Wed, 29 Jan 2014
Morningstar's Eric Jacobson sees PIMCO's appointment of four new deputy CIOs as an effort to reassure investors there is a succession plan in place for Bill Gross after heir-apparent El-Erian's departure.
Christine Benz: I'm Christine Benz for Morningstar.com.
On the heels of the departure of PIMCO's CEO and chief investment officer, Mohamed El-Erian, last week, PIMCO has announced a slew of additional manager changes.
Joining me to discuss them is Eric Jacobson, a senior fund analyst with Morningstar.
Eric, thank you so much for being here.
Eric Jacobson: Glad to talk to you, Christine.
Benz: Eric, last week PIMCO appointed two deputy chief investment officers. This week we are seeing additional deputy chief investment officers appointed. Let's talk about what's going on there and also get your take on what it means for the firm.
Jacobson: They have added another four folks to this list. There will now be a total of six deputy CIOs. The previous ones already announced were Andrew Balls and Dan Ivascyn. Balls coming with primarily a macro foreign-bond background but still a portfolio manager. And then Dan Ivascyn, who comes with a lot of mortgage market expertise.
The additional folks now are Mark Kiesel, who also manages a large number of corporate and investment-grade corporate assets, including at least a couple of mutual funds. Scott Mather, who comes also from the global bond side, is now a deputy CIO. And then Mihir Worah, who historically has been focused on real return, TIPS and commodities and so forth. He has a really interesting broad and international background. He is now a deputy CIO as well. And the final one is Virginie Maisonneuve. She is responsible for equity investing at PIMCO and will be an important representative there.
As part of these elevations, all these folks will be joining PIMCO's Investment Committee, which I think is very interesting.
Benz: You have mentioned to me prior to this that you think these changes are meant to shed some light on succession planning or at least provide a little bit more transparency into succession planning for the day when Bill Gross may not be so actively involved in running PIMCO. Let's talk about that, and why you see this as a step in that direction?
Jacobson: Prior to Mohamed El-Erian's departure, he really had been signaled as the heir apparent. Gross actually, I believe, said that at one point. The problem is, there really wasn't anybody behind the two of them that had been at all advertised or signaled to be even in the running for potentially replacing either one of them at some point.
I think that the client base at PIMCO and the market was OK with that for a while, because both of them were there. But now that Mohamed has left, or is leaving I should say, I think there has been a lot of angst and anxiety over the fact that it just hasn't been clear what might be next.
I think this was a way for PIMCO and Bill Gross to signal that not only do they really have, in their mind, the strength and quality of people to contend for that role at some point, they really want to highlight them, advertise them, let people know who they are. That's what I think is going on there.
The second major implication, I think, is that each of these folks will be joining PIMCO's Investment Committee, and they will be balancing out now a series of folks including Bill Gross, Saumil Parikh, and Tony Crescenzi, who is a new standing member--all of whom have very strong economics and macro backgrounds.
I think part of the idea here is to balance out and to some degree refocus, or put more of a focus, on markets and bottom-up looks at investments rather than simply macro policy, which is where the Investment Committee was very focused prior to this.
Benz: I also want to touch on some manager changes at some specific funds--some of the funds that Mohamed El-Erian used to run for PIMCO. Let's talk about those, because they are not tiny funds, and people probably will want to know who is going to be running those products.
Jacobson: The two major funds that we are talking about are PIMCO Global Advantage Strategy, which works off of a customized index that PIMCO built some time ago that gives a little bit less market-weighting focus, like the conventional indexes do, and spreads things out more globally.
With Mohamed El-Erian's departure, a manager by the name of Lupin Rahman, will be taking over, as they say at PIMCO, as co-PM1, a primary portfolio manager there. She is very sharp. She already manages, I believe, about $7 billion of assets, and mostly in emerging-market strategies, if I recall correctly.
The other big change specifically as a result of Mohamed stepping down is on PIMCO Global Multi-Asset. That fund in particular has had a very rough time of it, and there have been some changes here and there over the last year that have been really notable. But Mihir Worah, the gentleman I referred to earlier who has the real return specialty but also a very, very global purview particularly given the way that the inflation market is setup, and inflation linkers, if you will, such as on TIPS and so forth. He will be taking over the position that Mohamed held on that fund.
Benz: There were also a few manager departures announced. Marc Seidner is one name that people may be familiar with. Let's talk about what's going on there and what funds, what products he is going to be stepping away from?
Jacobson: Well in Marc's case, I don't want to put words in anybody's mouth, but it seems pretty clear at least from the outside that Marc is leaving mainly because Mohamed is leaving. Marc had a few places of employment, but before he joined the Harvard Management Company, he was at Standish Mellon, and he was recruited to the Harvard Management Company by Mohamed, when Mohamed went there for a couple of years.
And then after Mohamed left Harvard Management and came to PIMCO, Seidner came over a decent length of time afterwards. But he is clearly following him as a close confidant. It is not surprising, I don't think, that Marc is leaving. He is going to go back to Boston and perhaps go to work for a competitor, although we don't know who that is.
In terms of the funds that are affected, there are a whole suite of what we generally refer to as PIMCO's StocksPLUS Funds. They all don't have that name, but there are several that do have the word PLUS in them, or end with something like Absolute Return Strategy. And essentially these are all funds that use a combination of a beta play, in other words, a major market focus, for example, buying S&P 500 futures to get exposure to the stock market. And then they all layer on a bond portfolio to add extra incremental returns. So if they use futures, for example, to get exposure to the S&P, they require very little capital to put up to get those futures. And then the rest of the portfolio, which otherwise would be maybe 95% in cash can be put into a bond portfolio to supplement those returns.
There are number of those portfolios that he is giving up. They are being taken over by a fellow named Scott Mather. And then there is one that is an unconstrained tax-managed fund that will be taken over by Saumil Parikh.
Benz: Eric, I think there is probably a risk whenever you have this much news of getting lost in the weeds. I'd like to take a step back. There have obviously been a lot of notable comings and goings at PIMCO--new appointments, departures, and so forth. I think investors might be wondering, what does it all mean for them if they happen to hold a PIMCO fund or a couple of PIMCO funds. Should they be concerned about some of these changes and what they mean for their portfolios?
Jacobson: Well on a more micro level, let me address the management changes first. I think in general--I can't say this with certainty for every fund or in every case--but in general, you have very, very strong people who already have a reputation for other things that they have been involved with, taking over funds or assuming responsibility at funds for which these other managers are leaving. That doesn't really give me a large amount of worry from that perspective.
More broadly, tied together with what I am saying about succession and planning, I think some of these other things are meant to help reassure clients that not only is there really a broad base of skills, but that they are really focusing those skills. They are working on bringing into better view, exactly who is doing what, and also changing a little bit the overall approach to the way that the Investment Committee works, for example, because all those deputy CIOs are being added. Now there is a little bit more focus, as PIMCO will say, on markets rather than just macro policy, which I think will still be a major focus for the firm, but perhaps will be a little bit more balanced.
Wrapping all that up, I think a lot of this is … I don't want to say it's all PR, because it's not just all PR. There are obviously some very important underlying changes here. But I think to a large degree, this is meant to show what Bill Gross tweeted not long ago, which is that they are energized. They are at 110%, and that they are really, really engaged in what they are doing here. Obviously, it remains to be seen how some of these changes will work out. But overall, I think that especially this change to have more focus on markets is probably a very good thing.
Benz: You have said that the changes were meant to reassure. Are you reassured? Are you feeling more comfortable with PIMCO and its succession planning in light of all of these changes?
Jacobson: I am. I don't want to give an unqualified endorsement. We are still digesting some of this. I think that a lot of these are very much the right moves to be making given the circumstances. I still harbor a little bit of concern that despite the stature and skills of all these folks that have been elevated, I still don't know yet whether many of them, any of them, really have perhaps the confidence and inclination to be a strong counter-voice to Bill Gross in the Investment Committee.
And so, as I have said before, there have been a few losses in addition to Mohamed from the Investment Committee, including Chris Dialynas who is going on sabbatical, and Paul McCulley, who left in 2010. Those were a couple of the much more senior folks in addition to Mohamed that were, you could imagine, really scrapping with Bill Gross, really offering to be a strong devil's advocate and a counter to his voice.
I think Bill Gross really appreciates, covets, and needs that sort of critical contrarianism, if you will. And I just worry a little bit that, even with all these elevations, whether or not some of these folks are ready to scrap with him. I think some of them will be. I hope that some of them will be, and that will be to the better of the firm, but it still remains to be seen.
Benz: Eric, thank you so much for being here to share your insights.
Jacobson: Glad to talk to you, Christine. Thanks for having me.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.