What is the difference between being a charming and colorful eccentric, and being a tiresome crank? When it comes to Bill Gross, the former bond king, I think that one of the key answers is “market share.” Or, more specifically, losing market share.
Gross, of course, bailed out of the Pimco investment house two weeks ago just as the people who run the firm, which Gross co-founded more than 40 years ago, were getting ready to kick him to the curb. Gross, a flamboyant bond geek—now, there’s a contradiction in terms!—offended lots of people at Pimco during his decades at the firm, and had a messy public split early this year with his second-in-command and heir-apparent, Mohamed El-Erian, who left in January. That hurt Gross badly, especially because El-Erian and his allies did a far better job of peddling their version of events than Gross did.
But I think that even before the El-Erian mess, Gross’ clout within Pimco had been weakened by market share declines in the two funds that he managed directly: Pimco Total Return, which had been the world’s largest mutual fund; and Pimco Unconstrained, a so-called “alternative asset” fund that deserves more attention than it’s gotten.
When you’re attracting assets into your funds—which means you’re goosing up the firm’s fees and profits—people find your behavior a lot easier to tolerate than when money is gushing out and competitors are gobbling up your market share. When you used to be a big producer but no longer are, you turn from a phenomenon into a problem. No one has told me this is what happened to Gross—but the numbers speak for themselves.
I stumbled on the lost market share phenomenon last month while doing research for a column about unconstrained bond funds, which are the hottest retail bond product going because they will supposedly protect their investors from loss when interest rates rise and prices of existing bonds fall.
As I immersed myself in statistics that research firm Morningstar sent me, I saw that Gross’ fund had been hemorrhaging assets for a year—$8 billion of investor outflows—even as the overall unconstrained bond universe was growing like mad.
So after Gross quit, it occurred to me to ask Morningstar for market share statistics. And there it was: in the 12 months that ended in August, Pimco’s share of the 86-fund unconstrained bond fund universe had fallen to 14% from 26.03% (of a 63-fund universe)—a stunning share decline of almost 50%.
This gave me what we journalist types call a “news peg.” So I rewrote my column to focus on Gross rather than on unconstrained bond funds.
This week, I asked Morningstar for market share stats on Pimco Total Return, the very famous, high-profile fund in which Gross made his reputation (and a good part of his personal billions of net worth). Sure enough, I saw the same pattern. In April of 2013, when Total Return’s asset size peaked at $293 billion, it had 9.03% of the total assets of all 1,744 open-end bond funds. That’s an astounding share. But this past August, after tens of billions of dollars of outflows, Total Return’s share was down to 6.88% (of an 1,890-fund universe). For those of you keeping score at home, that’s a 24% decline. Heavy duty losses, folks.
My bet is that while Gross’ reputation and then-sterling investment performance attracted tens of billions of dollars into Pimco’s funds, he was such a winner no one would mess with him, no matter how badly he might have behaved. But when his funds hemorrhaged cash month after month while competitors were growing, his position weakened. And both he and El-Erian knew it.
Gross’ new gig is running Janus’ unconstrained bond fund, which took in $66 million in September, even though Gross was there for less than a week. So who knows? If enough of the dollars fleeing Pimco in the wake of Gross’ departure pour into Janus Unconstrained, Gross might just be able to transform himself back into an eccentric again. And wouldn’t that be a hoot?