Bill Gross — whose name invariably seems to come after the phrase "legendary bond investor" in press accounts — announced today that he is stepping down as the head of the financial management firm PIMCO and going to work at the Janus Capital Group, another financial management firm.
If that does not sound exciting to you, you are obviously not a financial journalist or practitioner because the news was greeted in that world as a mega-story, with inboxes crowded with news updates and finance twitter exploding with excitement.
Unless you yourself are a very wealthy individual or perhaps the steward of a well-endowed non-profit, this doesn't actually have much to do with your life. But it's still a huge story in the business world because of the sheer scale of PIMCO's operations, Gross's outsized personality, and most of all the sheer surprise of it all.
It's rare in the news business to see something happen that genuinely nobody was expecting. And that's what happened this morning.
What is PIMCO?
The Pacific Investment Management Company or PIMCO is a financial management company — people and institutions with savings hand their money over to one of its various funds, and PIMCO's managers invest it.
It was founded in 1971 by Bill Gross, and since 2000 has been a subsidiary of the German financial services company Allianz. But even after the acquisition it remained very much Gross's company, headquartered in Newport Beach, California as it's always been and closely identified with Gross. As of June 30, it had $1.97 trillion worth of assets under management which is an ungodly sum of money.
These assets exist in a variety of sub-funds, of which the most famous and important is the PIMCO Total Return Bond Fund, which is managed by Gross himself and which is the largest bond find in the world.
Bonds are a kind of loan raised typically by large companies and various kinds of government agencies. Because both the risks and rewards involved in buying and selling government bonds are so directly tied to budget policy and central bank decisions, bond analysts frequently find themselves commenting on public policy issues to a greater extent than specialists in other kinds of investments. This makes PIMCO even more high profile in the financial press than its sheer size alone would warrant.
Who is Bill Gross?
Bill Gross is the founder of PIMCO and the director of its Total Return Bond Fund. Having constructed the world's largest bond fund from scratch, he's an iconic figure in the world of professional bond traders and analysts.
He also has a colorful style of expressing himself that is well known to the financial media due to his monthly investment outlook letters. His May 2014 letter, for example, led with the observation that "A sneeze is, to be candid, sort of half erotic, a release of pressure that feels oh so good either before or just after the Achoo." This eventually led to the conclusion that long-term US interest rates are likely to be closer to 2 percent than to the 4 percent that is widely assumed.
As a leading figure in the practical world of bond investment, Gross has often weighed in on issues that are of interest to pundits and economics writers. In 2011, in particular, he frequently clashed with Paul Krugman over issues related to Quantitative Easing, the national deficit, and interest rates. Gross' analytical approach was generally more popular than Krugman's, especially with the kind of people who have money to invest, but broadly speaking his forecasts did not work out well in recent years and since the spring of 2013 investors have been pulling money out of his fund.
Why is Gross leaving such a big deal?
It's a big deal in two ways.
For starters, even despite recent setbacks Gross' fund is still the biggest bond fund around. Any time a pool of money that large loses its chief steward, you have a big deal on your hands.
But it's primarily a story just because it seems so surprising for a person to leave a company with which he's so closely identified and then to go work for a key rival. Gross is 70 years old and very rich, so for him to simply retire and dedicate himself to charity work or hobbies would be big news but not especially surprising. But to actually decamp for a rival investment firm is weird.
It would be as if Mark Zuckerberg had quit Facebook to go work at Google. The mere fact that Gross' contract allows him to go work for a competitor so quickly is a bit odd and seems to reflect the extent to which defection was simply unthinkable.
Financial markets, meanwhile, went berserk upon the news. In pre-market trading, the price of shares in Janus lept up almost 40 percent before settling at something closer to a 35 percent increase. That represents almost $800 million in paper value that Gross' move created for his new employer — a clear sign that stock investors are expecting tons of Gross' old clients to follow him.
Why is this happening?
It's a bit unclear, which is why it's an interesting story. But the beginning of the end appears to have involved clashes between Gross and his deputy at PIMCO, Mohammed El-Erian.
Disagreement between the two led to El-Erian's departure from the firm, and a scathing profile of Gross in the Wall Street Journal in February that painted a picture of Gross as a bit of an aging mad king figure:
When Mr. Gross establishes an investment thesis, he usually doesn't appreciate dissenting views, employees and former Pimco traders say. Once, when a senior investment manager said a bond in Mr. Gross's fund appeared to be expensive, Mr. Gross responded: "OK, buy me more of it," according to a Pimco executive. The purchase was made...
Mr. Gross said in a recent interview that he would be stepping back from some investment duties, but others at the firm are skeptical he will give up any control.
"I'm ready to go for another 40 years!" Mr. Gross posted on Twitter after Mr. El-Erian's departure.
The clashes clearly reflected some problems for Gross, but the fact that El-Erian left and Gross did not appeared to indicate that Gross had the confidence of his bosses at Allianz. Today, that appears not to have been the case.
Earlier this week we learned that PIMCO was the subject of an SEC investigation into whether the company had been juicing the returns of some of its funds with dodgy accounting. And this morning, CNBC's David Faber reported that Gross was going to be fired imminently over his "erratic behavior." Rather than accepting a quiet retirement, Gross decided to go down fighting — jumping ship to a rival company and perhaps embarrassing his old bosses.
In the short-term, this looks like a big win for Gross. Janus' shares are way up while Allianz's are slumping. Despite recent setbacks, Gross and his letters still have a strong following and markets are anticipating that he'll be able to take his clients with him. That said, details of Gross' deal with Janus are not yet known and the still-outstanding SEC investigation leaves an obvious cloud over the whole thing.
What seems most predictable is that PIMCO's status as a large, independently managed subsidiary of a German financial services firm is going to come to an end. There is more to PIMCO than Gross himself and long has been. But the Bill Gross brand is irreplaceable. With him gone, the bosses in Germany will almost certainly — and rightfully — seek to integrate the company and its remaining clients more closely into its larger business. Independence was part of the terms of the acquisition, and part of the price paid to keep Gross running the show. With Gross gone, that's all obsolete and it's not clear whether PIMCO will survive at all as an independent brand.