What to Watch as PIMCO's El-Erian Steps Down

Jason Stipp: I'm Jason Stipp for Morningstar. We got news Tuesday that Mohamed El-Erian has resigned as CEO and co-chief investment officer of PIMCO. Joining us today to give his first impression on the news is Morningstar's Eric Jacobson.

Eric, thanks for calling in.

Eric Jacobson: My pleasure, Jason.

Stipp: Eric, first of all, can you please detail the news that we received Tuesday about Mohamed El-Erian stepping down?

Jacobson: The announcement is that Mohamed El-Erian is stepping down, as you say, from his role as chief executive officer of PIMCO as well as his role of co-chief investment officer, a position he has shared up until now with Bill Gross. It's going to happen in Mid-March, and one of the key pieces of news here, I think, is that they announced at the same time that he's going to remain a member of the Allianz International Executive Committee, and Allianz, of course, is the parent company of PIMCO. In addition, part of the role is a plan for him to advise the board of management of Allianz on global economic and policy issues. So, that's a pretty big piece of information as well.

Stipp: Aside, obviously, from being CEO, he also did serve, as we mentioned, as the co-chief investment officer, which would suggest that he did have a hand at least in how a lot of the PIMCO offerings were managed or had influence over that. Can you explain, as you understand it, what role Mohamed El-Erian might have had in any PIMCO funds that I might have held or I do hold?

Jacobson: He was a named manager on just a couple of funds with relatively modest asset bases compared with what we see in other PIMCO portfolios. Those two would be PIMCO Global Advantage Strategy and PIMCO Global Multi-Asset.

However, as you suggest, being the co-chief investment officer, he's had a very large impact, I believe, particularly on the macroeconomic calls that have been implemented in probably almost every other PIMCO fund in existence. That's mainly, of course, through his role on the firm's investment committee, but that's a very big role, he's got a big voice, and he's been one of the most senior people involved.

Stipp: Eric, we do know that there have been a couple of missteps or stumbles as far as the calls, some of the bigger calls, that we've seen from PIMCO recently. Would you say that for investors who have these funds now that this is just one of the things that happens when you have active management, or do you think that there was potentially a real problem with some of the forecasts that they were making?

<TRANSCRIPT>

Jacobson: It's obviously a little of a cypher, because it's very hard to get anyone on the inside to point a finger one way or the other at any one issue or person, or a factor that may have led to those stumbles. But in general, I think they are the kind of thing that you simply expect to happen with almost any asset manager at some point.

I have a general modest concern that as the firm has evolved, other people have moved on on occasion, that the investment committee may have a slightly different feel to it than it used to, some different voices, a few less senior people with strong voices to counter Bill Gross' own personality, which is something I think that he actually has valued over the years.

So, the summary answer to your question: I think it's pretty natural for those kind of stumbles to happen, and I doubt that anything in particular can be attributed necessarily to Mohamed.

Stipp: We also know, Eric, a bit about the replacements for El-Erian in these roles. What can you say about some of the people who will be stepping up into those positions.

Jacobson: By all accounts Doug Hodge, who's going to take over as chief executive officer, is a very solid, very competent guy. I don't know him personally, but I've heard him speak many times, and we really don't have any reason to question whether that's going to be a problem or not.

I think that, importantly, [the CEO] role has historically been held by someone other than an investment specialist. In other words, it was kind of an unusual situation that Mohamed held it when he did, but I think it's actually been a key component of the firm's success over the years to have those responsibilities held by someone else, in particular other than Gross--giving the investment folks, and Gross in particular, a lot of room to spread their wings on the investment side and not have to worry about the operational issues. So, all in all, I think it seems like it's probably going to be just fine.

Stipp: We also got some information about some folks stepping into that investment role, and I believe one of those folks just did win Morningstar's Fund Manager of the Year Award.

Jacobson: That's exactly right. Dan Ivascyn is being appointed as one of the new deputy chief investment officers, and as you suggested, he runs PIMCO Income. We just named him Fund Manager of the Year. And it's pretty interesting because, up until now, he has not been a permanent member of the investment committee. So, it's going to be a pretty interesting and big change for him.

The other gentlemen is a fellow by the name of Andrew Balls. He, too, will be a deputy chief investment officer. He is a very high-profile manager within the firm as well, and currently works out of the London office.

Stipp: Eric, we're obviously still understanding this news. You're in touch with some folks at PIMCO to learn more about this transition. At this point, if I'm a PIMCO fundholder, what pieces of information should I be expecting to get, or looking for? I doubt you are going to tell me that I should think about selling right away; we just would have no reason to say that. But what should be on my radar at this point?

Jacobson: If you own one of the funds that Mohamed has managed up until now, either that Global Advantage Strategy or Global Multi-Asset Fund, you certainly want to know what the plans are, how the management may or may not change. Chances are, given the history of how PIMCO runs, I wouldn't be surprised if the folks who are co-managing now will step up into more of a lead manager role and then perhaps … [PIMCO will] backfill them with other managers to be co-managers with them. But that's obviously something that we want to see how it develops. I suspect we'll hear something pretty soon about that.

As far as the overall situation with other PIMCO funds--as you just suggest, I don't think this is any reason for anyone to make any major changes as a result of Mohamed leaving. I do think that, again, it's really important for us to keep an eye on how the investment committee continues to evolve, what those voices look like, and try to get a handle on whether or not it's a big enough change to have any concern.

Bill Gross has been and remains one of the best managers in the business. He's also been one of the best at evaluating macroeconomic conditions, if not, as we said before, perfect. But we want to also have a sense that he will continue to be challenged in his ideas much in the same way that he has been over the years, in a way that's produced pretty good outcomes. That's probably the biggest thing on my radar.

Stipp: Eric, you've been following PIMCO for a long time. Always good to get your take on news like this. I know you'll continue to follow this story. Thanks for calling in today.

Jacobson: My pleasure, Jason. Thanks for having me.

Stipp: For Morningstar I'm Jason Stipp. Thanks for watching.