Check Mate

The Bond King Leaves PIMCO for Janus Capital

Check Mate

We were as shocked as everyone else when we learned that Bill Gross had resigned from PIMCO, and we were doubly shocked to learn that he was going to Janus Capital, a company not known for its bond funds. In prior articles such as this one, we have discussed the problem of investor redemptions that PIMCO Total Return has faced for more than a year. We expect that these redemptions will only accelerate with Gross’s departure. According to reporting1 by the Wall Street Journal, Mr. Gross’s resignation was not a one-sided affair: “Mr. Gross’s behavior grew increasingly erratic in the wake of Mohammed El-Erian’s departure, according to people familiar with the matter. Several months ago, the PIMCO executive committee issued a warning to Mr. Gross that he needed to change his behavior…Several PIMCO deputy chief investment officers told the firm they would resign if Mr. Gross didn’t leave.”

Gross’s resignation comes on the heels of a story2 broken by the Wall Street Journal that the SEC is examining pricing practices of the PIMCO Total Return ETF. Specifically, the SEC is attempting to determine whether the fund bought investments at discounted prices but relied on higher valuations when the value of the holdings were calculated at a later date. According to the authors, “Such a maneuver could make it seem as though the ETF had scored quick gains when it was in fact taking advantage of variations in the way some investments are valued in the bond market.” As of today (9/26/2014), nobody has been charged with any wrongdoing. Mr. Gross declined to comment for the article.

At Janus, Gross will be managing their Unconstrained Bond Fund. Essentially, this is a “go anywhere/do anything” fund that will allow Gross to express his views of the financial markets. This fund currently has $12.9 million of assets (yes, million) compared to a whopping $222 billion for PIMCO Total Return.3 Janus Capital had its heyday just  before the dot-com crash in 2000 when its assets were at $330 billion. In 2003, it was involved in the mutual fund market timing scandal for which it paid a fine of $262 million. Today, it manages a little over $160 billion.4

The value of Bill Gross to the stockholders in Allianz (the parent company of PIMCO) and Janus capital was made apparent in market prices after the announcement. As of the market close today, Allianz is down 6.1% (or about $5 billion in market value) and Janus Capital is up 43% (or about $900 million in market value). These numbers, however, should not be interpreted as his value to the bondholders of the funds that he formerly managed or will manage. If Mr. Gross truly has alpha-generating ability going forward (and we are not saying he doesn’t), then the value of that alpha rightly belongs to himself and his employers. That value can be captured in two ways:

1)      Increasing the fees on the Janus Unconstrained Bond Fund which currently has a 4.75% front-end load and an annual expense ratio of 1.08% on the A-class shares.3   

2)      Allowing the assets of the fund to balloon so that instead of getting Gross’s ten best ideas, fund investors will be getting his fifty or one-hundred best ideas.

The economic reason (aside from market efficiency) why investors have no true expectation of gaining alpha via manager picking is explained in this article. If you are currently an investor in PIMCO Total Return (or any other PIMCO fund for that matter) and are unsure of what to do, please give us a call at 888-643-3133.

1http://online.wsj.com/articles/bill-gross-leaves-pimco-for-janus-1411736217

2”SEC Is Examining Pricing at Pimco”, Wall Street Journal, 9/24/2014, page C1.

3Data pulled from Morningstar.com on 9/26/2014.

4http://www.riabiz.com/a/4985008183836672/the-real-bill-gross-story-big-help-from-the-wall-street-journals-reporting-hint-the-signs-were-there