It’s time for Bill Gross to retire

By Felix Salmon
February 25, 2014

A word of entirely unnecessary advice for anybody on the Pimco trading floor Tuesday morning: do not look Bill Gross in the eye. Or talk. Or do anything at all to make yourself stand out or be noticed. Because Gross, who for most of his career has been the subject of some of the most glowing press imaginable, has just been brought down by a downright brutal article on the front page of the WSJ. Neither Gross nor Pimco will ever be seen the same way again, and indeed, if Gross cares at all about the long-term fortunes of the company he built, the best thing he can do right now is simply retire.

The story is illustrated, online at least, with a gruesome photograph of the 69-year-old money manager, looking sideways through yellowing eyes as he reaches out like something from a zombie movie. And it just gets worse from there, confirming all the worst fears of anybody with investments at the monster-sized firm.

Late last year, in front of a number of traders, Mr. Gross said, “if only Mohamed would let me, I could run all the $2 trillion myself…I’m Secretariat,” referring to the famed thoroughbred. “Why would you bet on anyone other than Secretariat?”

That’s just about the worst possible thing for Gross to be quoted saying, given who Pimco’s clients are, and what they want, and what former CEO Mohamed El-Erian has been telling them, consistently, since he re-joined the company in 2007.

Pimco’s clients are, overwhelmingly, fixed-income investors. That means they’re conservative: while they like outperformance, they’re not shooting for the stars, and they hate taking unnecessary risks. Like, for instance, the risk that they’ve placed their billions in the hands of a cantankerous old man who always thinks that he’s right and that everybody else is wrong.

“I have a 41-year track record of investing excellence,” Mr. Gross told Mr. El-Erian, according to the two witnesses. “What do you have?” …

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.

Pimco’s investors are also overwhelmingly institutions. Pimco itself gets mandates not because it has the best performance, but more because it’s the ultra-safe choice: it can pass any conceivable due diligence test, it has been around for decades, and it has multiple layers of checks and balances. El-Erian knew exactly what his job was, in public and in private: to paint Pimco as a disciplined supertanker of an investment vehicle, with committees and open dissent and a well-tested procedure for arriving at investment decisions, which was much more robust and much more trustworthy than any individual could ever be. In other words, to move Pimco (or at least the 90% of Pimco which isn’t Gross’s Total Return Fund) as far as possible from idiosyncratic Bill Gross risk as possible. Gross is old, he’s erratic, and he’s generally not someone you want to park your money with on the quasi-permanent time horizon which is used by Pimco clients like sovereign wealth funds and foundations.

Today, with the publication of this article, every fear of every large Pimco investor is going to be rearing its ugly head. Now that El-Erian has left, are Pimco’s trillions effectively under the sole charge of a monomaniac? Indeed, it seems that Gross has become so impossible to work with that El-Erian — the man who repeatedly said that he loved his job, the man who even according to this article “flourished in the firm’s demanding environment”, the man who was the explicit heir apparent to Gross — ended up resigning rather than work for Gross one more day.

“I’m tired of cleaning up your shit,” El-Erian said to Gross, last June, in front of more than a dozen colleagues. El-Erian is soft-spoken to a fault; if Gross had pushed him that far, it’s little surprise he quit.

Note too the byline on the article: it’s by Gregory Zuckerman, a man who has made a career out of writing awestruck books about the investing prowess of billionaires not unlike Gross. The Greatest Trade Ever: The Behind-the-Scenes Story of How John Paulson Defied Wall Street and Made Financial History, published in 2009, was followed up by The Frackers: The Outrageous Inside Story of the New Billionaire Wildcatters. Zuckerman’s stock in trade is not character assassination; quite the opposite. And yet he has penned what could — what should — be a fatal blow to the career of the greatest bond investor of all time.

There is no way for Gross to recover from this article. He knows it, too. When El-Erian first told Gross that he wanted to quit, Gross offered him “more power”, according to Zuckerman; indeed, El-Erian was offered “whatever he wanted to entice him to stay”. None of it was enough. El-Erian has said basically nothing in public since he quit, but the message here speaks loudly all the same: his job as CEO was to manage Pimco’s risks, and he felt simply incapable of managing the biggest risk of all.

Sometimes, the CEO isn’t really the CEO. When El-Erian was at Harvard, he “was having a heart attack” thanks to the irrational demands of Larry Summers, and ended up quitting to go somewhere a bit more grown-up. I can see how he would have had no desire to replay that movie a second time. And if El-Erian can’t manage Gross, then no one can manage Gross.

As a result, the only way to save Pimco is for Gross to leave the firm entirely. If he must, he can take his Total Return Fund with him. Pimco’s investors care about good governance ahead of anything else, and Pimco is clearly suffering under the very opposite of good governance right now. Gross is singlehandedly responsible for most of what Pimco is today, and he can leave, at this point, with his head held high. But his natural tenure at Pimco has come to an end. It’s time for Bill Gross to take his leave of the company he built, and for him to watch it thrive under more professional, less idiosyncratic, management.

Update: Matthew Klein responds with an argument which would be very strong, were Gross a stock investor rather than a bond investor:

Every investor has a choice between allocating their money to active money managers who bet on the markets, such as Gross, and handing over their savings to index-hugging mutual funds that charge rock-bottom fees.

Klein says, of Pimco’s funds, that “there simply isn’t an excuse for paying those kinds of fees unless you expect performance to materially differ from a standard buy-and-hold index.” Except, he never says what “those kinds of fees” are.

Klein makes two big mistakes, here. Firstly, he thinks that it’s possible for big institutional investors to simply pick a fixed-income benchmark and track it, at very low fees. It’s not. The S&P 500 is easy to invest in directly; the Barclays Agg is not.

Secondly, Klein thinks that Pimco’s fees, for its big institutional clients, are significantly higher than the “rock-bottom fees” you can find in a “buy-and-hold index”. Again, this is simply not true. You can’t buy-and-hold bonds: they constantly mature, and need to be reinvested in something new. Which is expensive, and non-trivial. Pimco and Blackrock, with their scale, can do that job more effectively than just about anybody else — which means that they can compete aggressively on fees against just about anybody else.

So not only is there no simple way of investing in bond indexes, even if there were such a way, it would not be significantly cheaper than most of the products being offered by Pimco. If you want to invest in bonds, you basically have to pick an active manager.

Investors have a choice between Pimco and its competitors, but they don’t really have a choice to pick “none of the above” and go with an entirely passive strategy. What’s more, if they did want an entirely passive strategy, and set up a fee scheme where any deviation from the benchmark would be punished, then I’m pretty sure that Pimco could provide them that product at a cheaper price than just about anybody else.


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It might be good to hold back on judgmental terms like “jerk” for a while. Changes in personality and instances of bad judgment can be the first signs of organic disease in someone of Gross’s age. Let’s hope for his sake that he turns out to be a jerk, but be aware that there may be something else going on.

Posted by RogerB | Report as abusive

Wait just one minute Felix.

You wrote a post ~ 2 years ago praising Bill Gross from top to bottom, iirc calling him the best bond trader and other superlatives — views that your readers (myself included) strongly disputed. Now you’re coming around to the view then widely held?

Post a link to your prior praise for Bill Gross.

Readers need to know how you blow with the wind.

Posted by dedalus | Report as abusive

Felix Salmon: “[T]he fact that Bill Gross, the greatest bond investor of all time….” (July 30, 2012) 12/07/30/questioning-el-erian/

Gross made many enemies “back in the day” when he was screwing over the locals in the CBOT pits by forcing shorts to cough up bonds they couldn’t possibly deliver because Gross had bought all of the eligible inventory, forcing the CBOT to change their rules to prevent Gross from repeating his crime.

Imho for well over two decades both Bill Gross and Mohamed El-Erian have written newsletters that drew heavily, almost plagiarized, James Grant’s “Interest Rate Observer.” But since so few people read all three authors that fraud has never been exposed. (At least El-Erian gave Grant a blurb for his book.)

Bill Gross hasn’t changed an iota over the last 30 years — only the fawning treatment of him by the press has changed.

Posted by dedalus | Report as abusive

We put Bills fund in our K-plan a few years ago. I’m not one for bonds myself… (I’m with you Felix the world needs more equity) but if I wanted bonds I’d pay Bill to manage him.

So what if one of the worlds best bond managers is a bit of a dick… last time I checked nice guys still finish last.

Posted by y2kurtus | Report as abusive

no i don’t thinks so that Bill Gross should retire right now.

Posted by MillyLynn | Report as abusive

I don’t believe Allianz likes a great deal of publicity, but they may be moving behind the scenes now that this story is public.

Posted by chlee1942 | Report as abusive

At this point, you just sound like Zuckerman’s cheerleader..
Everyone who read the article can form their own conclusions without your senseless banter..
From the tone of your article, it seems that you either have some PIMCO short positions or Zuckerman is causing some positioning underneath your shorts…

Posted by teyonton | Report as abusive

Regarding your update.. the Vanguard Total Bond Market Index fund has a fee of 10bp/annum with a minimum initial investment of $10,000. Now it’s a bit less than half the size of PIMCO Total Return (110bn vs 236bn), but the fee is 10bp vs 46bp. I dunno about you, but I’d call that significantly higher for PIMCO. The vanguard fund is twice as expensive as the Vanguard S&P 500 fund (5bp/annum), but it’s still a pretty low-cost way to invest in bonds.

Posted by niveditas | Report as abusive

I don’t know much about Gross’s investment performance, but I don’t like his think pieces. He is a bond trader, not an economist and a lot of his stuff is very shallow.

Posted by nixonfan | Report as abusive

Bill Gross made a bad call on Treasuries. Based on his experience, he couldn’t conceive of the possibility of a 10year below 2% and the long guy below 4%. (When you’ve seen Treasuries with coupons of 13%, 14%, 15% as he did, the 2%, 3%, 4% levels were “inconceivable.”) He hoped to crown his career by hitting the end of the 30yr bull market. He was wrong, of course, and most of his actions since then have been self-effacing to restore his reputation. El-Erian realized that Gross wasn’t going to retire, so he(El-Erian) did.

Posted by Fxincomeguy | Report as abusive

Having known Mohamed since his childhood in Egypt, and being familiar with both his private personality and public persona, here’s my own opinion. He started off by admiring Bill Gross, then by competing with him, and finally by feeling so superior to him that he came to believe he could replace him–even as a trader. So he made his move by resigning so abruptly in the expectation that by so doing Allianz would have him replace Bill. This was his strategy, and the tactics he used were vintage IMF bureaucratic turf war. To date Allianz has stood firmly behind Bill Gross, and Mohamed is moving on to blogging and writing a book.

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