Fri, 7 Mar 2014
Recent allegations have turned up the noise around PIMCO, but a bigger concern is whether the fund shop's new deputy CIOs can stand up to Bill Gross when needed, says Morningstar's Eric Jacobson.
Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. New reports have emerged that tensions between PIMCO's Bill Gross and his former heir apparent, Mohamed El-Erian, are escalating.
I'm here today with Eric Jacobson, a senior analyst here at Morningstar, to see what these allegations could mean for PIMCO investors and the firm.
Eric, thanks for joining me today.
Eric Jacobson: Glad to be with you, Jeremy. Thanks.
Glaser: Let's start with this Reuters article that was just recently released. Can you walk us through some of these new allegations and what you think it means for the relationship between Mohamed El-Erian and Bill Gross?
Jacobson: Sure. Well, some of it, I think, falls under the category of a little bit more circus music here of people writing about Bill Gross' temperament and so forth. That part of it isn't especially new. I think the newest part is that this Reuters reporter says that, Gross called her and said a number of things, including the fact that he was monitoring Mohamed El-Erian's phone calls and accused The Wall Street Journal of El-Erian being involved in writing an article, all these things. Like I said, it's nothing new particularly about Gross and his temperament. I think a lot of people already knew this stuff even before it started coming out recently. But I think as you suggested it really turns up the volume on a lot of this noise.
Glaser: You talk about this noise or this circus music. How disruptive is this to PIMCO in terms of its actual investment process in managing this money day to day?
Jacobson: That's certainly a really interesting question. I think a lot of people haven't really been focused on that because of the drama here. But the background to this is that El-Erian has now left. And another thing that hasn't been really talked about a lot lately is that another very senior person by the name of Chris Dialynas announced late last year [that he would be going on sabbatical] and is due to start it in April.
And initially the word was that he was almost certain to come back within a year. That he was going to stay fully engaged with PIMCO, while he was gone, in terms of attending important quarterly strategy meetings and things like that. But since that time, it has become a lot more apparent that folks at PIMCO are not expecting him to return necessarily. I think Gross maybe even said to some investors that it was more like a 90% chance Dialynas was going to retire.
The fall-out from that is Dialynas was one of the few very senior people left on the firm's investment committee. And now El-Erian was arguably "the last one" that was very senior. That's the bad news. The good news is that right at the same time within a week or so of El-Erian announcing his departure, PIMCO promoted several people to the roles of deputy CIO. And these are some very, very skilled people, whose abilities we believe pretty highly of.
The issue is that, like I said, none of them is really as senior as the folks who have departed. And so, I think it's fair to say that I have some concern, to just put it at this point, about whether or not [the new deputy CIOs] are going to all be able to work effectively with Gross, have the contrarian viewpoints to stand up to him, and act as a really legitimate sounding board and so forth. And I think a lot of this drama that's going on really pushes that forward in terms of calling it into question a little more.
Glaser: With a number of these senior departures, how important is it for a PIMCO investor to see a clear succession plan in place for Bill Gross? How long do you think PIMCO has to put that together before there is even more concern?
Jacobson: That's a really interesting question because to this point all the conversations that I have had with folks at PIMCO suggest that they are happy with what they have done so far, in the sense that they have appointed deputy CIOs and they are effectively going to let them run at this point and see how they perform over the next few years.
In other words there doesn't seem to be any intent on PIMCO's part to actually name a successor prior to any decision by Gross to step down at some point. He's already said that he's framed it that he is hoping to work at least another five years, and from the sound that I have to guess that he means that he's going to reevaluate it at that point. But my sense is that PIMCO is thinking in terms of the next few years as being a vetting period to see who among that group may shine to the point where they think they could be an appropriate replacement for him. But I don't think they are going to announce that anybody specific is ready to go at any point soon.
Glaser: What impact is this having on investor confidence then?
Jacobson: That's really the trickiest question, of course. We don't have a lot of data yet from the last month or so; it's just about to come out I think. And the bigger question of course now is with this Reuters article is whether or not any sort of asset-flow data is going to show up that is more serious.
I think from PIMCO's perspective, perhaps the biggest problem businesswise is that a lot of their competitors are out there hacking away at their client base. Interestingly enough, it doesn't sound like they are trying to convince people to dump PIMCO; I think they still feel as though that's probably not a winning strategy for them as competitors.
But they are trying to talk to a lot of PIMCO's clients and convince them to really kick some of the money that they have with PIMCO and reallocate it to others. I certainly don't know at this point how much traction that's having in terms of hard numbers. But it sounds as though from people we've talked to that, at least people are listening to the pitch lot more than they used to.
Glaser: Finally, are we making any changes to Morningstar's take on PIMCO's funds or on our stewardship rating generally, or is it more of a measured approach.
Jacobson: I would say measured approach in the sense that we're still taking things as they come day by day. We're having lots and lots of conversations with PIMCO at different levels. We had been having them even before this happened, but they've obviously ramped up since then. We've already talked to senior people at PIMCO earlier this week. We are going to do a lot more of that next week, and as we continue to digest this, we are going to keep revaluating. But at this point I don't think really that there is anything about Bill Gross frankly that's actually changed much over the last few years. I think that's a perception out there that I kind of discount.
I don't think he really is a whole lot different than he used to be. I think the bigger question, the biggest issue from our perspective as it affects investors is what does this potentially mean as I said before for the investment committee and how well it works and how well Gross works with his colleagues?
And frankly it's a little bit about what the culture is going to be like there going forward and whether or not a lot of these new stories are going to hurt that at all.
Glaser: Eric, thanks for the update this morning.
Jacobson: Glad to be with you, Jeremy. Thanks for having me.
Glaser: For Morningstar I am Jeremy Glaser.