Money-management firm Pacific Investment Management Co. is bracing for a deluge of redemptions in the coming weeks primarily from its flagship fund that invests in bonds in the wake of last week’s abrupt departure of its co-founder, Bill Gross, financial advisers who deal with the company say.
The Newport Beach, Calif. money management firm, known as Pimco, was deluged with calls on Friday from financial advisers demanding answers to breaking news that Gross—the firm’s chief investment officer who also ran Pimco’s $221 billion Total Return fund—had quit to join rival asset manager Janus Capital Group (JNS), these advisers say.
Investors withdrew more than $500 million from the Total Return Fund alone on Friday, and billions from other funds, but with some purchases it’s unclear how much money ended up flowing out of the fund company, advisers with first-hand knowledge of the matter tell FOX Business.
The behind-the-scenes concerns by senior management are in stark contrast to public comments made by Pimco executives including chief executive Douglas Hodge, who in one report said there is a widespread sense of comfort inside the firm now that Gross—a polarizing figure—is gone.
In the wake of Gross’s departure, senior Pimco executives are preparing for as much as $60 billion of investor cash leaving the massive bond fund, not to mention the slew of other investment vehicles Pimco manages, advisers say.
Moreover, vast portions of the firm had been caught flat-footed by Gross’s abrupt exit, they add, since much of the management turmoil at the top of Pimco had remained a secret outside the executive suites. Customer service representatives were without talking points to explain the management change, advisers say.
As news of Gross’s departure set in Friday, senior executives also scrambled to obtain credit facilities to meet the possible customer redemption demands, advisers say. At least for now, those demands for cash by investors – known as redemptions—haven’t been overwhelming for the firm, which has $2 trillion under management, advisers say.
Pimco funds are sold primarily through financial advisers, and based on the tone of those calls, combined with the acceleration of redemption requests during the course of the day on Friday, company officials are bracing for significant money flowing out of the TRF, and possibly the entire company in the coming weeks, advisers add.
“The company knows that many financial advisers are telling their clients to switch from Total Return to the fund that Gross will run at Janus,” said one adviser.
A spokesman for Pimco wouldn’t deny the firm’s concern about redemptions and declined further comment.
The 70-year-old Gross—known as the “bond king”—is an iconic figure on Wall Street. In 1971 he co- founded Pimco, now one of the world’s biggest money-management firms that specializes in bonds. His Total Return Fund, launched in 1987, has had one of the best-long term records in the financial business, showing strength particularly during the 2008 financial crisis. Gross sold Pimco to German insurer Allianz SE in 2000, but the company operates largely independent of its parent.
With that TRF attracted tens of billions of dollars in new investor cash. But Gross’s record in recent years has been erratic; management at the once smooth-sailing firm — that Gross as its chief investment officer ran with an iron fist– began to show signs of strain with the departure of its former chief executive Mohamed El-Erian earlier in the year. Since last year, investors have yanked nearly $70 billion out of the TRF.
More recently, Gross was resisting demands from subordinates and Allianz to plan on an eventual retirement, causing more tension within the firm, people close to the company say. Money managers have been threatening to quit. As a show of defiance, Gross wrote an investment letter to his dead cat, and also wore sunglasses during a speech at an investor conference.
“That was his f— you to those who wanted him to leave,” said one person with direct knowledge of the management turmoil. “Bill thinks he’s going to live and manage money forever.”
The drama came to a head in recent weeks when Gross dialed friends for a job in order to beat management of Pimco to the punch, and leave before he could be ousted.
Even with a slump in his performance, Gross brings star power with him to Janus, a much smaller firm with around $170 billion under management. He begins work on Monday, so there will not be gaps in his resume, allowing Janus to tout his long-term performance under regulatory guidelines.
Shares of Janus soared on the news of Gross’s hiring, while stock price of Allianz fell sharply. Prices of government bonds also began to slide in anticipation investors would yank shares out of the massive TRF, and management would have to sell out of positions.
Financial advisers say Pimco is spreading the word it has plenty of liquidity, meaning it can easily meet redemptions. Gross built up the fund’s cash position increasing it to tens of billions of dollars in anticipation of higher interest rates and a possible decline in bond prices, and possibly the investor unrest with his departure.
A spokesman for Gross had no comment.
Still, senior executives inside the firm are nervous about how investors and their brokers will view new management (a team will replace Gross at TRF) and the loss of Gross. In addition to the scramble to convey a sense of stability to the investment world, and find bank lines of credit to meet redemptions, Pimco executives have engaged in a little gallows humor.
At the end of the day on Friday, on the trading floor at Pimco’s New York City office, executives blasted the Paul Simon classic “50 Ways To Leave Your Lover,” and REM’s “It’s The End Of The World As We Know It.”
Charles Gasparino joined FOX Business Network (FBN) in February 2010 as Senior Correspondent.