Author: KIRSTEN GRIND
Date: Mar 18, 2014
Publication: Wall Street Journal
|Two months after a leadership shake-up designed to shift power away from co-founder Bill Gross, Pacific
Investment Management Co. is struggling to convince some analysts and investors that it is more than a
Morningstar Inc., an influential fund-research firm, on Tuesday cut two of Pimco's key ratings and said it
would likely review specific mutual funds next.
Morningstar's move comes after weeks of heightened scrutiny of Pimco, one of the world's leading asset
managers. On Jan. 21, the firm announced that Mr. Gross's chosen successor, Mohamed El-Erian, would
be leaving the firm. The Wall Street Journal later reported that growing tensions between the two
executives and an intense corporate culture led to Mr. El-Erian's decision to step down.
A Morningstar senior analyst, Eric Jacobson, visited the Pimco offices in Newport Beach, Calif. earlier this
month and said he saw positive signs of changes within the firm's corporate governance and culture.
However, he said, it is a "tricky puzzle" whether six newly appointed deputies to Mr. Gross, who is chief
investment officer, will be able to challenge him on the investment committee, where the firm makes its
decisions about how to allocate the almost $2 trillion it manages. Mr. Gross has long called the investment
shots as the head of the committee.
"It's evident that a lot of people have avoided conflict with Gross in ways that may have kept some of their
best ideas from getting to him," Mr. Jacobson said.
A Pimco spokesman declined to comment.
Pimco has previously posted on its website comments from Mr. Gross expressing his confidence in the new
management team. "Pimco's focus has always been on managing risk and delivering returns for clients,
and I firmly believe that our new investment structure will allow us to do that even more,'' Mr. Gross said.
The scrutiny of Pimco, and Mr. Gross in particular, comes amid continued outflows at his $237 billion Total
Return Fund, the world's biggest bond fund, which suffered a $41.1 billion outflow last year, a fund-industry
record. The outflow has continued this year, although the pace has slowed.
Pimco is a unit of German insurer Allianz SE.
Paul Schatz, president of Heritage Capital LLC of Woodbridge, Conn., which manages $65 million, this
week slammed Pimco and Mr. Gross in a letter to clients, saying that Pimco is "anything but a collegial,
team environment where dissenting opinions are encouraged and respected."
In an interview, he said that he had moved some client money from Pimco funds, including Mr. Gross's
Total Return Fund. Mr. Schatz also faulted Mr. Gross for allowing Mr. El-Erian's departure to become "a
Mr. Jacobson said Mr. Gross admitted to mistakes, and pledged to make improvements, particularly in
encouraging more voices on the investment committee going forward.
Morningstar grades money managers as a way to help guide investors' decisions about where to place their
funds. It dropped its "stewardship grade" on Pimco to a C from a B, in part because of the recent personnel
changes. That score looks at the fees charged by the firm, as well as its corporate culture and regulatory
Morningstar also cut Pimco's "parent pillar score," which evaluates a firm's priorities, to neutral from
Neither of those changes affected individual funds but Morningstar also said it was "logical to assume" that
its analysts would "move quickly from here to assess those ratings" of individual funds.
Patricia Jennerjohn, a financial adviser in Oakland, Calif., also recently shifted a few of her clients out of
several Pimco funds. She had become increasingly concerned about what she felt was Mr. Gross's "overly
contrarian view of the market," she says, adding that Mr. El-Erian's departure helped her make the decision.
"When the management team for a fund company becomes dysfunctional, it is time to go because there are
other fund companies that do a good job, too," she said.