Inside the Showdown Atop Pimco, the World’s Biggest Bond Firm; After clashing with Pimco co-founder Bill Gross, CEO Mohamed El-Erian decided to leave the fund giant.

Inside the Showdown Atop Pimco, the World’s Biggest Bond Firm

After clashing with Pimco co-founder Bill Gross, CEO Mohamed El-Erian decided to leave the fund giant.


Updated Feb. 24, 2014 10:34 p.m. ET

NEWPORT BEACH, Calif.—Tension increased at Pacific Investment Management Co.’s headquarters here last summer. The bond market was under pressure, losses grew and clients pulled billions of dollars from the firm.

Bill Gross, who co-founded Pimco in 1971 and is largely responsible for building it into a behemoth overseeing almost $2 trillion in assets, struck some of his colleagues as testier than usual. He argued openly with Mohamed El-Erian, Pimco’s chief executive—something employees say they rarely had seen.

Mr. Gross—by his own admission, a demanding boss—had long showed respect for Mr. El-Erian and indicated that the younger man eventually would take over the world’s biggest bond firm. But one day last June, the two men squared off in front of more than a dozen colleagues amid disagreements about Mr. Gross’s conduct, according to two people who were there.

“I have a 41-year track record of investing excellence,” Mr. Gross told Mr. El-Erian, according to the two witnesses. “What do you have?”

“I’m tired of cleaning up your s—,” Mr. El-Erian responded, referring to conduct by Mr. Gross that he felt was hurting Pimco, these two people recall.

Later, after Mr. El-Erian told Mr. Gross he needed to change the way he interacted with employees, Mr. Gross, 69 years old, agreed to make adjustments, several Pimco employees say. But last month, Pimco announced that Mr. El-Erian, 55, would leave the firm—a surprise to both employees and investors.

In a note to clients, Pimco said Mr. El-Erian will leave in March but will remain on the management committee of Pimco’s parent company, German insurer Allianz SE.ALV.XE +1.32% Mr. Gross later said Mr. El-Erian wanted to write a second book and spend more time with his family.

Interviews with nearly two dozen individuals close to both men and to the firm suggest more-important factors in the departure: a high-pressure work environment that turned less collegial over the past year, a deteriorating relationship between the two senior executives and certain decisions by Mr. Gross that confused some employees.

In a prepared statement, Mr. Gross said: “For more than 40 years, Pimco has delivered superior results for our clients, consistently and during periods of extraordinary market volatility. We hold ourselves to the highest standards of excellence and performance, and I ask of others only what I demand of myself: hard work, dedication and intense focus on putting our clients first.”

In an earlier interview with The Wall Street Journal in January, Mr. Gross denied tension with Mr. El-Erian was a factor in his departure. “It had nothing to do with friction,” he said, although he acknowledged he can be difficult to work with. “Sometimes people will say ‘Gross is too challenging,’ and maybe so. I would say if you think I’m challenging now, you should have seen me 20 years ago.”

Mr. El-Erian’s abrupt departure raises questions about the leadership-succession plan at Pimco, a largely autonomous unit of Allianz. In late January, Pimco designated a new chief executive, Douglas Hodge, a new president and six deputy investment officers. The firm has yet to choose a new heir apparent for Mr. Gross.

“Pimco needs to avoid becoming an upside-down pyramid balanced only on Bill Gross,” says Alex Friedman, global chief investment officer of UBS Wealth Management. “We’re hoping others emerge to replace Mohamed.”

Mr. Gross said in a recent interview that he would be stepping back from some investment duties, but others at the firm are skeptical he will give up any control.

“I’m ready to go for another 40 years!” Mr. Gross posted on Twitter TWTR -0.25% after Mr. El-Erian’s departure.

Messrs. Gross and El-Erian, fixtures on business television and in the press for their views on global markets, were always something of an odd couple. Mr. Gross is a former blackjack player and a trader at heart. Mr. El-Erian is an economist with a more methodical approach.


Mr. Gross’s management style has produced stellar results. His Total Return Fund now manages $237 billion. In 2010 he was named the fixed-income manager of the decade byMorningstar

Inc. MORN +0.13% In recent years, Mr. Gross was paid more than $200 million annually, according to employees.

“The culture is intense” because the firm manages the retirement savings for millions of people, says Neel Kashkari, who ran Pimco’s equity business from late 2009 until departing in early 2013 to run for governor of California. “People work hard, and expectations are high. I had a terrific experience there.”

The Pimco complex, located about a mile from the Pacific Ocean, is called “the Beach” on Wall Street trading desks. Mr. Gross has talked about how he has taken time off during the day to do yoga. But employees say the work environment is charged.

Most Pimco investment professionals arrive at the office around 4:30 a.m.—well before trading opens on Wall Street—and stay until 5 p.m. or later. The firm encourages internal competition, current and former employees say.

On the trading floor, Mr. Gross doesn’t like employees speaking with him or making eye contact, especially in the morning, current and former employees say. He prefers silence and at times reprimands those who break it, even if they’re discussing investments, these people say.

Mr. Gross, who served as a naval officer during the Vietnam War, has strict requirements for presentations to Pimco’s investment committee. He has scolded employees for forgetting to number the pages in their presentations and has given them “communication demerits” that an assistant to Mr. Gross tracks to help determine year-end bonuses, according to people who have worked at Pimco.

Some at Pimco have been told to leave the firm but stuck around instead, waiting for Mr. Gross’s anger to ebb and for him to change his mind, according to these people.

Bill Powers, a former Pimco senior executive who left in 2010, says Mr. Gross “routinely grew tired and wary of those closest to him who had assumed significant responsibility, power, and compensation. After a four to five-year honeymoon period, the chosen one’s halo would turn into a crown of thorns where interactions with Bill would turn adversarial, short, and unpleasant.”

When Mr. Gross establishes an investment thesis, he usually doesn’t appreciate dissenting views, employees and former Pimco traders say. Once, when a senior investment manager said a bond in Mr. Gross’s fund appeared to be expensive, Mr. Gross responded: “OK, buy me more of it,” according to a Pimco executive. The purchase was made.

In 2005, Eric Flamholtz, a consultant and then a professor at the UCLA Anderson School of Management, was hired to advise the firm, he says. Mr. Flamholtz says he spent three years with Pimco employees and shared his results with the firm in 2008.

“You had a lot of very talented people who were, in effect, nervous about their positions,” Mr. Flamholtz says. “It was an unhealthy atmosphere for Pimco in the long run, and they needed to address the issues.”

Mr. Flamholtz says he doesn’t know whether the firm took any steps in response. “The feedback did not make me very popular at Pimco,” he says.

One day about 10 years ago, recalls John Brynjolfsson, at the time a Pimco portfolio manager, Mr. Gross criticized him for not standing when a visiting client toured the trading floor. He recalls Mr. Gross telling him there would be “consequences.”

Mr. Brynjolfsson says Mr. Gross suggested that he write a $10,000 check to Pimco’s charitable foundation. Mr. Brynjolfsson, who says he considered the situation a misunderstanding, made the donation. Less than a year later, Mr. Brynjolfsson was named a Pimco partner.

“I knew he wouldn’t have tested me if I couldn’t handle it,” says Mr. Brynjolfsson, who now runs a hedge fund. “He’s a great motivator of top talent.”

The prestige of working at Pimco has long attracted talented traders. The company pays among the highest compensation in the investment world. Mr. El-Erian earned more than $100 million each year in recent years, according to several current and former employees, while other senior executives made $20 million or more annually.

Mr. El-Erian, the son of an Egyptian diplomat, worked at the International Monetary Fund before joining Pimco in 1999 and rising to managing director. In 2006, he left Pimco to become the chief executive and president of Harvard Management Co., which manages Harvard University’s endowment. He returned to Pimco in late 2007 to become the firm’s co-chief executive officer and co-chief investment officer, along with Mr. Gross.

Colleagues say Mr. El-Erian traveled the world meeting Pimco clients while also helping to run the firm and manage some money. He hardly took a vacation and flourished in the firm’s demanding environment, they say.

Mr. El-Erian favored a more structured approach to management than Mr. Gross’s informal style, but the men rarely clashed in front of the staff, employees say.

Last summer, bonds came under pressure because investors were worried the Federal Reserve would reduce its bond purchases. In June, investors withdrew $9.6 billion from Mr. Gross’s fund. “Don’t jump ship now,” Mr. Gross wrote clients that month.

But more investors cashed out, adding to the stress. Disagreements between Mr. Gross and Mr. El-Erian became common over trading strategy, personnel decisions, new products and more, employees say.

Some of Mr. Gross’s decisions struck some employees as unusual. Last summer, during a rough time in the market, Mr. Gross limited the firm’s trading, restricting it mostly to sales aimed at raising cash to meet client withdrawals, according to three Pimco employees. Some employees complained to Mr. Gross and Mr. El-Erian that they couldn’t buy inexpensive investments and that Mr. Gross didn’t seem to trust their abilities. Mr. Gross didn’t budge. He had restricted trading during rough patches before. These restrictions were longer, lasting for several weeks, according to the three employees.

A Pimco spokesman said the firm’s investment committee told employees to limit “nonessential” trading—as it sometimes does during market stress—and that overall trading volume didn’t decline during those weeks.

Mr. El-Erian told Mr. Gross to be less combative with employees and to give others more leeway in investment decisions. In the late summer, Mr. Gross agreed to be less confrontational, but the change didn’t last, according to senior Pimco executives.

During investment committee meetings, when Mr. El-Erian or others discussed stocks or other topics not related to bonds, Mr. Gross often looked bored, say people who attended the meetings. Sometimes he walked out of the room, effectively ending the discussions, they say, and he became more dismissive of Mr. El-Erian’s views.

Late last year, in front of a number of traders, Mr. Gross said, “if only Mohamed would let me, I could run all the $2 trillion myself…I’m Secretariat,” referring to the famed thoroughbred. “Why would you bet on anyone other than Secretariat?”

Pimco’s performance added to strains. Mr. Gross’s $237 billion Pimco Total Return fund lost 1.9% in 2013, the first year the fund posted a negative return since 1999, although it narrowly beat the benchmark Barclays U.S. Aggregate Bond Index, which fell 2.02%. Investors yanked a net $41.1 billion from Mr. Gross’s fund—more withdrawals in a year, in dollar terms, than any fund in history, according to Morningstar, although it remained the world’s largest bond fund.

Mr. El-Erian saw his own efforts to help build a stock-fund business falter and two funds he helped manage weaken.

In November, Pimco’s executive committee tried to address the growing discord, establishing a task force to meet with both men, according to two Pimco executives. A month later, Mr. El-Erian was offered more power. Instead, he told Mr. Gross he was leaving.

“You can’t resign,” a Pimco executive recalls Mr. Gross telling Mr. El-Erian. “We need you.”

Colleagues figured the men would find a way to patch up their relationship. Early this year, Mr. El-Erian agreed to work with a mediator to find a new way to operate the firm. Mr. Gross rejected the concept of bringing in a mediator, according to a Pimco executive.

Later in January, Mr. El-Erian told Mr. Gross he had made up his mind: He was leaving..

Since the announcement, Mr. Gross has expressed disappointment and bewilderment over Mr. El-Erian’s departure, telling colleagues that Mr. El-Erian was offered whatever he wanted to entice him to stay.

Earlier this month, the firm began removing Mr. El-Erian’s pictures from Pimco’s walls and placing copies of a book he wrote in boxes for storage. They also moved Mr. El-Erian’s office to a building far from Pimco’s trading floor.

Last Tuesday, Pimco posted a question-and-answer session on the company website in which Mr. Gross extolled the new leadership structure, which he said “gives others the opportunity to lead…it will be great!”



About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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