When Pimco co-founder Bill Gross' heir apparent abruptly stepped down this week, the news illustrated just how reliant the company is on its star manager, an uncomfortable fact for investors who worry the 69-year-old has not done enough to find a replacement.
With Mohamed El-Erian, 55, resigning his position as chief executive and co-chief investment officer at the $2 trillion asset manager, all power now appears to be flowing back to Gross, who co-founded Pimco in 1971 and runs the $237 billion Total Return Fund, a mainstay in many retirement portfolios.
Gross, a yoga enthusiast who shaved his mustache a few years ago to look younger, greeted the departure by dividing up El-Erian's roles among a few more men, and by saying he is not yet planning for life after investing in bonds.
"Pimco's fully engaged. Batteries 110 per cent charged," Gross said in a Twitter post from the firm's official "@PIMCO" account that still features a photo of Gross and El-Erian side by side.
"I'm ready to go for another 40 years!" his tweet continued, a nod to the rigorous work ethic demanded by Gross, known among rivals and investors as the "Bond King." Portfolio managers at Pimco start their days at 4 a.m. and rarely speak on the firm's Newport Beach, California, trading floor, communicating instead by email to keep the noise down.
El-Erian, a trained economist and one-time senior International Monetary Fund official known for his near daily appearances on cable television and wide-ranging market calls, landed back at Pimco seven years ago after leaving the bond house for a two-year stint as head of Harvard University's endowment. He first joined Pimco in 1999.
Pimco parent Allianz (ALVG.DE) brought him back in part to "reduce the Bill Gross risk," said one investor who asked not to be named for fear of angering Gross.
Even though Allianz quickly appointed Douglas Hodge as chief executive officer plus Andrew Balls and Daniel Ivascyn as deputy co-chief investment officers to replace El-Erian, analysts and investors agree that none are real contenders for Gross' job right now.
"The problem is it takes a number of years to groom somebody like Mohamed," said Sean Egan, president of Egan-Jones Ratings Co. "It's difficult and Bill Gross is not getting any younger. From a public perception standpoint, the next couple years are going to be difficult."
Pimco declined repeated requests to interview Gross, El-Erian or his newest lieutenants.
The two deputy co-chief investment officers have managed billions of dollars, but nothing that compares to the Total Return fund. Ivascyn's $30 billion fund at Pimco, for example, amounts to less than 13 per cent of Gross' main portfolio.
"Heir apparent is not their label now," said Morningstar senior research analyst Eric Jacobson.
Indeed Gross has said in media interviews following El-Erian's resignation that more deputies would be named in coming weeks, a sign his pool of potential successors is growing, not narrowing. Morningstar analysts said the list of new appointees could include portfolio managers and directors such as Curtis Mewbourne, Christian Stracke, Scott Mather and Tony Crescenzi, each a long-time bond market hand of one stripe or another.
The group, Jacobson said, tends to skew relatively young and is somewhat split among those with strong backgrounds in economics, and those with more hands-on experience running portfolios. There appear to be few generalists who have the mix of skills one would expect to find in an heir to Gross, he said. "I can't think of any single person who would seem to be an obvious and ready candidate."
For investors - especially the big name institutions - a clear succession plan has always been important, prompting even other iconic investors such as Warren Buffett, 83, to groom Todd Combs and Ted Weschler as potential successors.
But at Pimco there is now no clear plan B.
"Pimco investors should be worried," said Erik Gordon, professor of business and law at the University of Michigan. "There should be a succession plan that doesn't require Gross to be CEO at age 109," he said.
Turning the tide
For Pimco, the abrupt shift in management comes at a critical time just as the decades-long bull run in bonds appears to be ending, and the bond market's biggest influence, the Federal Reserve, is maneuvering to dial back its extraordinary policies that pushed bond yields to historic lows.
Gross' Total Return fund had outflows of $42 billion, according to Lipper, and lost 1.92 per cent last year. The fund underperformed 72 per cent of comparable funds in 2013, data from Morningstar shows.
Burton Greenwald, an industry consultant who runs Greenwald Associates, said: "Bill Gross is well along in age and at some point he is going to want to hang up his hat. After all he wasn't fixed income manager of the year last year, Dan Ivascyn was. This is a critical transition period for the firm as stocks are more on most investors' minds."
Because El-Erian managed only a fraction of the assets Gross oversees, his departure is unlikely to trigger the kind of redemptions asset manager TCW faced when star manager Jeffrey Gundlach left.
But it will raise questions, analysts said. Gross's calendar will likely be jam-packed with meetings for weeks as pension funds, endowments and others stream to Pimco's Newport Beach offices for an explanation of what is next.
In the meantime, deputy co-chief investment officers, Ivascyn and Balls, are considered rising stars, and highly capable. Ivascyn, 44, a mortgage credit expert, has just been named Morningstar's fixed income manager of 2013 along with colleague Alfred Murata. Their Pimco Income fund gained 4.8 per cent with the help of bets on nonagency mortgage-backed securities.
Andrew Balls, a former journalist turned portfolio manager, has been Pimco's spokesman for the European debt crisis and has close ties in London where his brother, Edward Balls, is the Labour Party's shadow chancellor.
It will fall to them, in part, to help Pimco bring in fresh money and turn the tide after last year's outflows.
"Ivascyn has certainly demonstrated great skill as a portfolio manager," Michael Rosen, chief investment officer at Angeles Investment Advisors said, adding "but whether he can continue to do that while he's taking on increased responsibilities of being a deputy chief investment officer remains to be seen."