King Gross – an Unintentional Abdication
The PIMCO Total Return Fund, the largest mutual fund in history, peaked at $292,875,998,695 in April of 2013. So did its captain, Bill Gross. This may in fact be the most prominent example of the rise and fall of a blockbuster fund in history. It is my assertion that this $293 billion high water mark will not be reached again.
The dynamics that mark the end of the reign are outlined below:
1. Investors are having an increasingly tough time hearing the investment message – the storyteller and his shenanigans are distracting them. While once compelling, the reality-TV nature of the show has lost its appeal.
2. Mr. Gross, at 70 years old, appears to be increasingly interested in preserving his own legacy and status in lieu of his clients who have invested with him.
3. In light of the quickly evolving market environment, investors have found that there are other, less contentious, options – particularly in the era’s post 2008 rise of unconstrained bond funds. These funds are discussed in terms that resonate with today’s investor audience.
4. The fund had reached a state of auto-flow: the stage at which the money into an investment product decreases in terms of quality while its volume increases. A fund in auto-flow often has become the ‘default’ for a specific asset class. Once auto-flow is disrupted, the imbalance causes cascading outflows.
5. Performance, the ultimate driver of all investment decisions, has slipped (but not to the extent that would account for a 20% outflow in 6 months except in the case of auto-flow).
The Tarnished Crown
There is no question that Bill Gross is an exceptional investor. Until recently, Mr. Gross had been an outstanding statesman for the firm that he founded and the asset class that he executed so compellingly. Over his long career, he led investors and their advisors through periods of market volatility with steadfast encouragement. As a result, investors flocked to him in droves and the fund became one constant in times of turmoil. Now, however, his own instability is eroding investor confidence.
Mr. Gross had, through a combination of sheer will power, drive and business savvy risen to the rank of Bond King. But the King analogy is easily carried too far – he is of course an elected king – his clients are not subjects. Investors vote with their money. Now, while trying to quell the outflows and the fading strength of his public persona by a strategy of direct confrontation, he is unwittingly dethroning himself. Debating with no one in particular about why you really are a nice guy and that the ‘media’ has you all wrong is of no real interest to investors.
It is beyond a desire to add to industry chatter and (for some) Schadenfreude that industry participants must pay attention to this. The questions posed and dynamics reflected in what is now transpiring with Bill Gross, the firm and the fund all entail serious lessons for the industry. While the scale is grand and the story prominently public, elements of the complexities being faced by PIMCO exist in many investment management companies. Leaders of investment management businesses should think through their own situations in light of what is happening on Mr. Gross’s watch.