Pimco’s newly appointed chief executive has admitted there is an “urgency” for the world’s largest bond house to diversify its business into equities after a year of painful outflows from its fixed income funds.
The bond specialist, which is being battered in the media over what has now become a very public spat between Bill Gross, Pimco’s founder, and its departing chief executive, Mohamed El-Erian, haemorrhaged €35.6bn of net cash in the fourth quarter of last year.
Its flagship $237bn Total Return fund also lost nearly 2 per cent in 2013, its worst fall since the bond market rout of 1994.
Pimco boss Doug Hodge says: “Yes, there is now a sense of urgency to develop our equity arm. We need to respond and we want to do that quickly, but we also have to maintain quality.”
Reports refuse to die down that long hours – Mr El-Erian’s day started at 4.15am – and a frequently fractious relationship with Mr Gross prompted the resignation of the 55-year-old. Tensions were said to have exploded in the course of one particular meeting in June during which the Pimco founder questioned Mr El-Erian’s investment record in front of more than a dozen colleagues
One fund management consultant, who counts Pimco as one of his clients, believes Pimco’s “pedestrian” shift into equities contributed to the breakdown in relations between the pair.
He says: “Pimco’s move into equities has been painfully slow under El-Erian and I think there has been a feeling that the company might have missed the equity market rally as a result.
“Mohamed had wanted to do things more methodically but there was impatience elsewhere at the top, which definitely contributed to tensions. Those around him wanted action.”
Mr El-Erian’s sudden and unexpected resignation seven weeks ago was a shock to those both inside and outside the Newport Beach company, triggering a reshuffle that ultimately parachuted Mr Hodge, the company’s former head of operations, into the role of chief executive.
Pimco also named six new deputy chief investment officers to work alongside Mr Gross, who took back the title of chief investment officer. They were Dan Ivascyn, Andrew Balls, brother of the UK’s shadow chancellor Ed Balls, Mark Kiesel, Scott Mather, Mihir Worah and Virginie Maisonneuve, who was hired from Schroders in October to expand the bond specialist’s equities business.
Jake Moeller, a fund analyst at Lipper, the data provider, says: “Pimco has stuck to its knitting but has the economies of scale and resources to buy the right [equities] people in. But just as a wealthy football club can afford to buy the best players, it will only gel if management has a coherent long-term strategy.”
He added that, while the goodwill of Pimco’s brand is associated with bonds, it can create a “new hegemony” in equities. “Fidelity did the same some years ago in the UK, but Pimco could also acquire a suite of specialists much the way BNY Mellon has,” he says.
But Mr Hodge is quick to rule out any purchases. “In 43 years we have only grown organically – that is just a fact,” he says. “We have never done an acquisition and, although I realise other firms have grown both organically and through purchases, that has not been our history.”
Just hours after Mr El-Erian announced his intention to quit, Mr Gross took to Twitter to declare his “batteries are 110 per cent charged” and that he is ready to go “for another 40 years”.
Mr Gross has since told CNBC rather more realistically that he has “at least a good five years left” in him. Mr Hodge says the intention was clear: “It was an unambiguous signal from Bill to say, ‘I’m here, I intend to remain here, and I’m on the job for you’.”
Mr Hodge adds: “Bill and Mohamed were partners. They were co-CIOs and literally sat next to each other. They worked together fantastically well.”