“Bond king” Bill Gross this morning announced that he was leaving Pimco, in order to launch a new bond fund at the much-smaller Janus Capital (JNS) (after an apparent flirtation with Jeff Gundlach’s Doubleline Capital). I’m sure we’ll hear all sorts of palace intrigue over the next few days, including how Gross is a strange guy (not a secret) who couldn’t get on the same page with his bosses at Pimco parent company Allianz (not a surprise). But the real foundational issue is likely more about business troubles than personality clashes, as Pimco’s below-pedestrian performance has caused around $68 billion of customer money to walk over the past 16 months.
A lot of the blame for Pimco’s poor returns has rightly been put on Gross, who famously suggested in mid-2011 that public equities had peaked. But Janus shares are up more than 30% on news of his hire, suggesting that they’re expecting major inflows. If these traders are proven correct, could it be that some view the problem more that Gross was at Pimco than that Gross was, well, Gross? Namely, is Pimco too big to produce market-leading returns?
For those who believe in the law of threes, let me try this out on you: CalPERS, the nation’s largest public pension fund, recently said that it will pull out of hedge funds, arguing that it is too large to properly invest in the asset class. Then Harvard University, which features the nation’s largest endowment, reported mediocre returns, with one source arguing to me that size issues make it difficult for Harvard to match smaller, more nimble peers. And now we may be poised to see clients jump from the largest bond fund to a smaller one, even though the same laggard manager will be in charge.
Need another data point? How about this: The world’s largest mutual fund, managed by Vanguard, is trailing the S&P 500 for both the past six months and for the past year. And then there is (admittedly controversial) research from Kauffman Foundation that argues venture capital returns begin to decrease once fund size surpasses $250 million.
To be sure, this is not a perfect theory. As just one of many examples, CalPERS outperformed almost all other large public pension funds for fiscal 2014 (leaving aside its hedge fund troubles). But as all of Wall Street is constantly striving for size, Gross’s departure from Pimco may highlight that big isn’t always beautiful.
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