By Jennifer Ablan and Luciana Lopez
NEW YORK (Reuters) - The Bond King has lost his throne.
Bill Gross, who built Pimco into a $2 trillion asset manager and became one of the world's best-known bond investors, quit the firm he co-founded on Friday after his flagship fund suffered its 16th straight month of outflows and amid a Securities and Exchange Commission probe into whether one of his funds artificially inflated returns.
Gross's sudden departure follows a public falling-out with former heir-apparent Mohamed El-Erian, who quit in January, and may accelerate net outflows from its funds, which have shed some $35 billion this year, the worst in the mutual fund industry out of 764 fund groups, Morningstar data show. Pimco is likely to name Dan Ivascyn to replace Gross as chief investment officer, said a person familiar with the situation.
"This will likely accelerate the negative cash outflow momentum at Pimco," said David Schawel, vice president and portfolio manager of Square 1 Financial. "This news doesn't help with the backdrop of a lot of investors chasing performance. Pimco is no longer the hot go-to fund."
Since the start of the year, investors have pulled $25 billion from the Pimco Total Return Fund, the world's largest bond fund, and $6 billion from the Pimco Unconstrained Bond Fund, according to Morningstar data as of the end of August. Both were personally supervised by Gross, 70, who also oversaw the Pimco Total Return ETF, the object of the SEC probe.
Pimco's losses come as rival firms attracted about $25 billion into the intermediate-term bond category – to which Total Return belongs - and about $18 billion into non-traditional bond funds – to which Unconstrained belongs.
"People chase performance and performance hasn't been crushing it at some of the biggest and most high-profile Pimco funds," Schawel said. "It's easier for money to flee when all of these things are happening aside from nervousness surrounding the leadership shakeup and now Gross's departure."
Gross will join the $177 billion Janus Capital Group and said he was going to "get back to spending the bulk of my day managing client assets." Michael Diekmann, chief executive officer of Allianz Group, which owns Pimco, said "the management and investment structure put in place in January as well as the thorough succession planning gives us complete confidence in Pimco's investment and executive leadership team," in a statement on Friday.
Long-time rivals of Pimco have been mum all year about the ugly public divorce between Gross and El-Erian, but they've been some of the biggest beneficiaries of client money fleeing the Newport Beach, California, firm.
Jeffrey Gundlach's DoubleLine Capital, Tad Rivelle's TCW and Larry Fink's BlackRock, among others, have seen money reallocated to their portfolios from pension funds, foundations and endowments, as Pimco's flagship fund failed to stem the net outflows since El-Erian's resignation in January, according to SEC filings and interviews with at least a dozen consultants and institutional investors.
DoubleLine, TCW/MetWest and BlackRock rank in the top 25 fund families attracting the strongest net inflows so far this year with Vanguard at No. 1 with net inflows of $86.5 billion, according to Morningstar data. This includes not just funds groups dominated by fixed income funds, but fund groups dominated by stock funds, index funds, managed futures and munis.
"Clients and their advisors make it clear to me that they want income, but they are more worried about interest rates now than at many times in the past," Gundlach told Reuters. "So to attract investors in the intermediate-term bond fund arena, it certainly helps for a fund to offer a strong dividend yield with temperate-to-low interest-rate sensitivity."
Regarding Pimco, he said a sequence of news this week "already made it seem that some kind of reorganization was occurring. I have no idea what or how successful the outcome will be." [SEC probes Pimco chief Bill Gross's ETF bond fund, [El-Erian: Would have done "things differently"]
BlackRock and TCW declined to comment.
Morningstar analyst Vincent Lui said in a report on the Morningstar website Friday: "It is likely that tens of billions, if not hundreds of billions in AUM (assets under management), will follow Gross to Janus from Allianz."
WATCH LIST WORRIES
Pimco, or some of its funds, remains on the watch list at a number of pension funds and endowments, such as the North Dakota Retirement & Investment Office, the Florida State Board of Administration, the Orange County Employees Retirement System and the Vermont Pension Investment Committee.
CalPERS, the nation's largest public pension fund, said in a statement on Friday: "CalPERS has respect for both Bill Gross and Pimco investment professionals. Pimco manages an international bond fund for CalPERS, valued at approximately $1 billion and representing 1.5 percent of our Fixed Income program. We will continue to monitor developments at the firm, and will conduct a thorough analysis of our exposure managed by them. We have no plans at this time to make changes with our Pimco mandate."
The Foundation for a Healthy Kentucky did terminate its bond fund with Pimco, pulling out $3.3 million in August after concerns arose about the strength of the firm's leadership, said chief executive Susan Zepeda.
Gross "has been a very strong force behind our affection for Pimco, and we thought he had a strong succession plan in place," Zepeda said. "And then our confidence was shaken. It's sort of the strong man risk situation. He's been so identified with Pimco for so long. The committee was concerned about the depth of the bench remaining."
Nor is the management shakeup the only reason institutional investors are leaving Pimco.
"A lot of clients are re-assessing their fixed income mandates," said Neil Rue, managing director at Pension Consulting Alliance Inc.
Many of those client investors are now moving away from the typical core or core-plus and exploring other strategies, he said.
That means money that might have been reallocated to an already-in-place Pimco - or similar firm - core-plus fund could switch to another mandate using different forms of expertise, he said.
One fund that reassessed the way it handled fixed income was the Fire & Police Pension Association of Colorado, which transitioned about $250 million out of Pimco's total return strategy earlier this year.
"It was primarily an internal restructuring of our fixed income portfolio," said chief investment officer Scott Simon. "It's a move to more unconstrained, flexible strategies that should be able to take advantage of a rising rate environment."
But some moves out of Pimco, in fact, were already in the works when El-Erian left. Columbia Management Investment Advisers LLC in March replaced Pimco as the subadvisor of a $1.3 billion bond fund. A person familiar with the matter said that the move was unrelated to the management changes at Pimco.
Similarly, Mercer Asset Management announced in April that it was replacing Pimco as a subadvisor on its Mercer Core Fixed Income Fund. Mercer declined to comment.
(Reporting By Jennifer Ablan and Luciana Lopez. Editing by John Pickering)