Bill Gross casts the next chapter and challenge for Newport Beach-based Pacific Investment Management Co. in simple terms: stay on top.
The head of Pimco—who runs the biggest bond fund in the world—says he’s confident the firm he cofounded 43 years ago can “keep being No. 1” and more. He expects Pimco to grow its lead with an expanding range of investment products and a fresh lineup of leadership.
Talk of growth and a chant of “We’re No. 1” were the least likely takeaways from a rugged 2013 for Pimco’s Total Return Fund and a bruising round of media coverage that followed Mohamed El-Erian’s decision early this year to leave his job as Gross’ co-chief investment officer.
Gross made no secret in his disappointment that El-Erian—who had been all but anointed his successor—decided to leave the firm.
He didn’t waste any time in moving on, though, and the recent opening of Pimco’s new headquarters in Newport Center provided a prime opportunity to talk about the growth strategy for the firm, which has nearly $2 trillion in assets under management.
The new building, developed by Newport Beach-based Irvine Company, is a 21-story tower that hosts 1,500 or so employees. It’s a sleek testament to Pimco’s staying power.
Ocean views come with an interior replete with form and function. Art works punctuate hallways and common areas, and the cafeteria resembles a chic restaurant.
There’s a state-of-the-art broadcast studio, trading facilities, and an auditorium that seats more than 200 and serves as a central location for talks and meetings, drawing guests and Pimco employees from around the globe. It features a circular table in the middle of the lower floor, with large TV screens to the front, back and sides, as well as ceiling-mounted screens for easy viewing from every angle. Each seat has an audio system to allow audience members to participate.
Top executives have 15-foot-by-15-foot offices—the same as lower-ranking colleagues. The egalitarian approach on office space points to a cultural shift from what Gross called the “twin pillars”—referring to himself and El-Erian—to a wider lineup of several deputy CIOs who were hired or promoted in the recent shakeup.
The building also is a celebration of the 40-year history of the company, as well as a platform for what Gross says will be the next 40 years of growth and value-creation for investors.
The challenge now is to adjust, according to Gross.
“It’s a new home—it’s a new company in many ways in terms of organization, so we’ll have to adapt,” he said during an interview at the new headquarters, which is just a half-mile or so down Newport Center Drive from the firm’s old main office.
Hot Dogs, Burgers
He made the observation from a comfortable lobby chair after a hot-dogs-and-burgers luncheon for staff to mark the move-in, an event that featured visits from key players in Pimco’s history and a pep talk from Gross to his current team.
“We’ll have to challenge ourselves going forward to hold tight in terms of the family structure,” he said. “The closeness that we’ve had for 40 years—that’s really what has helped us as an organization. The sense of family, the sense of looking out for each other and, of course, looking out for clients. It can be different and has been different in the past few months. But I think it’s better.”
Gross doesn’t dismiss the past few months of fund performance or ignore the recent knocks in the media.
“The headlines focus on the Total Return Fund,” he said, referring to Pimco’s flagship product that has about $229 billion in assets. “Yes, the Total Return Fund is smaller than it was. But Pimco itself, in terms of the $2 trillion that we manage, is still expanding. Actually, a lot of the billions that came out of the Total Return Fund went to a lot of other Pimco products. Pimco is not just the Total Return Fund anymore, although it garners the headlines because it’s the biggest. It’s the biggest [bond] fund in the world, and, admittedly, it’s had outflows the last 13 months, and the press focuses on it. But we think even that’s going to turn around.”
The investor pullback wasn’t so much about what was portrayed to be internal discord at Pimco, according to Gross.
A record year for stocks also drew investors away from bonds.
“The outflows started well before Mohamed [resigned],” he said. “It was a normal function of people looking at the bond market and seeing a minus sign in front of it as opposed to a plus sign. And so, you know, some of it in 2013 was due to the fact that people were giving up on bonds. And now of course, in 2014, they’re back. Once they find out that Pimco is back, as well, and still is the leader in the bond market, I think that will turn around.”
Turning Point
Gross has pegged a turning point for the Total Return Fund in a matter of weeks, predicting it will begin to rise in the ranks of peer U.S. intermediate-term bond funds. The fund now is up 2.78% year-over-year, versus the benchmark bond fund index return of 3.33%. It’s up 3.11% since the beginning of the year, versus a 3.61% return on the index.
Gross said Pimco generally puts a premium on growing steadily, “one penny at a time,” and wouldn’t want to “do things much differently.”
“There’s always that temptation: ‘You have to take a chance here or else,’ ” Gross said. “But that’s not the way we do it, and that’s not the way we’ve done it for 40 years. … Sometimes it gets frustrating. You see the press reports and so on. But you know, we’ve been at this for a long time.”
Pimco’s approach to actively trading—as opposed to buying and holding—bonds got its start four decades ago.
Gross, who earned his bachelor’s degree at Duke University and MBA from University of California-Los Angeles, served in the U.S. Navy and had played blackjack professionally in Las Vegas before starting his investing track. He started Pimco in 1971 with two partners—Jim Muzzy and Bill Podlich—as part of Pacific Life Insurance Co., where he had begun his finance career with a credit analyst job that involved literally clipping bond coupons for interest payments.
Pimco soon became independent, a move Gross credits to Walter Gerken, then-chief executive at Pacific Life who gave Gross and the other Pimco managers autonomy. Pimco later was acquired by Munich, Germany-based insurer Allianz.
A wall at the new Pimco headquarters contains a spread of highlights during the company’s course so far. It’s during those years that there’s been an expansion of the financial markets overall—a change that is not likely to be repeated in the next 40 years, Gross said.
“When we started down here … the total [amount] of credit, or assets, in the U.S. economy was $1 trillion. And now it’s $60 trillion. It’s been a primordial expansion of the universe. Going forward, it certainly can’t be that. Returns on assets in terms of how much you make [are] going to be limited, as well.”
Broad Challenge
Pimco isn’t alone in facing the challenge, Gross noted.
“Families need money for retirement, they need it for education, for their kids, they need it for daily living expenses,” he said. “Up until this point, they’ve been able to get most of it [from the market], certainly in stocks last year. But going forward, that’s the challenge of the markets, to provide expected benefits. And it’s a challenge for Pimco to provide additional ‘alpha’ to maintain our top-notch superiority. So all of those are challenges. The management, the organization—all of that has to be taken into consideration.”
But it can work, he said.
“Lots of teams have had managers retire, superstars retire, and they’ve gone on to win lots of championships. And we’re putting ourselves in that position.”
