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A Short-Term Bond Manager's Long-Term Legacy

PIMCO loses a skilled maestro of the bully pulpit.

Eric Jacobson, 01/07/2011

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Some managers leave obvious and enduring legacies when they retire from the very public world of mutual fund management. Think Peter Lynch, Jeff Vinik, or Michael Price. PIMCO's Paul McCulley never achieved the same celebrity, but in some ways his career was just as noteworthy as those well-known stock managers'. As one colleague put it, McCulley was often overshadowed by other luminaries at his own firm, such as the Bond King Bill Gross and author and Harvard Endowment refugee Mohammed El-Erian, but McCulley's impact was no less deserving of recognition.

McCulley, whose primary responsibility at PIMCO was managing short-term bonds, may not have been well-known, but he had an extremely broad impact on the firm. During his PIMCO tenure, McCulley ran the firm's short-term desk, and was responsible for a broad swath of assets, including the nearly $12 billion PIMCO Short-Term PTSHX. He had full, personal responsibility for more than $38.6 billion in assets, but a lot of PIMCO funds and institutional accounts rely heavily on short-term investing; numerous funds in the complex, including PIMCO Total Return PTTRX, use forward contracts, futures, or other tools that allow big pools of underlying "cashlike" assets to be invested with the goal of adding incremental extra returns. So much of that money was entrusted to the tutelage of McCulley and the short-term desk (including roughly $120 billion in money markets) that he actually had his hands in the management of more than $419 billion.

His record as a manager speaks for itself. He was by no means infallible, nor did he ever hesitate to dissect and explain his mistakes. But unlike other short-term managers who--prior to the financial crisis--took risks they neither grasped nor could control, McCulley resisted the temptation to chase yield and grow assets. Some of those who gave in wound up ruining their careers, punishing shareholders with painful losses, and subjecting their firms to ignominy and litigation.

By contrast, McCulley's use of complex tools obscured the fact that he was cautious and conservative, never reaching too far along the maturity spectrum, or too far down the credit ladder in order to compete with feckless rivals. He avoided the twin dangers of subprime mortgages and asset-backed commercial paper during the financial crisis, for example, which meant a minimal loss and a 2008 finish among the top third in the category. So even though the ultrashort-bond category has more than doubled in size since the worst of that period (when it bottomed at some $18 billion) investors arguably got some religion after the crisis. Those in search of McCulley's more conservative approach poured so much money into PIMCO Short-Term that it comprised more than 29% of the category's $40.1 billion in assets by November 2010.PAGEBREAK

What's less understood, however, is McCulley's impact within PIMCO and on the broader asset-management industry. One part economist, one part money manager, McCulley served on PIMCO's investment committee, and was a crucial voice in debates that have raged inside the firm and produced the ideas that have helped PIMCO flourish over the years.

McCulley also deserves credit for spreading those ideas to the broader industry and public through his writing and speaking. He may not have been the first person to utter the term "shadow banking system," but he's been credited as the first using it to describe "the whole alphabet soup of levered-up nonbank investment conduits, vehicles, and structures." He helped draw attention to these entities and how critical they had become to the global economy during the middle of the past decade.

He also spoke and wrote often about the mercantilist trade relationship that has developed between the U.S. and China--within which currencies and government policies are managed to keep China selling and America buying--and offered nuanced commentary on the complex ways in which it constrains both parties, and affects the bond markets and the value of the U.S. dollar.

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