The $5.6 Billion Price of Bill Gross Getting Dumped

On September 26, PIMCO’s Bill Gross resigned from the firm he built into a $2 trillion world class manager, in order to avoid what the Wall Street Journal described as his impending termination for the abusive treatment of employees. The action rattled markets around the world as the stock value of PIMCO’s parent, Allianz Insurance, tanked by a stunning $4.9 billion. But when mutual fund giant Janus Capital Group announced Gross was taking over their tiny $13 million Janus Global Unconstrained Bond Fund, Janus’ stock went up by $628 million.

Gross, who co-founded PIMCO in 1971, had described himself a number of times as a “demanding boss.” But the Journal reported last June, during a bond market sell-off, he got into a public screaming rant on the firm’s trading floor in Newport Beach, CA with PIMCO’s Chief Executive and Gross apparent, Mohamed El-Erian:     

Gross: “I have a 41-year track record of investing excellence… What do you have?”

El-Erian: “I’m tired of cleaning up your s#&t.”

Supposedly, after he received a private dressing down from Mr. El-Erian that he needed to change the way he interacted with employees, Mr. Gross agreed to make amends. 

But the excrement that El-Erian referred to was Gross’ massive use of derivatives to leverage of his performance in the mutual funds and pension assets he managed. The good news is the strategy had allowed PIMCO to outperform other managers. But derivative leverage in 2013 and 2014 caused PIMCO to drastically underperform and investors to withdraw an average of $4 billion a month from PIMCO.

Gross continued his public humiliation of employees, and in January, PIMCO shocked the public and employees by announcing that Mr. El-Erian was leaving the company.  Gross denied that tension with Mr. El-Erian was a factor in his departure. The final straw that forced Gross out was a 10-point e-mail he sent last week outlining why the major problems at PIMCO were specifically due to other executives actions. 

tellingly, as Gross’ performance in managing the Total Return Bond Fund has been in the bottom 20% of money managers with only a +3.3% return, the executives he blamed for his funds’ lousy performance actually manage other funds at PIMCO whose performance is described by the Journal as the hottest on Wall Street.  

Pimco Income Fund, for example, managed by Dan Ivascyn and Alfred Murata and investing in “multisector” high income bonds, is in the top 10% of performance versus peers this year, according to Morningstar, with a +7.4% return. Pimco Real Return Fund, managed by Mihir Worah, which invests in inflation-protected bonds, is up +4.6% return. 

The end for Gross came when Ivascyn, nickname at PIMCO as “The Beast“, led a palace coup of PIMCO executives and deputy chief investment officers that threatened to resign unless Gross left first.  Allianz quickly told Gross he was leaving and replaced him with Daniel J. Ivascyn as PIMCO’s Chief Investment Officer.

Bill Gross has always loved the limelight, and for decades had a terrific track record making money managing bonds to back it up. But that reputation had seriously eroded with his poor investment performance and bizarre employee relations. Now, by causing markets to move by $5.5 billion in one day, Bill Gross has hit a new high in notoriety.

Image: Jim Young/Reuters