Are Bill Gross, Frontier Markets Vulnerable?

TUESDAY, FEBRUARY 25, 2014

Are Bill Gross, Frontier Markets Vulnerable?

By JOHN KIMELMAN  | MORE ARTICLES BY AUTHOR

A negative WSJ article puts Pimco’s leader on the defensive. And are frontier markets too rich?

There was one story in the financial press that everyone was talking about Tuesday.

The Wall Street Journal reported in a lengthy front-page feature (the piece is behind a paywall) that Pimco co-founder Bill Gross created a toxic work environmentthat led to last month’s surprise decision by his No. 2, the respected Mohamed El-Erian, to leave the firm.

The Journal piece, based on sources inside in the company, includes this exchange between the two Pimco executives.

“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.

Though Gross had told the outside world in recent weeks that El-Erian was resigning to write a book and spend more time with his family, the Journal suggested that the departure was more about the growing friction between the two men as Pimco’s performance suffered in recent months amid rising interest rates and almost steady fund outflows month after month.

The Journal story spawned a slew of others on the Web, including a piece by Reuters columnist Felix Salmon, who argues that Gross must resign his job.

“The only way to save Pimco is for Gross to leave the firm entirely,” he writes.

Gross, who has been nicknamed the “Bond King,” is a longtime member of the Barron’sRoundtable, a group of professional investors who assemble twice a year to chew the fat about stocks and other investments.

In the wake of the Journal article, Gross went on CNBC Tuesday to give his side of the story.

“All this discourse about an autocratic style from my standpoint and conflict between Mohamed and myself is overblown,” Gross said during an interview on CNBC’s Street Signs.

But Gross didn’t refute the facts in the Journal story, some of which had to be embarrassing. (Referring to his investing prowess, Gross at one point compares himself to the famed Triple-Crown winning thoroughbred, Secretariat.)

One has to wonder, however, whether the Journal story comes at a time when Pimco might be working its way back from some of its problems.

To be sure, the company’s flagship fund, Pimco Total Return (ticker: PTTRX), endured $3.5 billion in net fund outflows last month, coming on top of the $41 billion in net outflows for all of last year.

But the fund has generated a positive return of 1.56% year-to-date, according to Morningstar, in line with its intermediate-term taxable bond benchmark.

And The Wall Street Journal also reported Tuesday that investors are piling into exchange-traded bond funds “at the fastest clip ever, the latest sign of a bond-market revival driven by uneven economic data, emerging-market volatility and the thirst for income-generating investments.”

Assuming that this back-to-bonds trend holds up, it seems only a matter of time before the world’s largest actively managed bond house can at least begin reversing some of its outflows.

Meanwhile, the Financial Times wrote a piece that should give pause to fans of the so-called frontier emerging-market stocks, which have gained about 20% in the past year while the more standard emerging-market stocks have lost value in that time.

According to the FT, “FM equities are trading at an average price earnings ratio of 13.6 times and a price to book ratio of 1.8 times, representing a premium of 18% and 28% respectively to valuations on EM markets, according to MSCI. (All ratios are calculated on a trailing basis, using company earnings over the latest available 12 month period.)”

The FT interviewed Andrew Howell, an analyst with Citi Global Markets in New York, who is worried that if a sharp frontier markets correction were to occur, “investors could face difficulty selling their holdings.”

Howell is quoted as saying “if I look through the ranks of widely-held stocks by FM funds—the likes of Bank of Georgia, or Nostrum Oil & Gas, or Nigerian Breweries—I am struck at how illiquid they still are.”

Seems like it’s time to take a hard look at the wild frontier.