WASHINGTON, September 26, 2014 – Big, big news in Bond Land today. Bond traders and Wall Street alike were stunned to learn Friday morning that Pacific Investment Management Company’s (PIMCO’s) legendary founder, bond maven, guru and wizard Bill Gross, 70, will exit the company, effective Monday, September 29.
Gross has served as PIMCO’s chief investment officer for an astounding 43 years, continuing in that position even after PIMCO, then a unit of Pacific Life Insurance Co., was acquired by Munich Germany-based financial giant Allianz in 2000. During that time, he acquired an unparalleled reputation as an extraordinarily talented bond trader whose PIMCO Total Return Bond Fund became part of seemingly every conservatively managed portfolio.
However, in recent years, particularly since the Great Recession debacle, PIMCO’s funds, most notably the massive Total Return fund, have behaved very poorly, in spite of clawing back from the 2008-2009 market crash that clobbered nearly every known investment, and badly.
Worse, Gross increasingly appeared on network TV to make uncharacteristically wild and seemingly erratic predictions as to the direction the bond market would take in given scenarios, making moves in his funds that increasingly intended to backfire.
More recently, his public feuding with his own firm’s CEO, the highly respected Mohammed El-Erian, led to a complete break with his longtime colleague, leading to the latter’s highly disruptive break with Gross and PIMCO, even as he continued a consulting relationship with the parent firm. Lately, more trouble seems to have surfaced with the SEC now beginning to question how Gross has been pricing his bond holdings.
More importantly, however, PIMCO fund management questions plus El-Erian’s abrupt exit accelerated the already massive, ongoing customer and institution exit from PIMCO funds, particularly its bellwether Total Return fund. As the summer of 2014 drew to a close, parent company Allianz apparently had seen enough, releasing the following announcement this morning on its website and to the press:
PIMCO, a leading global investment management firm, announced that Co-founder and Chief Investment Officer (“CIO”) William H. Gross, has resigned and will leave the firm, effective immediately. The firm has a succession plan in place and its Management Board, comprised of its Managing Directors, will confirm shortly the election of a new Chief Investment Officer. Relevant portfolio management assignments will also be announced at that time.
Said Mr. Hodge: “While we are grateful for everything Bill contributed to building our firm and delivering value to PIMCO’s clients, over the course of this year it became increasingly clear that the firm’s leadership and Bill have fundamental differences about how to take PIMCO forward.”
Mr. Hodge continued: “As part of our responsibilities to our clients, employees and parent, PIMCO has been developing a succession plan for some time to ensure that the firm is well prepared to manage a seamless leadership transition in its Portfolio Management team. Earlier this year, the firm established a new portfolio management leadership structure that reflects our long-held belief that the best approach for PIMCO’s clients and our firm is to evolve our investment leadership structure to a team of seasoned, highly skilled investors overseeing all areas of PIMCO’s investment activities.”
Follow the link above to read the rest of the release which indicates the firm will shortly appoint a new Chief Investment Officer while retaining Douglas Hodge and Jay Jacobs as PIMCO’s CEO and President respectively. But the remainder of the release also implies that other manager’s continued service could be in some jeopardy as Allianz cleans house and tries to restore PIMCO’s respectability, hopefully stemming the current tide of fund redemptions.
Other sources seem to be confirming that today, Friday, will be Gross’ last formal day at the helm, regarding September 29 as his official exit date.
Regarding Gross’ successor, Allianz is fending off rumors that Mohammed El-Erian will step into his old colleague’s shoes. Meanwhile, Dow Jones is hinting that current PIMCO deputy chief investment officer Dan Ivascyn will take over from Gross on September 29.
For his part, Gross will immediately join Janus Capital, a mutual fund and investment firm whose heyday occurred in the late 1990s when its high-flying, tech-heavy funds produced outsized returns for its customers before crashing in the 1999-2001 dot.bomb fiasco.
Since then, Janus has clawed its way back to respectability somewhat. It’s likely that they reached an agreement with Gross some time ago in the hope he could regain his once-magic touch to help restore his new firm’s long-ago luster.
The stocks of both corporations have been more than usually active this morning, with Allianz American Depository Receipts (ADRs) trading around $16.25 this morning on the OTCQX, down nearly 7% from yesterday’s $17.44 closing quote.
For its part, the Janus Capital Group (NYSE: JCG) opened at $15.36 this morning, up a whopping 38% from yesterday’s closing price of $11.11. As of 11:30 a.m. Friday, JCG had settled down a bit, trading around $14.50, still up a dramatic 31%.
Predictably, bond markets are roiled this morning, trying to sort out the news, which is occurring on top of threatened Fed interest rate hikes, surprising dollar strength vs. most currencies, and a host of deteriorating international situations.
Elsewhere on Wall Street, stocks are attempting a weak rally today after yesterday’s pounding, but the rally may very well fizzle this afternoon as volume lately has tended to drop on up days while increasing when negatives hit the tape.
Monday’s action is likely to be much livelier but still predictable. The lack of buyers this week has been partially attributed to the absence of Wall Street’s considerable number of Jewish traders, taking time off this week for Rosh Hashanah, which ends at nightfall Friday evening. That said, volume during Thursday’s across the boards bushwhacking was quite heavy, working somewhat at odds with the missing Jewish traders meme.
Complicating action is the usual rampant though entirely illegal “window dressing” fun that goes on at the end of each calendar quarter as mutual funds, hedge funds and the like massively jettison those investments they don’t want showing up on their third-quarter reports, replacing them with investments they regard as likely winners in the coming quarter.
In this manner, they can report to their customers what “geniuses” they are, exercising brilliance by getting into the hot stocks allegedly before everyone else, but not really. It’s pure deception, really, but why should Federal government enforcers start rounding up these perps when they’re looking to them for high paying jobs in the industry once they leave government and start double dipping? Your tax dollars at work.
Window-dressing is likely to wrap up today, pretty much, although there could be little bits and pieces on Monday and Tuesday, September 29 and 30.
But when we hit October 1, we’re in a whole new 4th quarter world, and anything goes, so let’s be careful over the next few trading days. September and October tend to be historically treacherous. And with election news starting to dominate the headlines in October, headline risk seriously enters the picture.
Democrats have already loosened their financial arsenal on the Republicans, taking advantage of their funding superiority to fire volleys of smears and slanders at their opponents since they have no real successes to run on. These tactics often work with those much-treasured no-information voters, so Republicans should try to unify while avoiding hubris—always hard for any politician.
Otherwise, they’re likely to be as unhappy in 2014 as they were in 2012, a loss that could heavily affect markets as well, fed up as they are with this AWOL, socialist administration as well as Harry Reid’s utterly dysfunctional senate.
In other words, except for occasional opportunistic moves, hold on to your cash for now.
Still holding fire, for the most part. We’ve added partial positions in Merck (MRK) and Pfizer (PFE), as pharmaceuticals (and the U.S. dollar) are about the only things left on the “buy” lists of our favorite charting services.
The Maven is holding his nose on the MRK purchase, long a favorite of his late, conservative-investing father who made quite a bit of money on it simply by holding the stock and reinvesting its dividends for decades.
The Maven’s reason: Merck’s another one of these companies that has been guilty of despicable politically-correct grandstanding, ending its longstanding corporate support for the Boy Scouts of America over that honorable organization’s longstanding, legal (freedom of association) and Christian-oriented opposition to allowing gay Scoutmasters in its ranks.
Merck’s grandstanding was an obvious sop to Obama supporters, and, no doubt, also helped curry various favors for the company as Obamacare—which the company’s crony capitalist management supported for fun and profit—came into being.
Unfortunately, although we’ve carried on a quiet boycott of this company for quite some time, its drug pipeline, high dividend, and persistent profitability are once again making it the compelling investment that it always was for the old man’s portfolio. So under protest, we’re slipping back in.
It’s the same reason cigarette-haters often end up holding shares of Altria (MO), formerly known as Philip Morris and still retaining its old symbol. Quite simply, Altria has always paid a huge dividend and has often raised it. Plus, cigarette consumption, confiscatory tax and all, has always gone up in tough economic times. So even some liberals gag and quietly add it to their portfolios when they’re searching for yield in bad times, like now.
Ditto the Boy Scout-hating Merck. There’s no other way for the middle class to make money in Obamanation, so you do what you have to do. When it comes to money, successful investors are always amoral when it comes to stock picking.
Have a great weekend and we’ll be back on Monday with more cheery news!