Did Wrong Guy Resign?
Last year, one of the biggest bond funds in the world, Allianz's SE ADR (OTCQX:AZSEY) Pimco Total Return Fund (BOND), set an all-time record for the most outflow from any mutual fund, when its flagship fund had $41,100,000,000 in redemption. Now that's a big number! Pimco, which is owned by the German insurer Allianz SE cannot be happy with Mr. Gross, a well known yoga devotee.
The PIMCO Total Return ETF is the younger sibling of the PIMCO Total Return Institutional Mutual Fund (PTTRX). Bill Gross, manages the exchange-traded fund following the same strategy he has been employing in PTTRX since 1987.
This week, Pimco's Chief Executive Officer, who is also it's Co-Chief Investment Officer, Mohamed El-Erian, announced that he will quit the firm in March. Following his departure, two portfolio managers will be elevated to work under Mr. Gross as Deputy Chief Investment Officers, while the Chief Operating Officer, Douglas M. Hodge, will become the Chief Executive.
An Unjustified Resignation
Following El-Erian's departure, Pimco's founder William H. Gross will now be the only Chief Investment Officer. He will work with his two new deputies. Mr. Gross recently sent a questionable tweet about the C-suite restructuring, stating that Pimco is now fully engaged, that the company's batteries have been fully recharged, and that he, Mr. Gross, is ready to go on for yet another 40 years (which would make him 109 years upon retirement).
Why did the heir apparent of Pimco suddenly step down, and why did Mr. Gross send out a self-congratulatory tweet? The obscurity in this shift draws questions. Mr. El-Erian helped influence the returns of millions of IRAs, and the news of his abrupt departure is sending shock waves to investors. Pimco holds nearly $2 trillion in assets and is one of the major investors in the global bond market.
Bill Gross Troubled Total Return Fund
In the past year, Pimco's bond funds have struggled monumentally as interest rates rose and bond prices fell. Pimco's signature line, the Total Return Fund, the largest fund of its kind in the world, did not fare well as investors pulled out more than $41 billion.
Bullish for decades, the bond bull market, responsible for giants like Pimco and BlackRock (BLK), is undergoing serious shifts. However, what hurt Pimco more than market fluctuations, is the underperformance of the Total Return Fund fund, managed by Bill Gross. Since 2013, this fund lost an astonishing 1.2 percent-despite 2013 being a record year for the company's outflows. Moreover, compared to other similar funds, this fund has underperformed by 72 percent, losing its position as the biggest mutual fund in the world-a status passed on to Vanguard Total Stock Market Index Fund.
Bonds No Longer Bullish
Currently, the Total Return Fund-which debuted in 1987, and which is managing $237 billion-is vulnerable as it relies heavily on the performance of U.S. Treasury bonds. In 2013 U.S. Treasury bonds posted their first annual loss in 5 years. The trend resulted in large investment clients withdrawing from the funds. For instance, Arbor Wealth Management's financial adviser, Margaret McDowell pulled out $76 million in assets last year. However, investors renewed their hope in the U.S. economy in December when the Federal Reserve talked about tapering down its bond-buying program. The problems encountered by the Total Return Fund appear to be a result of a series of miscalculations by Mr. Gross, a bet on Treasury bonds that turned out to be ill-timed.
The Loss of a Top Economist
The resignation of Mr. El-Erian is causing unrest in the investment world, because of his solid reputation. Mr. El-Erian is the son of a U.N. diplomat and Egyptian ambassador to France. He was born in New York and educated in finance and economics at Oxford and Cambridge. His career highlights include becoming the deputy director of the International Monetary Fund; running the endowment fund at Harvard for two years (where he received a raise of $100 million); and being appointed by President Obama to be the chairman of the President's Global Development Council, an advisory counsel on sustainable economic growth and partnership opportunities between the public and private sectors.
At Pimco, Mr. El-Erian served as a public commentator on financial issues and gained fame for his popularization of the phrase, the 'new normal,' which referred to the sluggish economic growth following the financial crisis in 2008. Mr. El-Erian was best known as the public face of Pimco-someone investors had come to trust because of his breadth of experience on economic fluctuations.
What Should Investors Consider?
Investors need to ask themselves if the wrong Co-Chief Investment Officer resigned in sunny Newport Beach, California. We believe performance counts.
The turnover of Mr. El-Erian for Mr. Gross was not anticipated and does not seem to be supported by the duo's track records. Investors should watch BOND carefully in 2014, along with US Treasury bonds, for signs of sluggishness, following Mr. Gross's appointment as Pimco's Chief Investment Officer.
Until this reorganization proves itself, investors may want to lighten up on their Total Return Bond position.