By Ross Kerber and Luciana Lopez
NEW YORK/BOSTON - Vanguard Group and BlackRock Inc could be prime destinations for hundreds of billions of dollars in assets that may flee Pimco in the wake of the sudden exit of Bill Gross, the celebrated "Bond King" of U.S. mutual funds. His new company, Janus Capital Group Inc, may see Gross's cachet attract tens of billions of dollars, investors and analysts said.
During the year ended Aug. 31, investors made $64.7 billion in net withdrawals from Pimco funds, according to research firm Morningstar Inc. Those outflows will likely accelerate with Gross's departure.
"Lots of Pimco AUM (assets under management) will be up for grabs," analysts at Wells Fargo Securities said, noting that they reckoned the total sum Gross managed at Pimco ranged from $500 billion to $700 billion. If half of that amount turns over - typical when a high profile manager leaves a fund - Gross' departure could translate into a $300 billion market opportunity for rivals, Wells Fargo analyst Christopher Harris said Monday in a research note.
BlackRock, the world's largest money manager, and Vanguard, the No. 1 U.S. mutual fund company, provide the performance and the size to attract cash flows from investors unnerved by the infighting at Pimco during the past several months and amid a probe by the U.S. Securities and Exchange Commission. Smaller fund companies may also benefit from the fallout.
Retail investors tend to shift money quicker than big pensions and other investment institutions, which deliberate more slowly about what to do.
Janus, the Denver asset manager with a volatile history, could be in for a surprise if it is expecting Pimco money to flow automatically after the star fund manager.
"Gross is a very capable investment manager. He's not God," said Carl Nelson, executive secretary and chief investment officer of the $1.1 billion San Luis Obispo County Pension Trust.
Instead, institutional investors such as Nelson, who can take months to make decisions, will want to see how Gross settles into his new role managing the Janus Global Unconstrained Bond Fund, which has about $13 million under management.
To be sure, more than a dozen fund representative and consultants told Reuters that they have hesitations about leaving Pimco, which Gross co-founded more than 40 years ago.
"We hired Pimco as an organization, we didn't hire Bill Gross as an individual to manage our money," said Stephen Rauh, the chairman of the $4 billion Vermont Pension Investment Committee, which has Pimco on its "watch list."
Pimco's Total Return Fund, which Gross ran personally for 27 years and has about $222 billion in assets, appears most vulnerable to poaching, said analysts at Susquehanna Financial Group.
"BLK (BlackRock) is likely the biggest beneficiary," analyst Doug Sipkin said.
BRINGING IN A STAR
Meanwhile, few fund firms have had a harder time than Janus over the past decade as its stock funds fell out of favor. Janus has struggled for years to recapture the status it lost during the dot-com crash. Its assets peaked at more than $300 billion in 2000 and stood at $178 billion at the end of June.
Janus CEO Dick Weil hopes Gross will attract money to a stable of bond funds that have just $31.4 billion in assets under management as of June 30. That's up from $9.2 billion four years ago.
Janus now could double or triple those bond assets again as money follows Gross, said Dan Sondhelm, partner at SunStar Strategic, a financial services consulting company in Alexandria, Virginia.
"No salesman could do that," Sondhelm said. Investor cash flows could start to gather steam by the first quarter of next year, he said.
For Gross, the shift to Janus means giving up one of the industry's biggest paychecks, a reported $200 million a year, if for no other reason than the fund he will manage is a fraction of Total Return Fund's size. Gross has a net worth of $2.3 billion, according to Forbes.
"He didn't come for big money upfront, he came to build a fund" and other products, said a person familiar with the matter, speaking on condition of anonymity because of the sensitivity of the situation.
Janus likely has put together a pay plan that would reward Gross for drawing assets into products he oversees, a key measure of success in the fund industry, said Todd Sirras, managing director at pay consulting firm Semler Brossy, which has worked with Janus in the past.
Gross, 70, wasn't available to comment. A Janus spokesman said executives including Weil wouldn't comment.
"Janus's move to hire Mr. Gross strikes us as precipitous, coming two days after last week's multiple news reports about the U.S. Securities and Exchange Commission investigation of alleged improper valuation and performance reporting in Pimco's $3.6 billion Total Return exchange-traded fund," Moody's said.
"If the SEC determines that these allegations are true, it would not be clear what liabilities – both legal and reputational – might attach to Mr. Gross."
(Reporting by Ross Kerber and Luciana Lopez; editing by Tim McLaughlin, Linda Stern and John Pickering)