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Business Analysis & Features

The Bond King of Wall Street faces a tough hand

As investors question his $200m salary and his flagship fund lags behind rivals’, Bill Gross of Pimco is on the back foot, says Mark Mcsherry

It’s the ugly fight between financial world heavyweights at the $1.9trn (£1.1trn) bond fund giant Pimco that has kept Wall Street agog for weeks.

The champion, at least for now, is former Las Vegas blackjack player Bill Gross, Pimco’s founder and to many the most famous bond investor in the world.

The Bond King’s opponent is the intellectual Mohamed El-Erian, until recently Pimco’s chief executive and the heir apparent, who shocked the financial world in January when he quit, giving no reason.

Pimco, the Pacific Investment Management Company – a subsidiary of the German insurance giant Allianz – manages retirement funds for global clients from offices around the world, including one in London run by Andrew Balls, the younger brother of the shadow Chancellor, Ed Balls.

It’s known for rewarding its top-performing money managers handsomely but even Pimco’s own trustees are now balking at the $200m a year Mr Gross reportedly earns.

“You could hire 2,000 schoolteachers for that money,” William J Popejoy, a Pimco trustee for more than 20 years, told The Los Angeles Times this week.

“I don’t know what Bill should be paid, but $200m is not appropriate.”

On Wednesday it also emerged that Pimco was the only top 10 US mutual fund manager to suffer net withdrawals from its funds last month, as clients redeemed $2.49bn. Some investors now worry that more and more Pimco clients and customers could take their money to other fund companies.

Mr Gross and Pimco moved quickly after Mr El-Erian’s exit, appointing the company veteran Douglas Hodge as chief executive and naming six new deputy chief investment officers, including Mr Balls.

But about a month later came reports alleging that Mr El-Erian went after a verbal fight with Mr Gross in front of colleagues. The Wall Street Journal said the two squared off last summer in front of at least a dozen colleagues in an unseemly fashion.

Mr Gross was depicted as a leader with a management style so abrasive that traders – who start work at 4.15am in Newport Beach, California – are advised not to make eye contact with him in the mornings and keep it quiet until he’s had enough coffee.

“It’s nothing new particularly about Gross and his temperament,” said Eric Jacobson, an analyst at Morningstar. But he quickly added: “It really turns up the volume on a lot of the noise.”

Mr Gross, usually seen on the financial news channels pontificating on economics and finance, has now been phoning CNBC to defend his management style and the culture at Pimco.

“Mohamed left because he told us that he wasn’t the man to carry out his own plan,” Mr Gross told the news channel. “And so what I’m really calling to suggest is that we had a plan in place to share authority, not just between Mohamed and myself but between six deputy chief investment officers.

“That plan is in place and has been disseminated to clients two, three, four weeks ago and was going to be basically shared by Mohamed and I going forward.”

Addressing the allegations of his management style on the trading floor, Mr Gross told the TV channel: “First of all, I’m not a morning person and that strikes people as odd because I have to get up at 4.30 in the morning. But I’m better at 12 than I am at 7.”

Last summer’s rows between Messrs Gross and El-Erian appear to have come as Pimco’s flagship Total Return Fund fell behind rivals as it was surprised by the US Federal Reserve’s decision to taper monetary stimulus. The flagship bond fund lost 1.9 per cent in 2013 as equities rallied, and the exodus from Pimco’s funds started even before the spat became public, with $56bn pulled out in the past year, according to Morningstar.  

But the real test of any damage will be whether any more clients take their savings elsewhere to be invested. 

“A lot of their competitors are out there hacking away at their client base,” Mr Jacobson added. “They are trying to talk to a lot of Pimco’s clients and convince them to maybe take some of the money that they have at Pimco and reallocate it to others.

“It sounds as though people are listening to the pitch a lot more than they used to.”