Gross' last defiance stuns Pimco, Allianz

Even the executives at Allianz SE didn't know. It was 2:28 p.m. in Munich on Friday, and Bill Gross, in charge of $2 trillion as chief investment officer at Pacific Investment Management Co., had just announced that he was joining Janus Capital Group Inc., a struggling stock fund manager. With Allianz shares starting to slump, the German insurer called its U.S. asset management arm to confirm that the most influential bond manager had just quit. Pimco, based in Newport Beach, Calif., hadn't known either, according to people familiar with both firms. Mr. Gross, 70, had left the bond giant he helped found 43 years earlier without telling its executives, a last act of defiance by a great investor whose disregard for management concerns had brought him to the verge of being ousted. As shares of Allianz fell the most in almost three years and Pimco traders worked to contain the fallout of his departure — the news sparked a selloff in markets for Treasuries, credit derivative indexes and the Mexican peso — the billionaire was on a plane to Denver, where Janus is based. “While we are grateful for everything Bill contributed to building our firm and delivering value to Pimco's clients, over the course of this year it became increasingly clear that the firm's leadership and Bill have fundamental differences about how to take Pimco forward,” Douglas Hodge, Pimco's chief executive officer, said in a statement later that day. FALLING OUT Mr. Gross's falling out with the firm he built had been in the making since at least January, when former Chief Executive Officer Mohamed El-Erian resigned amid disputes over Gross's management style. Mr. El-Erian's surprise departure resulted in the biggest management reorganization in Pimco's history in January, and prompted the firm to put in place a succession protocol. Some investors approached Allianz, Europe's biggest insurer, over reports of abrasive behavior by Mr. Gross, said one person familiar with Pimco, who like the others asked for anonymity because he wasn't authorized to speak. “Ever since the Mohamed departure, the knives were out for Bill,” said Kurt Brouwer, chairman of Tiburon, Calif.-based advisory firm Brouwer & Janachowski, who has invested in Pimco funds since the 1980s. “They have not handled their corporate decisions very well, but from a money-management perspective, I don't have any issue with the Pimco organization.” Mr. Gross, whose personal wealth is estimated at $2 billion by the Bloomberg Billionaires Index, repeatedly disparaged senior professionals, according to people familiar with the firm. At one point, he told Mr. El-Erian, “I have a 41-year track record of investing excellence. What do you have?” The behavior didn't stop after Mr. El-Erian quit and Gross promised to straighten up. Of long-time Pimco leadership including Mr. Hodge, Gross repeatedly said, “I made these people rich,” according to another person. Mr. Gross didn't respond to telephone calls and a message left at his home. Mark Porterfield, a spokesman for Pimco, declined to comment. The bond king had been untouchable while his fund topped peer rankings and assets more than quintupled in the past decade. In recent years, however, performance had declined. The Total Return Fund (PTTRX), the world's biggest bond fund, trailed 63 percent of peers over the past year, on track to underperform a majority of rivals for the third year in four. The fund's assets have shrunk to $222 billion from a peak of $293 billion last year. SEPTEMBER MEETING The January management changes, which included the appointment of top-performing fund manager Daniel Ivascyn, 45, as one of six deputy CIOs, emboldened some managers to challenge Gross's views. At investment committee meetings in April and May, four of his six newly appointed deputy investment chiefs questioned whether their boss was too pessimistic about the economy, four people familiar with the matter said earlier this year. By mid-September, after Ivascyn had threatened to leave, the executive committee met behind closed doors to assess if they had enough votes to oust Gross, and spoke to fund managers to gauge their views, according to another person. They planned to decide Gross's future at a meeting over the past weekend, this person said. Gross didn't wait that long. Last Tuesday, he picked up the phone and cold-called DoubleLine Capital LP, asking for Jeffrey Gundlach, a money manager with a personality as big as his own, to discuss joining the much smaller crosstown competitor. The talks didn't go anywhere and Gross instead agreed to run a startup fund with no assets at Janus, a firm run by Dick Weil, who worked at Pimco from 1996 to 2010, as general counsel and later managing director and chief operating officer. Michael Rosen, chief investment officer at Santa Monica, Calif.-based Angeles Investment Advisors, had one word for the move: “Stunning.” For Gross, joining Janus is a chance to cement his reputation as a bond investor and go back to building up a smaller firm. Gross starts managing the Unconstrained fund at Janus on Oct. 6, putting a competitor in the market with deep knowledge of Pimco's holdings six business days after his name disappeared from Pimco Total Return. 'FULL FOCUS “I look forward to returning my full focus to the fixed income markets and investing, giving up many of the complexities that go with managing a large, complicated organization,” Gross said in the statement. “I chose Janus as my next home because of my long standing relationship with and respect for CEO Dick Weil and my desire to get back to spending the bulk of my day managing client assets.” Janus, with $178 billion in assets under management, has seen its shares slump since the bursting of the Internet bubble after rapid growth in the 1990s. The firm was one of the first mutual-fund companies identified by former New York Attorney General Eliot Spitzer in September 2003 as permitting improper trading and agreed to pay $226 million in penalties and management fee cuts to settle complaints. More recently, Janus suffered from underperformance and employee defections. For Pimco, Gross's departure may mean asset withdrawals of 10 percent to 30 percent, Sanford Bernstein said in a report. Some wealth managers had already been exiting Pimco this year amid confusion over its leadership. Clients pulled about $10 billion immediately after Gross announced his departure, the Wall Street Journal reported yesterday, citing unidentified people familiar with the matter. “Pimco manages nearly $2 trillion in client assets and we are confident that the vast majority of our clients will continue to stand with us,” Mr. Hodge said in a statement. Pimco over the weekend started to contact investors, saying there will be no major changes in investment strategy at the manager of the world's biggest bond fund. Pimco was initially focused on trading following Gross's departure, Hodge said in an interview. The firm has since reached out to clients and distribution partners around the world in a bid to prevent large-scale redemptions. “It's business as usual,” said Scott Mather, one of three newly appointed managers of the Pimco Total Return Fund. “We've all been part of the team as members of the investment committee.” UNANIMOUS CONSENT' Allianz, which has owned Pimco since 2000, said it has no plans to sell the fund or alter its relationship with the business. After Mr. Gross's exit, Pimco's managing directors met and “by basically overwhelmingly unanimous consent,” confirmed Mr. Ivascyn as group CIO, Mr. Hodge said in the interview. Pimco named Mr. Mather, Mark Kiesel, and Mihir Worah to take over management of Pimco Total Return. Pimco's leadership team also convened a meeting with more than 300 employees who deal directly with clients, walking them through the process of appointing the new management, according to a person who was present. After Mr. Ivascyn was introduced, the group cheered and gave him a standing ovation, said Hodge. The new management will keep the existing structure with annual secular forum and quarterly cyclical forums, investment committee meetings and regional portfolio committee meetings, all of which are “working very well,” Ivascyn said in an interview. The main changes, he said, will be in style. “We're going to share responsibility a bit more than we have in the past,” he said. “A way to describe that is we'll be using the word 'we' a lot more than we have, hopefully, and hopefully we'll emphasize team a little bit more.”