After reading the Wall Street’s Journal’s page-one piece on life at Pimco under Bill Gross, Felix Salmon has decided that Gross has no choice but to retire and walk away from the bond-trading behemoth that he built. “Neither Gross nor Pimco will ever be seen the same way again, and indeed, if Gross cares at all about the long-term fortunes of the company he built, the best thing he can do right now is simply retire,” Salmon wrote on Reuters.
That isn’t going happen. Nor should it. It would be the worst-possible outcome for Pimco investors.
It’s not that Bill Gross is a bond-trading genius who can do no wrong. (We’ve previously pointed out when he’s had rocky runs.) And under Gross, Pimco’s trading floor is clearly not the most pleasant place to work in the world.
But if Gross were to walk away now, you’d likely see a riptide of investor cash pour out after him. That’s because, for most investors, Bill Gross is Pimco. It’s Gross’s public persona—all the hits on CNBC, the years on Barron’s roundtable, the accolades from Morningstar—and the Pimco’s track record under Gross that have drawn money into the Pimco complex. It’s hard to imagine his departure wouldn’t drive a fair chunk out. And those outflows would be painful to investors. Large-scale outflows hurt performance as they box-in the ability of traders to take advantage of market movements, forcing them to sell out of positions they believe in so that they can raise money to meet redemptions.
Basically, the situation at Pimco—which became a unit of German financial giant Allianz after the bond-trading firm was purchased in 2000—is a textbook example of “key man” risk, when a company’s business may suffer due to the departure of an important individual. Clearly that’s a problem. Here’s what one analyst told the Journal:
“Pimco needs to avoid becoming an upside-down pyramid balanced only on Bill Gross,” says Alex Friedman, global chief investment officer of UBS Wealth Management. “We’re hoping others emerge to replace Mohamed.”
Unfortunately, Pimco already is that upside-down pyramid. But that’s a problem that can be fixed. Succession plans can be put in place. Gross can empower a new generation of traders with more responsibility. Over time, the 69-year-old bond market legend should start to shift some of his duties onto them. And gradually, he should do more yoga and stamp-collecting and less trading.
It might be tough for Gross to do. But that firm’s problem is its reliance on Gross. Unfortunately, until Pimco fixes that problem, Gross is in the best position to solve it. A disruptive departure is in no one’s interest.