mariappa. They gave Roman high marks for hard work, leadership and intellect, along with other attributes, including a famed wine collection. "Never let him know you do not like his wine," Mariappa said.