Fallen Angel: PIMCO Find Itself on the Wrong Side of Its Own Advice

With Mohamed El-Erian’s resignation from PIMCO due to take effect in mid-March, the Hollywood effect swung into high gear. Replete with drama, backstabbing, finger-pointing, and ill will took center stage in February as Reuters quoted Bond King Bill Gross complaining about El-Erian undercutting him. As Reuters said: “Gross told Reuters that he had “evidence” that El-Erian “wrote” a February 24 article in the Journal, which described the worsening relationship between the two men as Pimco’s performance deteriorated last year, including a showdown in which they squared off against each other in front of more than a dozen colleagues at the firm’s Newport Beach, California headquarters.”

Outflows

When a behemoth with $1.9 trillion in assets under management starts infighting the market takes notice. Still, while most managers would be delighted with total AUM of the nearly $60 billion in outflows PIMCO experienced in the 4th quarter of 2013. Shear off another $20 billion or so in negative returns and it’s a whopping $80 billion decline in AUM overall. So far it’s a pittance for a giant like PIMCO, but it may take more than a simple course correction to stop the hemorrhaging.

Smoke and Mirrors

Then again when the dust settles, the public sniping may amount to little more than sleight of hand concealing the real story. The past five years have dimmed much of the luster from PIMCO’s vaunted reputation. According to Lipper 73% of all PIMCO funds and 67% of their bond funds outperformed their Lipper category average over the trailing 10 years. The same measure sagged to 50-50 over the trailing 3-year period.Over the trailing year just 31% of the PIMCO universe of funds outperformed. At 41% outperforming their bond funds did slightly better.

When You Find Yourself in a Hole …

Experienced financial services professionals understand that finding themselves in a hole doesn’t call for a halt. Most errors that wrong kill the business. Instead, on-going investment managers face a toss-up. Dig faster or dig somewhere else. Supported by political decisions in Washington and at the Fed, the domestic bond market mainly faced quiet stresses following the meltdown. It didn’t have to go that way. Investors forget history. Instead of quantitative easing, which comes with its own problems, in the Great Depression Washington accepted a huge dose of inflation that amounted to a partial default on all US debt.

Aftermath

For a bond giant like PIMCO defending its clients’ wealth meant staying on the right side of politics. At the time, some inflation later beat taking a default right away. Dodging future inflation meant digging elsewhere. In PIMCO’s case, that meant diversifying the book into equities. At the end of the day, even kings learn that building a new business takes time. Impatience seldom makes the job go faster. On the upside, observing employment drama instead of fear and paralysis suggests that the markets are back to business as usual.

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