Bond Giant Pimco and Founder Bill Gross Struggle to Heal Strains

The Wall Street Journal

NEWPORT BEACH, Calif.—In early June, before hundreds of employees at Pacific Investment Management Co.'s new 21-story headquarters here, Chief Executive Douglas Hodge spoke effusively about Bill Gross's enduring passion for investing.

"Forty-three years ago, he founded Pimco with a vision and a fire in his belly, and we are living that vision today," Mr. Hodge said, with the 70-year-old Mr. Gross, the firm's chief investment officer, standing beside him. "We all owe so much. Thank you."

Employees gave Mr. Gross a standing ovation. The two executives shook hands, almost hugging, according to people in attendance. It was a show of warmth at the bond giant known for its high-pressure environment and a display of unity amid a closely watched leadership transition.

Behind the scenes, however, strains persist more than six months after the abrupt January resignation of Pimco's previous CEO, Mohamed El-Erian, according to people familiar with the matter.

About three months ago, a group of Pimco senior executives became so concerned about Mr. Gross's dealings with the media that they warned him to stop making public comments they viewed as divisive, according to people familiar with the matter. Mr. Gross, the face of a firm that manages $1.97 trillion and its star investor, has threatened to quit more than once since Mr. El-Erian's March departure, including after that warning, the people say.

A key reason for the tension: Clients continue to leave Pimco and, in particular, Mr. Gross's fund. His Total Return fund, the world's largest bond fund, saw $4.5 billion of net investor outflows in June—its 14th consecutive month of defections—despite outpacing two-thirds of it rivals in the second quarter, according to fund-research firm Morningstar Inc. Over that period, investors pulled $64 billion from the now-$225 billion fund, an amount that dwarfs the total size of most mutual funds. The withdrawals came as investors, industrywide, added money to bond funds. Pimco has suffered net outflows across all its mutual funds for the past 13 months.

Six months after then-Pimco CEO Mohamed El-Erian resigned, do tensions still continue internally with co-founder Bill Gross? Gregory Zuckerman discusses on the News Hub with Sara Murray.

Mr. Gross has expressed frustration with those on Pimco's business side, according to people familiar with the situation. At a partner meeting in early June, Mr. Gross challenged Mr. Hodge, who joined Pimco in 1989, about the company's business strategy.

"There's a committee" looking into ways to improve sales and retain clients, Mr. Hodge answered, according to people in attendance.

"You should know" what steps are being taken, Mr. Gross replied sharply, these people say.

Some viewed Mr. Gross as being unduly critical of Mr. Hodge. In an interview June 30 at Pimco's headquarters with Mr. Hodge by his side, Mr. Gross said he has questioned Mr. Hodge, but that the firm has a history of encouraging spirited debate, a point echoed by other Pimco employees.

"No one here is afraid to say what's on their mind. Have we had disagreements? We've had debate for 40 years," Mr. Gross said.

In a July 7 written statement, Mr. Gross said he has offered to resign "several times" over the past seven years—including when Mr. El-Erian submitted his resignation, when he tried to persuade Mr. El-Erian to stay. On Thursday, in a new statement, Mr. Gross said: "I have never considered leaving the firm" other than to allow Mr. El-Erian the sole chief-investment-officer responsibility.

In a separate, joint statement July 7, members of the executive committee said it never took up the matter of Mr. Gross leaving. The committee called Mr. Gross a "vital leader" and "an extraordinary asset for our clients." Mr. Hodge said Mr. Gross continues to be the firm's primary spokesperson and has "maintained a regular presence in the media throughout this year."

Both Messrs. Gross and Hodge said the transition to a new leadership team is going smoothly. Traders say Mr. Gross has been a calmer presence in recent weeks than at times in the past, helping boost morale. And Pimco's investment performance has improved, leading some executives to feel the firm is close to weathering the recent storm.

Mr. Gross has begun to allow others to share some responsibility, appointing six executives as deputy chief investment officers. The deputies now take turns running investment-committee meetings, held four times a week. Previously, Mr. Gross and Mr. El-Erian split that duty.

"The table is more evenly balanced" than when Mr. El-Erian was at the firm, Mr. Gross said in the June 30 interview. "We needed some additional chefs and cooks. It's working really well."

Making sure Pimco's new leadership structure succeeds is crucial because some investors have said they will decide whether to pull their money based on how well new management operates. "We're waiting to see how the management change plays out," said a spokesman for the Florida State Board of Administration, which has about $400 million at Pimco and is reviewing its investment with the firm.

In many ways, Pimco, a unit of German insurer Allianz SE, is still dealing with the aftermath of the departure of Mr. El-Erian, who continues to serve as an adviser to Allianz.

After The Wall Street Journal reported in February that a tense relationship between Mr. Gross and Mr. El-Erian led to the latter's departure, Mr. Gross told Reuters that Mr. El-Erian was trying to "undermine him" and that he had evidence Mr. El-Erian "wrote" the Journal article—a claim the Journal dismissed as "astoundingly incorrect." A Pimco spokesman declined to comment.

On April 10, appearing on Bloomberg TV, Mr. Gross urged Mr. El-Erian to explain his resignation. "Come on, Mohamed, tell us why," Mr. Gross said in the interview.

The comments raised eyebrows within Pimco, partly because it was known that Mr. El-Erian had signed a pledge not to publicly address his departure. A group of senior executives subsequently issued a warning that Mr. Gross should avoid inflammatory public comments, according to people close to the matter.

In addition to threatening to quit, Mr. Gross told people he was considering resigning from Pimco's executive committee, which leads the firm, though he has since changed his mind, according to people familiar with the matter. In the July 7 statement, Mr. Gross said he made it clear to the executive committee that "if they ever should choose to pursue another direction for the firm, for whatever purpose, I would resign if it would be in the best interests of our clients."

Spirits have improved lately. Mr. Gross's Total Return fund, following a year of spotty performance, posted a return of 2.4% in the second quarter, thanks to a prescient bet on rising U.S. government bonds. That compares with 2.05% for its benchmark, the Barclays U.S. Aggregate bond index, according to Morningstar. It still lags behind 71% of rivals this year, though the fund's 15-year record beats 96% of peers.

"My attitude is, 'We'll show ya,' " Mr. Gross said during the interview at Pimco's headquarters, while wearing an unknotted blue tie he says was a present from Mr. El-Erian. "I'm not leaving until we show everybody that this new structure is better than the old structure."

"Don't count me out," he added.

There are signs Mr. Gross is maintaining at least some of his former approach. In mid-May, during a meeting of about 20 Pimco executives at the firm's investment committee, Mr. Gross halted Jeremie Banet, a French-born executive vice president and portfolio manager, while he was sharing his views.

Bloomberg News Chief Executive Officer Douglas Hodge

"I never understand what you're saying," Mr. Gross said, according to people in the room. "Ever."

A day after the exchange, Mr. Banet announced his resignation and said he planned to operate a food truck selling croque-monsieur sandwiches in Los Angeles. In an email, Mr. Banet said there was no connection between the meeting and his departure from Pimco. He said he has "enormous respect and admiration for Bill Gross."

In a July 10 statement, Mr. Gross said: "On that day, Jeremie was sitting at the far end of the table and I was unable to hear what he was saying. I have always respected Jeremie professionally and I like him personally."

Last month, Mr. Gross gave a keynote address at a Morningstar conference in Chicago. Donning sunglasses, he singled out media organizations in the room and said, "Repeat after me: Bill Gross is the kindest, bravest, warmest, most wonderful human being you've met in your life."

The widely circulated comments were criticized on some blogs and via social media.

Mr. Gross says that, one day later, he told hundreds of Pimco employees at a town-hall meeting in New York: "I wish I could do it over again. I wouldn't have worn the sunglasses."

"Hey, I'm not perfect," he says he told the employees.

Write to Gregory Zuckerman at gregory.zuckerman@wsj.com and Kirsten Grind at kirsten.grind@wsj.com



More From The Wall Street Journal

Rates

View Comments (16)