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By Jeremy Glaser and Eric Jacobson | 03-07-2014 09:00 AM

Is Investor Confidence in PIMCO Shaken?

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.

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