El-Erian's exit yet another blow to PIMCO

The unexpected announcement that PIMCO CEO and Co-Chief Investment Officer Mohamed El-Erian was resigning adds new problems for a firm already under stress.

Even before Mr. El-Erian's announcement on Jan. 21, financial analysts were concluding the days of rapid increases in assets and operating profits for Pacific Investment Management Co., one of the world's largest money managers, were gone.

“The enormous growth is over for PIMCO,” Daniel Bischof, an analyst with Helvea AG in Zurich, said in an interview, citing asset flows away from fixed income, the company's core strength. “No way can they keep up the growth.”

Investment consultants, analysts, pension executives and sources familiar with PIMCO's operations say the firm now has to deal with another major issue: who will succeed William Gross, the so-called “bond king,” if the 69-year old co-founder and CIO leaves.

Mr. Gross tweeted on the day Mr. El-Erian's departure was announced: “Batteries 110% charged. I'm ready to go for another 40 years.”

Mr. El-Erian, an economist with an impressive resume including stints at the International Monetary Fund and as CIO of Harvard Management Co., came to PIMCO, Newport Beach, Calif., for a second time in 2007 with the understanding he eventually would be Mr. Gross' successor.

The muted growth projections for PIMCO are a serious concern of executives at parent Allianz SE, Munich. PIMCO's 2013 estimated operating profit of $3.85 billion amounted to around 30% of Allianz's entire operating profit, Mr. Bischof said.

On Jan. 17, four days before the announcement that Mr. El-Erian was leaving PIMCO, Societe Generale Group equity analyst Nick Holmes in Paris lowered his rating of Allianz. “We are downgrading Allianz from "hold' to "sell' as we expect PIMCO's earnings to come under pressure in 2014, disabling Allianz's main growth engine,” he wrote in a research report.

The report predicts net PIMCO outflows for all strategies and vehicles of $136 billion in 2014, much of it from mutual funds. Mr. Holmes said growth came “to an abrupt end” in the third quarter of 2013, when the firm experienced $28.2 billion in net outflows.

The 2014 outflows will result from a negative environment for bonds because of rising interest rates, he said. Mr. Holmes also predicts an 8% drop in asset management revenue for PIMCO in 2014.

Until last year, PIMCO's asset growth had been nothing short of phenomenal. Assets under management, which totaled $1 trillion at the end of 2009, were more than $2 trillion at the end of 2012, according to data provider eVestment LLC, Marietta, Ga.

But by last year, the growth surge was over. On March 31, 2013, AUM reached an all-time high of $2.044 trillion, then declined to $1.919 trillion as of Dec. 31, eVestment data show.

Mr. Gross and Mr. El-Erian both declined requests for interviews. In a televised interview last week, Mr. Gross said he and Mr. El-Erian were friends and get along well.

That counters what sources, who asked to not be identified, say was a tense environment at PIMCO in the past year, with executives on edge over fund outflows and tempers flying at company investment committee meetings.

“These people are used to being winners,” said one source familiar with PIMCO's operations. “They were shaken up.”

PIMCO's Total Return Bond fund, managed by Mr. Gross, had been the largest mutual fund in the world. It suffered $41 billion in net outflows in 2013 because of negative returns and fell to No. 2.

Despite Mr. Gross' high visibility during a tenure that has spanned more than four decades at PIMCO, Mr. El-Erian had developed a strong following among institutional clients. He helped win business for PIMCO, where institutional assets make up about 65% of total assets under management, said consultant Geoffrey Bobroff, president of Bobroff Consulting in East Greenwich, R.I.

While PIMCO named six new deputy CIOs following Mr. El-Erian's resignation, none will have his worldwide visibility, which is bound to affect the firm's ability to attract new business, Mr. Bobroff said.

One former senior PIMCO official said Mr. El Erian was a deal-closer for PIMCO with institutional investors. “He was an articulate, powerful representative of PIMCO, and his presence made sure we won billions of dollars in new business,” said the former executive, who asked to not be identified.

The new appointees all carry extensive investment backgrounds and include Daniel Ivascyn, a mortgage credit expert who, along with colleague Alfred Murata, was Morningstar's 2013 fixed-income manager of the year, and Andrew Balls, a portfolio manager who became PIMCO's public point person on the European debt crisis.

But grooming one of the new deputies to replace Mr. Gross could take several years, noted consultants and clients. They added that Mr. El-Erian's departure leaves no clear succession plan.

Mr. Gross, in the televised interview last week, acknowledged Mr. El-Erian had been his designated successor.

“It's putting shock waves through their client basis,” Eric Jacobson, senior fund analyst at Morningstar Inc., Chicago, said of the departure news.

There were always concerns, even with Mr. El-Erian at PIMCO, as to who could replace Mr. Gross, said Mr. Jacobson. But he said Mr. El-Erian's stature at the firm and his role on the investment committee helped ease fears.

Now, succession concerns are increasing, he said. “What I'm hearing now suggests that many (institutional investors) feel it's a much more acute issue and they want to hear a lot more than they've been hearing,” Mr. Jacobson said.

Top investment officials at two major public pension clients of PIMCO say company representatives have assured them things are under control and emphasized Mr. Gross' role in naming the new deputy CIOs and broadening the leadership pool.

The pension fund officials, who requested anonymity, said they still are concerned about a lack of a clear succession plan for Mr. Gross and hope to learn more at PIMCO's annual forum for public pension fund CIOs on March 11.

“If we don't get answers, we might have to consider a Plan B,” one pension executive said, referring to putting PIMCO on a watch list and possibly reducing its allocation or even terminating the firm.

The official at the other public fund said staffers there are in the midst of a review of the fund's fixed-income portfolio to determine what strategies it should pursue in a low-yield environment. He said the lack of a successor for Mr. Gross could cause officials to consider reducing PIMCO's $500 million allocation and adding more fixed-income managers.

At least one asset owner already put PIMCO on its watchlist: the $167.5 billion Florida State Board of Administration, Tallahassee, which has $1.8 billion invested with PIMCO. Spokesman Dennis MacKee said it is routine for the board to make such a move after a money manager has a major personnel change.

Investment consultants said they don't see any reason to panic about Mr. El-Erian leaving.

Allan Emkin, managing director of Pension Consulting Alliance, Los Angeles, said PIMCO has immense investment talent. But Mr. Emkin said the firm has to show that someone would be in place if Mr. Gross left.

“Every investment organization needs a general,” he said.