Bill Gross can claim he won a battle when the company he co-founded, Pacific Investment Management Co., agreed late last month to pay him an estimated $81 million to resolve a bitter split.
PIMCO, however, is winning the war to convince investors it’s a better bet.
The Newport Beach-based firm’s wide variety of funds are more widely promoted in the industry and are reporting higher returns.
Gross’ unconstrained bond fund, designed to battle rising interest rates, on the other hand, is lagging this year, and worse, has fallen out of favor.
“This particular style was all the rage a couple years ago following the financial crisis,” said Eric Jacobson, an analyst of bond funds at Morningstar, speaking of Gross’ bond fund. “Overall, this type of fund has been less popular in the last couple of years.”
PIMCO and Gross on March 27 resolved their dispute resulting from the latter’s departure in 2014. The split and subsequent lawsuit grabbed business headlines worldwide, with Gross accusing other managers of trying to steal his $200 million bonus and PIMCO executives saying Gross exhibited eccentric behaviors.
A trial scheduled for September promised to reveal titillating gossip about the elite world of fund managers, who routinely make tens of millions of dollars annually in salaries and bonuses. Such a battle would have damaged both sides in the view of large institutional investors that have fiduciary obligations to avoid controversial investments.
“Investors in general don’t like any kind of indication that the firm may have legal or lawsuit issues, said Fadel Lawandy, director of the Hoag Center for Real Estate and Finance at Chapman University and a former portfolio manager at Morgan Stanley. “They want a company that is a steady ship. Lawsuits are not attractive.”
Spokespeople for Gross and PIMCO declined to comment for this article, citing their agreement. Gross has said he would donate whatever he won to charity, including his family foundation.
PIMCO also agreed to dedicate a new “Founders Room” in honor of Gross and other co-founders.
Gross, a co-founder of PIMCO in 1971, is an investing legend, becoming the first three-time winner of Morningstar’s prestigious Fixed Income Manager of the Year and being named Manager of the Decade for 2000-09.
Both Gross and PIMCO have suffered setbacks since the breakup.
PIMCO’s assets under management decreased from a high of $2 trillion to as low as $1.4 trillion last year when it cut 3% of its workforce. In 2013, the Total Return fund was the largest bond fund in the world, with $290 billion AUM, but its assets have since plummeted to $74 billion. Chief Executive Douglas Hodge resigned last July and was replaced by Emmanuel Roman.
Comparisons
Still, by many metrics, PIMCO, where assets have stabilized at around $1.5 trillion, is faring better than Gross.
After the split, he set up shop a five-minute walk from PIMCO headquarters at Fashion Island in Newport Beach, where he manages the Janus Capital Group’s Global Unconstrained Bond Fund.
The fund is ranked 81st this year by returns, according to Morningstar, after being 39th last year and 34th in 2015.
By contrast, a comparable PIMCO Unconstrained Bond Fund is ranked ninth this year after placing 30th last year and 67th in 2015.
Gross’ old fund, PIMCO Total Return, is ranked 10th this year to date after being 63rd last year and 15th in 2015.
To make matters worse for Gross, his successor, Dan Ivascyn, has emerged as a star in the bond world.
Ivascyn, PIMCO’s top investment officer, manages the PIMCO Income fund, which is ranked 17th this year.
Most importantly, the fund, which has Alfred Murata as co-manager, has beat its peer group in eight of the past nine years and ranked among the top 10% in its category in six of those years.
In 2013, Morningstar named Ivascyn and Murata as fixed income managers of the year. Investors have noticed, pouring $15.5 billion into the fund in the trailing 12 months, making it the largest at PIMCO, with $75.4 billion AUM as of February, according to Morningstar.
“We’ve come through a tumultuous decade. And we’re confident about our ability to weather whatever comes next,” the pair wrote in a recent article on PIMCO’s website to celebrate the fund’s 10-year anniversary.
Other PIMCO managers who have won the same award include Jerome Schneider, who won in 2015 and manages short-term investments, and Mark Kiesel, PIMCO’s top credit investor, in 2012.
Furthermore, PIMCO often hires some of the world’s most famous consultants, like former Federal Reserve Chairman Ben Bernanke.
Gross, who last won a Morningstar manager of the year award in 2007, hasn’t enjoyed a huge shift of investors into his bond fund.
While AUM has climbed $600 million in the past 12 months to $1.9 billion, some believe much of the money is Gross’ own, Jacobson said. According to the Business Journal’s list of the wealthiest people in Orange County, Gross is worth $2.6 billion.
The relatively small amount of AUM can hinder a manager’s ability to attract attention. For example, Gross’ fund isn’t rated by Morningstar because there hasn’t been customer demand for it, Jacobson said.
Gross’ fund didn’t make the cut on Northwestern Mutual’s list of approved funds, while PIMCO’s funds are on it, said Kevin DuPree, a wealth management adviser in the company’s Irvine office, which manages $1.1 billion.
While DuPree said he has much respect for Gross’ philanthropy, he declined to discuss the fund.
“PIMCO has proven that they still have a good track record,” DuPree said. “PIMCO is one of the crown jewels in fixed income.”
Gross’ fund has lost favor among firms pitching it because investors aren’t as worried about rising interest rates, Jacobson said. His fund also charges 0.75%, which makes it difficult to compete with other funds with lower expenses, he said.
“Most of the firms were pitching this type of fund with the idea that investors should be scared of rising interest rates,” Jacobson said. “At some point, investors began to realize that even if the rates go up, it won’t be as catastrophic as people feared. It’s a difficult category to compete in.”
