Bond managers and analysts say the dramatic exit of Bill Gross from PIMCO on Friday is unlikely to cause longer term difficulties for fixed income traders.
PIMCO announced late on Friday that Dan Ivascyn would replace Gross as group CIO, with five other CIOs reporting to him who are responsible for individual strategies.
Gross joins Janus Capital today, leaving behind PIMCO’s flagship $222 billion Total Return Fund, which has been passed to Scott Mather, Mark Kiesel, and Mihir Worah.
“The team [at PIMCO] has been running the show on a day-to-day basis for a while now. They still have big names.”—Gary Kirk, TwentyFour Asset ManagementUS 10-year government bonds rose by 0.9% on Friday, while various reports have also attributed price falls in credit default swap indices and the Mexican Peso to immediate market reaction to Bill Gross’ resignation.
Deutsche Bank’s Jim Reid, head of global fundamental credit strategy, said the unexpected nature of Gross’ resignation “shocked the market and left it selling first and asking questions later.”
But fixed-income managers have cast doubt on the impact of Gross’ exit and the size of potential withdrawals. Nick Gartside, CIO for fixed income at JP Morgan Asset Management, told Chief Investment Officer that bond market movements on Friday were as much down to new US economic data as Gross’ exit.
“The big dynamics of the bond market are underlying fundamentals,” Gartside said. “There was some pretty significant data released by the US government.”
“We have no plans at this time to make changes with our PIMCO mandate.”—CalPERSAn upward revision of second-quarter US economic output may also have weighed on US government bonds, according to Gary Kirk, portfolio manager at fixed income boutique TwentyFour Asset Management. He said any data which could indicate a sooner-than-expected interest rate hike could be taken as bad news by bond markets.
Kirk pointed out that price movements were also affected by banks scaling down risk at the end of the quarter in a bid to improve their capital ratios.
Liquidity
The Wall Street Journal reported over the weekend that $10 billion has already been withdrawn from PIMCO funds in the wake of Gross’ departure, with its anonymous source also claiming a further $100 billion could eventually exit. Analyst firm Sandford Bernstein has claimed up to 30% of PIMCO’s total $2 trillion could be taken out.
However, Kirk said he would be “staggered” if outflows were “remotely close” to 30%.
“The team still there has been running the show on a day-to-day basis for a while now,” he said. “They still have big names.”
Gartside pointed out that the outstanding issuance of the US bond market was roughly $100 trillion, with “close to $1 trillion” expected in new bonds this year. This compares with PIMCO’s $2 trillion in total assets, which include equity, commodity, and multi-asset funds.
Adrian Hull, a fixed-income product specialist at Kames Capital, said there would be outflows from PIMCO’s funds because “people are nervous,” but he argued that withdrawals would take place “much slower” than the initial reaction indicated.
“It’s probably going to be a much straighter line than that.” PIMCO, he said, “is a professional organization and everybody is capable of making decisions.”
Pension Fund Reaction
In the immediate aftermath of Gross’ resignation, the California State Employees’ Retirement System (CalPERS) released a statement declaring “respect for both Bill Gross and PIMCO investment professionals,” while maintaining that it had “no plans at this time to make changes with our PIMCO mandate.”
“PIMCO manages an international bond fund for CalPERS, valued at approximately $1 billion and representing 1.5% of our fixed-income program,” the public pension giant said. “We will continue to monitor developments at the firm, and will conduct a thorough analysis of our exposure managed by them.”
Canadian newspaper the Globe and Mail reported that public sector defined benefit plans in Florida, New York, and Indiana were all monitoring the situation at PIMCO, and had been ever since the resignation of CEO and Co-CIO Mohamed El-Erian in January.
Gross quit PIMCO, the company he co-founded in 1971, last week and will today start work at Janus Capital. By October 6 his new employers said he would be running an “unconstrained” bond fund and other related strategies.
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