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Our Thoughts on Leadership Changes at PIMCO

February 27, 2014

PIMCO, a $2 trillion bond manager, is the manager of several bond funds we utilize in Savant’s model portfolios (PIMCO Real Return, PIMCO Commodity PLUS, PIMCO Foreign Bond, PIMCO Total Return III, PIMCO Low Duration III).  Recently PIMCO announced that their CEO and co-Chief Investment Officer, Mohamed El-Erian, will be leaving the firm, which is a significant change in leadership. The stated reason for El-Erian’s departure is personal. At this time there is no information as to what he will do next, other than he will still sit on the management committee for Allianz, the parent company of PIMCO. The co-founder of PIMCO, Bill Gross, will remain the sole Chief Investment Officer (CIO) and has no plans to retire soon.

As a result of the changes, Morningstar downgraded PIMCO’s Stewardship score to a neutral rating in March. While this rating change does not automatically affect the individual fund ratings, the analysts for each fund are likely to re-visit their ratings. Morningstar’s biggest question is whether the atmosphere within PIMCO’s current Investment Committee and broader investment team will remain conducive to its success.

Savant’s Thoughts

Six Deputy CIOs
Mark Kiesel (Credit)
Mihir Worah (inflation)
Daniel Ivascyn (income)
Andrew Balls (Europe)
Scott Mather (global)
Virginie Maisonneuve (equities)
PIMCO often makes news due to their size and the publicity of their macroeconomic views and portfolio positioning. With such significant personnel changes, it is not surprising they have grabbed so many recent headlines. 

Changes in firm management are typically a red flag in our due diligence process. Savant just made an on-site visit to PIMCO’s corporate headquarters in Newport Beach, CA in February of this year. PIMCO continues to have a very deep bench of analysts, economists, portfolio managers, and traders, which together make for a solid investment management firm.

 

In our view, PIMCO is addressing the departure of El-Erian in a reasonable manner. Furthermore, their Investment Committee (IC) may be more well rounded going forward, as this change will give voices to other prominent PIMCO leaders. This should also help provide for a stronger succession plan within the firm.  However, given the uncertain outcome of these changes, Savant’s ongoing due diligence process will maintain a higher focus on PIMCO.

Here are further details about the changes at PIMCO:

Who will replace El-Erian?
The firm appointed 25-year PIMCO veteran Doug Hodge as the new CEO and 15-year veteran Jay Jacobs as President. Instead of promoting another co-CIO, the firm promoted six internal leaders (five fixed income managers, one equity manager) who will have expanded roles as deputy CIOs. They will continue to oversee portfolio management teams, strategy formulation, implementation, and risk management.

How will these changes affect PIMCO’s Investment Committee (IC)?
Gross and El-Erian have been the two most prominent members of the IC since El-Erian re-joined PIMCO in 2007, with El-Erian most often running the meetings and setting the tone. He has also been the main face of PIMCO in recent years, which has placed their macroeconomic calls in the spotlight much more so than in the past.  The new IC will be comprised of Bill Gross, six deputy CIOs, and three other firm leaders.

The new structure will most likely bring a bottom-up analytical, sector, and market perspective to the IC that has not been their primary focus in the past. In other words, there may be more of a balance between macroeconomic and bottom-up views.

How will El Erian’s departure affect the management of mutual funds?
There are just a few funds he manages; none of the funds are used by Savant.

Are the other recent personnel announcements significant?
There have been a few other personnel changes that are important to note:

  • Chris Dialynas an important member of the IC, stepped down to begin a one-year sabbatical starting in April (not something typically allowed at PIMCO, but granted based on his tenure with the firm — which is nearly as long as that of Bill Gross).
  • PIMCO made a firm commitment to equities by hiring a global head of equities, Virginie Maisonneuve, in January. She has an extensive background and reputation in global equities. Neel Kashkari, her predecessor and a former U.S. Treasury official, departed PIMCO to focus on a political career.

What Has Not Changed?
PIMCO continues to manage funds successfully through many environments and has produced long-term returns above their respective benchmarks (see table below).

Returns ending 12/31/13 1 Year 5 Year 10 Year

PIMCO Real Return Instl

-9.05% 7.29% 5.25%

Barclays US Treasury US TIPS Index

-8.61% 5.63% 4.85%

PIMCO CommoditiesPLUS Strategy Instl

-1.43% - -

DJ UBS Commodity Index

-9.52% 1.51% 0.87%

PIMCO Foreign Bond (USD-Hedged) I

0.90% 9.25% 6.25%

JPM GBI Global Ex US Hdg USD Index

1.39% 3.35% 4.36%

PIMCO Total Return III Instl

-2.07% 6.67% 5.78%

Barclays US Agg Bond Index

-2.02% 4.44% 4.55%

PIMCO Low Duration III Instl

0.24% 5.05% 3.78%

BofAML US Treasuries 1-3 Yr Index

0.36% 1.09% 2.57%

Source: Morningstar Direct. Returns longer than one year are annualized.

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