Notes From the Fieldby Martin Weil

Bloomberg printed a very well-researched article yesterday on the sequence of events that led to September’s surprising departure of “bond king” Bill Gross from the Newport Beach firm he founded.

To anyone who paid close attention, there had been trouble brewing at PIMCO for some time, evidenced by the sudden departure earlier this year of co-CIO Mohamed El-Erian. My own concerns date back to 2010. As an investor whose client accounts were heavily allocated at the time to funds under Gross’s management, I grew concerned by the ballooning of Total Return’s assets and the increasing use of derivatives in PIMCO’s flagship fund. PIMCO’s decision that year to enter the equity business, having been a bond-focused shop since its start, raised yet more red flags for me. And then, performance at Total Return started to lag. As I wrote in this 2011 article for Advisor Perspectives, the under-performance did not appear to be a blip but more likely indicative of the larger systemic problems that had been building over time. We steadily reduced our allocations to PIMCO’s Total Return from a peak of more more than 10% of assets under management in 2009 to less than 3% by the start of 2014.

Bill Gross demonstrated for more than two decades that he is one of the most astute managers of fixed income on the planet. It will be interesting to watch whether he can rediscover his “mojo” at Janus. Given the advantages available when investing with a very small start-up asset base, it would not surprise me to see Gross score big right out of the gate. What is less certain, as assets under management start to grow again, is whether Gross can routinely add “alpha” over the benchmark as he once did. The odds of this, judging from the records of other “star” managers who lost their footings and attempted to start over, is not encouraging.