How the mighty have fallen. Earlier this month, the once towering Total Return Fund of Pacific Investment Management Co. hit a milestone. Mary Childs of Bloomberg News observed that Pimco’s “flagship fund fell below $100 billion in assets for the first time in more than eight years, leaving it with about a third of the money it managed at its 2013 peak.”
Perhaps it is only a coincidence, but the collapse in assets under management followed the departure last September of founder and Chief Investment Officer Bill Gross. Pimco did well for a while after the financial crisis and the firm more than doubled in size, while bonuses to the top executives and managers became enormous. However, investment performance eventually lagged, and after several tumultuous years Gross was fired in a palace coup.
There are hardly any peers to Bill Gross and Pimco. The data set of star managers who captured so much attention and assets is almost nil. We are left with powerful anecdotes but few hard data points.
A modest pattern does seem to emerge, though, and it doesn’t seem to bode well for the fund that loses a superstar. Bear with me as I speculate, but it seems that once an ace manager departs, it is only a matter of time before the outsized reputation of that fund departs as well.
The closest person I can come up with to compare to Bill Gross is Fidelity’s Peter Lynch. He was one of the only rock-star fund managers who gracefully retired at the peak of his game. Running Fidelity’s Magellan fund for 13 years (from 1977 to 1990), Lynch averaged a 29.2 percent annual return before calling it quits. During the time he ran the fund, assets under management increased from $18 million to $14 billion. (And that was back when a billion dollars was real money.)
His initial successor, Morris Smith, only stayed for two years, and after a rocky start, posted good results, outperforming the Standard & Poor’s 500 Index. Assets under management increased almost 50 percent to $20 billion during his tenure. Smith was replaced by Jeffrey Vinik, whose stewardship of the Magellan fund wasn’t especially successful for investors. It did however, work out splendidly for Vinik, and pretty well for Fidelity.
Vinik ran the fund from July 1992 to June 1996. Magellan’s assets ballooned to $50 billion. But the returns suffered, underperforming the S&P 500 in every year but one.
Vinik left to open his own hedge fund, Vinik Asset Management, and during the final throes of the 1990s boom and bubble, put up fantastic numbers. The Tampa Bay Times reported he returned “93.8 percent return in his first 11 months and about 50 percent a year for each of the three years after that.” He became a billionaire, purchased a National Hockey League team, and closed his hedge fund in 2000 to focus on his own portfolio.
Perhaps a better comparison to Bill Gross’s Pimco firing would be Jeff Gundlach’s ouster from Trust Co. of the West (TCW) in 2009. Both men are bond managers, both were part of an acrimonious debate over inflation and fixed income, both were publicly fired. TCW made a number of embarrassing accusations about Gundlach, leading to messy litigation over fees.
Gundlach, with the assistance of fellow TCW alum Howard Marks, started Doubleline Capital upon being fired. As of June 30, DoubleLine’s assets under management were more than $76 billion. Gundlach and TWC eventually settled the dispute for an undisclosed amount, but it’s hard to see how any of it reflected well on TCW. About$30 billion in institutional assets fled after Gundlach’s termination; the firm also lost 45 employees to Gundlach’s new firm.
TCW now has more than $160 billion in assets. But more than five years after firing Gundlach, that’s only about $20 billion more than it had when Gundlach ran the show. During that same time period, which included an immense bond rally after the financial crisis, Pimco doubled in size to $2 trillion in assets under management.
Three examples is hardly a robust data set. It seems clear that the departure of a star manager is never easy for the parent company. Fidelity probably managed the transition better than either TCW or Pimco. Fidelity kept Lynch on as a brand ambassador, which was possible because at the time he stepped down he was on good terms with the company. Magellan more than doubled in size after his retirement, but ultimately, it reverted back to being a much smaller fund.
And to be a fair to Pimco, assets under management were declining during the last few years of Gross’s tenure. But it sure looks as if firing Gross accelerated whatever cash outflow had already began.
The lessons here are fairly obvious: Losing some like Gross or Gundlach is a loss for the parent company. If handled intelligently, the damage can be minimized. However, an acrimonious, public firing accompanied by litigation can inflict long-term damage. For both TCW and Pimco, the firings had troubling ramifications for both the departing manager’s funds, and the companies overall.
Originally published as: The Price for Losing Bill Gross or Jeff Gundlach
ANother argument for indexing…