New normal

After Pimco’s worst year since 1994, El-Erian will depart

January 21, 2014
January 21, 2014

And then there was Bill.

Bond market bigshot Bill Gross will be the lead pilot on the world’s largest bond fund—Pimco’s Total Return Fund—beginning in March, when Mohamed El-Erian, Pimco’s CEO and co-chief investment officer, leaves the asset manager. (Pimco parent Allianz put out a somewhat brief statement announcing the news this afternoon.)

There’s no word on what El-Erian’s next move might be and there’s little information on what led to his departure. Bill Gross (El-Erian’s desk at the firm’s Newport Beach, Calif. trading floor was directly beside Gross’s) is known to have his prickly moments. In theory, Gross and El-Erian were supposed to be equals. But we couldn’t help but notice the lack of any kind of warmly worded quote from Gross in the Allianz announcement of El-Erian’s farewell.

From his perch at Pimco, El-Erian has become a well-known voice on financial markets in recent years. Since the financial crisis hit, he has regularly flogged the firm’s view that investors were entering a period known as the “new normal,” in which interest rates would remain low and growth would be sluggish. (Coincidentally, that type of environment would be a splendid one for owning bond funds, such as Pimco’s.)

That economic view has been right, more or less, over the last few years. But it hasn’t stopped Pimco from having a rough run recently. The firm failed to foresee the Federal Reserve’s shift toward the taper over the spring. And when interest rates rose—and bond prices fell—the fund suffered its worst quarter ever. The fund fell 1.9% last year, its worst performance since 1994.

Yes, the bond market was down too, but fund managers are paid to outperform the market. If investors only wanted the market’s returns, they’d just buy an index fund.

In fact, investors seem to be doing just that. They yanked some $41 billion from the Total Return Fund in 2013. And the outflow of funds meant the Total Return Fund was forced to relinquish the title of “world’s largest mutual fund” to the Vanguard Total Stock Market Index fund.

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