Gross eager to repeat magic that made him investing guru

William H. Gross is returning to his investment roots at Janus Capital Group, with plans to add a version of the PIMCO Total Return Fund that made him famous.

The Janus portfolio manager said in a wide-ranging interview with Pensions & Investments, which also touched on his PIMCO past and future goals, that an institutional investor is finalizing arrangements for at least a $100 million total return strategy institutional separate account. He declined to name the investor.

Denver-based Janus, for its part, is actively advertising Mr. Gross' total return institutional strategy on its website.

Mr. Gross also said he expects to launch a Janus total return mutual fund, although arrangements have not been finalized.

“The thinking is to make it available in mutual fund form,” said Mr. Gross in a telephone interview from his Newport Beach, Calif., office. “In simple English, it's back to the roots of the Total Return Fund.”

As co-founder of Pacific Investment Management Co., Mr. Gross managed the Total Return Fund for more than 25 years and enjoyed solid investment returns for much of that time, making it the world's largest bond fund with assets of nearly $300 billion at its 2013 peak.

But Mr. Gross' management of the fund ended with his sudden departure from PIMCO in September 2014 following deteriorating investment performance and a dispute over how the firm should be run.

Mr. Gross joined Janus and within a matter of days took over as portfolio manager of the Janus Global Unconstrained Bond Fund. Mr. Gross said the fund was open when he joined Janus but it had only $9 million in assets. That made it a logical opportunity for him to start managing money right away.

Despite strong investment performance this year, the $1.6 billion Janus Unconstrained Global Bond fund remains just a fraction of the size of the PIMCO Total Return Fund under Mr. Gross' management and a smaller fund he managed, the PIMCO Unconstrained Bond Fund.

The Total Return fund had $221.6 billion in assets under management when Mr. Gross left PIMCO in September 2014 while the PIMCO Unconstrained Bond Fund had $21.6 billion at the time of his departure. Assets under management of both funds have since dropped, to $84.4 billion and $3.7 billion, respectively, as of Sept. 30, Morningstar data show.

Mr. Gross said he remains committed to growing the Janus unconstrained fund while at the same time recreating a version of the total return strategy that honed his reputation.

“I am here to outperform the market, which is what I have done for a long time,” Mr. Gross said. He said managing total return accounts and a total return fund at Janus “would be an exciting event for me.”

In reality, Mr. Gross resumed managing a total return fund in July 2015.

Mr. Gross is working as portfolio manager of the $330 million Old Mutual Total Return USD Bond Fund as part of a subadvisory relationship that began in July 2015. Officials of London-based Old Mutual Global Investors terminated PIMCO as manager in favor of Mr. Gross and Janus.

The fund, which is domiciled in Dublin, had been managed by Mr. Gross from its founding in April 2002 to September 2014, when Mr. Gross left PIMCO.

“We have a long-standing relationship with Mr. Gross and we believe that clients who choose to be invested with him in the Old Mutual Total Return USD fund will benefit from this change,” said Warren Tonkinson, global head of distribution at Old Mutual, in a statement at the time of Mr. Gross' hiring.

Vee Montebello, a spokeswoman for Old Mutual Global Investors, said company officials would not be available for comment but referred to Mr. Tonkinson's comments.

Morningstar data show the Old Mutual Global Investors mutual fund beat its benchmark under Mr. Gross as portfolio manager in his most recent stint. From July 6, 2015, through Oct. 24, 2016, the fund returned 5.1%, compared with the Barclays Capital Aggregate Bond index performance of 4.3%, data show. In contrast, the PIMCO Total Return Fund returned 3.7% during that same time period, Morningstar said.

In the interview with P&I, Mr. Gross said he wishes the Janus Global Unconstrained Bond fund attracted more assets but concedes some investors might have been scared off by his sudden departure from PIMCO. He said some investors may have viewed him with a “question mark.”

“I think they wanted to see exactly how great an investor Gross was,” he said. “And so did I, to tell you the truth. It's not that I wanted to leave PIMCO but when I did, I took it as a challenge.”

Mr. Gross said he hopes all investors will eventually view the new Bill Gross much like they did the old one, but it will “probably take time.”

Mr. Gross said his unconstrained fund has been attracting about $2 million a day in new assets. “I look at it from the standpoint of, at least it's growing,” he said. “Do I wish it were $5 billion or $10 billion? Of course I do. And that's my objective because I intend to be here for many more years.”

Mr. Gross said part of the problem is that investors in the current risk-averse environment are reluctant to allocate to unconstrained funds in general because the funds have broad investment mandates and could be considered riskier.

“In a world of high risk, unconstrained sounds a little like a wild mustang as opposed to a circus pony,” he said. “Unconstrained basically says, hey, hang onto the saddle. But I've run the Janus fund more like a money market fund. I think if we could change the name from unconstrained to a more gentler-sounding name it might do better, but that's not going to happen.”

Morningstar data show the non-traditional bond category, which includes unconstrained funds, had $19.9 billion in net outflows in 2016 through Sept. 30.

The Janus unconstrained fund had $260 million of inflows during that same period and returned 5.3% for the year through Oct. 24, compared with 0.513% for its London interbank offered rate benchmark, according to Morningstar. Meanwhile, the PIMCO Unconstrained Bond Fund returned 4.984% for the same period.

Even at 72, Mr. Gross does not see retirement in the horizon. “I think it's been more than a passion, I think obsession is the right word,” he said of being a portfolio manager. ”And it fills my day.”

Allan Emkin, managing director and founder of Los Angeles-based Pension Consulting Alliance, said if Mr. Gross' strategies and funds continue to post strong returns over the next few years, they will attract larger pools of assets. “Institutional investors want to see long-term success records,” he said.

While Mr. Gross had developed a performance record as one of the world's greatest fixed-income investors, his performance faltered toward the end of his tenure at PIMCO, raising doubts about whether he had passed his investment peak, Mr. Emkin said.

Mr. Gross' nasty split from PIMCO also raised more questions. “He needed to re-establish his credibility,” Mr. Emkin said.

In a third-quarter conference call with analysts on Oct. 25, Janus CEO Richard Weil said “there are significant opportunities on the institutional side for Bill, so I think we can look forward to some growth there.”

Mr. Weil discussed Janus' planned merger with Henderson Group PLC in London and said the Henderson distribution team was “excited to have access to Bill Gross” and that “expanded distribution should be able to bring significantly more assets to the table, particularly in Europe.”

He also said Mr. Gross' group needs one or two more product specialists in the U.S. to carry the word effectively outside of Newport Beach about Mr. Gross and his strategies.

Mr. Gross is the only portfolio manager of the unconstrained fund. In July, Janus announced that co-manager on the unconstrained bond fund Kumar Palghat was being transferred to another investment job. Mr. Palghat was named Janus' global head of fixed income earlier this month.

Mr. Gross said he sees no pitfalls of not having a co-manager; if something happens to him, the money would be returned to investors.

Mr. Gross said he misses working at PIMCO.

“I viewed it as myself being one of its creators, and so it's like a family, and yeah, if you get divorced and you don't have access to your kids or whatever, it's the same type of thing,” he said. “I miss it because a lot of me was in it and probably still is. And that's just the way it works.”

In a continuing lawsuit filed in California state court in October 2015, Mr. Gross is seeking no less than $200 million in damages, alleging he was pushed out of PIMCO by a “cabal” of PIMCO managing directors who were “driven by a lust for power, greed and a desire to improve their own financial position” by getting a portion of his roughly $200 million bonus.

PIMCO in a response states Mr. Gross left PIMCO with no notice or transition and was warned he would lose his bonus if he left before the end of the third quarter 2014.