The bond king has left the building

PIMCO executives began preparing months ago for William H. Gross' departure, sources said, although the announcement on Sept. 26 that he was leaving to become a portfolio manager at Janus Capital Group surprised the money management industry and financial markets.

“We've been hearing that there's been a replacement in place for quite some time,” said Alan Kosan, senior vice president and head of alpha research at investment consultant Segal Rogerscasey, Darien, Conn.

Mr. Gross was a co-founder and chief investment officer of Pacific Management Investment Co. LLC. He was replaced at PIMCO by Daniel Ivascyn, who had been deputy CIO, and was given the new title of group CIO.

On the day Mr. Gross announced his plans to leave, PIMCO CEO Douglas Hodge said in a news release: “PIMCO has been developing a succession plan for some time to ensure that the firm is well prepared to manage a seamless leadership transition in its portfolio management team.”

Mr. Gross, who had managed as much as $400 billion at PIMCO, will be sole portfolio manager ofthe $12.86 million Janus Unconstrained Bond Fund, which was launched March 27. He will assist Myron Scholes, chief investment strategist, on global macro strategies. Mr. Gross will join the firm on Sept. 29 and begin managing the strategies on Oct. 6.

Daniel Fannon, equity analyst at Jefferies & Co., New York, said in a Sept. 26 note to clients, “The profile of (Janus') product offerings as a whole has risen as a result of this hire and Janus' retail and institutional distribution personnel will be looking to take advantage of this.”

Ariel Investments, Chicago, the largest U.S. investor in Janus, with 15.8 million shares or 8.42% of outstanding shares, greeted the news with joy.

“We had no advance notice of this. I had to check that it wasn't April fools,” said Charles K. Bobrinskoy, vice chairman and head of the investment group at Ariel. “But it's just great, great news. It's massively good news. The market thinks it's very good news. He's the most famous bond investor of his generation, maybe of any generation.”

Russel Kinnel, director of manager research, Morningstar Inc., Chicago, is taking a more tentative approach.

“They'll be watched closely. But I'm not so sure that will translate into inflows for Janus. The investment professionals that worked with Bill Gross at PIMCO aren't coming with him, and others will ask how long he'll be at Janus. For those that are concerned with the erratic statements he's made recently, the assets won't necessarily follow him.”

Mr. Fannon also said among institutional investors that pull money from PIMCO strategies, Western Asset Management Co. should get additional institutional inflows because of its “considerable resources” targeting that client base.

Mr. Gross' announcement came eight months after former CEO and co-CIO Mohamed El-Erian left the Newport Beach, Calif.-based manager.

On Sept. 26, clients and consultants were waiting to see who Mr. Gross' successor is and how performance of the firm's flagship Total Return fund is affected.

The $298 billion California Public Employees Retirement System, Sacramento, issued a statement saying that although CalPERS' officials “will continue to monitor developments, (it has) no plans at this time to make changes with (its) PIMCO mandate.”

PIMCO manages an international bond mandate for CalPERS, valued at approximately $1 billion and representing 1.5% of its fixed-income assets.

Connecticut Retirement Plans & Trust Funds, Hartford, which has $295 million with PIMCO in a short-duration, fixed-income portfolio for the pension plan's liquidity fund, put PIMCO on watch on Sept. 26, when Mr. Gross announced his departure, said state Treasurer Denise L. Nappier and principal fiduciary of the $27.1 billion plan.

“We will carefully consider the performance and track record of the replacement CIO and the stability of leadership and organizational cohesiveness,” said Ms. Nappier in an e-mailed response to questions.

The $30.3 billion Indiana Public Retirement System, Indianapolis, continues to monitor PIMCO, which has been on watch since Jan. 31 following Mr. El-Erian's resignation.

As of June 30, INPRS had $608 million in PIMCO'S unconstrained bond strategy, $461 million in its long-duration government credit strategy and $55 million in the PIMCO Total Return fund, the latter for its $6 billion annuity savings account.

On the defined contribution side, Jennifer Flodin, DC practice leader and senior consultant at Plan Sponsor Advisors, Chicago, said her firm was working on a formalized opinion about Mr. Gross' departure.

“Defined contribution is different. We can't just pull the trigger and pull out next week. It isn't as easy to unwind a DC investment plan like another investment asset pool,” she said.

Michael W. Kozemchak, managing director at Institutional Investment Consulting in Bloomfield Hills, Michigan, said he spent all of Friday talking to clients about Mr. Gross' move. Mr. Kozemchak said more than half of his defined contribution clients already had PIMCO on a watch list due to “headline risk,” following Mr. El-Erian's departure and last week's reports that the firm is cooperating with an ongoing SEC investigation into a PIMCO exchange-traded fund.

Mr. Kozemchak would not say how many clients he has.

He said many of his clients this year also “had us do due diligence” to investigate using competing funds to the PIMCO Total Return fund. “We think most will make changes before year end,” Mr. Kozemchak said.

In a statement, Janus CEO Richard M. Weil said Mr. Gross will provide Janus with “a very unique opportunity to offer global macro fixed-income strategies and products that are highly complementary to” Janus' credit-driven fixed-income strategies led over the past 10 years by Gibson Smith, CIO for fixed income.

Mr. Gross is reuniting with a longtime colleague, Mr. Weil, who was chief operating officer at PIMCO until he joined Janus in early 2010.

There were some questions on the day he announced his plans about why Mr. Gross, 70, was not simply retiring after more than 40 years managing money at PIMCO. Mr. Gross, who owns less than 5% of equity in PIMCO, according to its ADV filing with the Securities and Exchange Commission, has a net worth estimated at $2 billion, according to Bloomberg LP.

Janus Capital had $177.7 billion and PIMCO had $1.97 trillion in total assets under management, both as of June 30, according to the companies.

For PIMCO, Mr. Gross' departure announcement may have caught people outside the firm off guard, but in the aftermath of Mr. El-Erian's departure PIMCO appointed six deputy CIOs and began considering questions from analysts, investment consultants and pension executives about who would succeed Mr. Gross, the so-called “bond king.”

Barry B. Burr, Timothy Pollard and Robert Steyer contributed to this story.