The Bond Market Discovers a New Leading Man
July 28, 2012
Newport Beach, Calif.
RECESSIONS, crackups, bailouts — these are profitable times for Mohamed A. El-Erian.
Mr. El-Erian is the crown prince of the multitrillion-dollar global bond market, the figurative heir of its long-reigning king, William H. Gross of the mighty Pacific Investment Management Company, known as Pimco.
From the company’s trading floor here in Newport Beach, some 2,500 miles from Wall Street, this odd couple, Pimco’s co-chief investment officers, preside over the world’s biggest bond funds — funds where many investors turn in uncertain times.
Mr. Gross is the maestro behind the biggest of all, the $263 billion Pimco Total Return fund. But as the financial world has come unhinged — first in 2008, with the subprime fiascoes in the United States, and now in Europe, where the debt crisis flared anew last week — Mr. El-Erian has come into his own, stepping out of the long shadow of Mr. Gross, one of Pimco’s founders and his former boss.
On many mornings, you can spot Mr. El-Erian, who is also Pimco’s chief executive, on CNBC, BBC or Bloomberg, or somewhere in the financial pages, expounding on the financial crisis of the day. He cultivates financial reporters and presses Pimco’s message with flair on the conference circuit, occasionally flanked by financial illuminati like Christine Lagarde, the managing director of the International Monetary Fund, as if he were an I.M.F. supremo himself rather than a fabulously wealthy money manager.
Indeed, even by the standards of Wall Street, where many financial types pull down eye-popping paychecks, Mr. El-Erian and Mr. Gross make gobs of money. Mr. El-Erian, 53, was paid about $100 million last year, according to a person with knowledge of Pimco’s finances who spoke on condition of anonymity because the firm, a unit of Allianz, the big German financial company, doesn’t disclose compensation.
To put that in perspective, Jamie Dimon, the chief executive of JPMorgan Chase and one of the most powerful figures in American finance, got a quarter of that. Mr. Gross, 68, made about $200 million last year, according to the person with knowledge of Pimco’s finances. (As for how much he and Mr. El-Erian are paid, Mr. Gross, in a joint interview with Mr. El-Erian, said only this: “We all earn too much, but I can sleep because of the multiples we have provided for our clients over the years.”)
ON Wall Street, Mr. Gross is something of a legend, and not just because of his mega paydays. Over the last five years, Pimco Total Return has returned nearly 9.5 percent, annualized, trouncing once-celebrated stock market funds like Fidelity Magellan and even that old standby, the Vanguard 500 Index fund.
Yet Mr. El-Erian, a former I.M.F. official and an admired economic thinker, is increasingly becoming the public face of Pimco — a one-man marketing machine for the company, its views and its agenda. Last week, for instance, as Spain’s financial troubles shook world markets, Mr. El-Erian was once again in Europe — he declined to say where — assessing the situation. In an e-mail, he said things in Europe would get worse before they got better.
Still, the question on many minds is whether Mr. El-Erian, who previously made headlines with a brief — and somewhat controversial — run as the investment chief of Harvard, can possibly replicate Mr. Gross’s success.
Mr. Gross, who made his first serious money at blackjack tables in Las Vegas, relishes high-stakes bets. He doesn’t simply sit back and clip bond coupons; he trades, and trades well. Mr. El-Erian, by contrast, tends to be more deliberate and cerebral, a big thinker who likes to fly in the rarefied circles of global economic policy making.
“Mohamed is my heir apparent,” Mr. Gross said in the joint interview, which took place earlier this year at Pimco’s headquarters here. “He is more conservative than I am. I am the risk taker.”
And yet Mr. El-Erian has quietly moved away from sharing power with Mr. Gross and William S. Thompson Jr., who retired not long ago as co-C.E.O. Pimco, which oversees $1.8 trillion in assets, quite simply is Mr. El-Erian’s to lose.
“He is the succession plan for Bill,” Marilyn Cohen, who runs Envision Capital Management in Los Angeles, says of Mr. El-Erian and Mr. Gross. “I think it has worked masterfully. They have doubled-clutched it together or singularly.”
Not everyone is so enthusiastic. While Mr. El-Erian has years of experience at the I.M.F. and Pimco, some people wonder if he can successfully navigate the world’s increasingly tumultuous bond markets. Unlike Mr. Gross, Mr. El-Erian isn’t a trader by nature.
“Why would somebody with so little bond trading experience be in line for the top job?” asks Sylvain R. Raynes, a co-founder of R & R Consulting in New York, which helps investors measure risks associated with bond investments. “There are other candidates who are less flamboyant.”
Others go further. An investment executive who manages money for endowments says he is comfortable keeping funds at Pimco as long as Mr. Gross is around.
“I think once Bill is gone, we take our money away immediately,” says the executive, who spoke on the condition of anonymity so as not to jeopardize his relationship with Pimco.
But given Pimco’s growth in recent years, assessing the big economic picture — Mr. El-Erian’s purview — seems to matter more than ever. Questions of macroeconomics will have a bigger effect on a fund’s performance than the particular bonds a manager picks, says Eric Jacobson, director of fixed income at Morningstar.
“El-Erian’s expertise is more as a macro thinker,” Mr. Jacobson says.
ON most mornings, Bill Gross wakes early at his beachfront home in Laguna Beach, south of here, and is on Pimco’s trading desk by 6 a.m. He says he is working harder than ever and has no plans to retire anytime soon. Mr. El-Erian, he says, has energized Pimco — and him.
Mr. Gross once used to work in a little golf in the afternoons and then return to his office. Not anymore.
“You can’t help but be affected by someone who comes in at 4:30 a.m. when you are coming in at 5:30 or 6 and not know that there is an example that is being set,” Mr. Gross says of Mr. El-Erian as the two sit at a round table in Pimco’s offices.
“To some extent, I wish that I could go over and hit golf balls like I used to at 3:30, but I have not hit balls in three and a half years,” Mr. Gross says. “Mohamed did not tell me not to hit balls, but his behavior basically said that this is a different company moving at a faster pace.”
For all the buzz surrounding Mr. El-Erian inside and outside of Pimco, his track record for managing money is mixed.
From 1999 to 2005, as head of Pimco’s Emerging Markets Bond fund, Mr. El-Erian turned in an impressive annualized return of 18.4 percent, about 3 points ahead of the competition. He turned heads with a bold call on Argentina in 1999, when Pimco, alarmed by the outlook for that country, dumped its holdings of Argentine bonds. Two years later, Argentina defaulted, and bondholders lost big.
Mr. El-Erian attracted more headlines during his time atop Harvard’s endowment.
In 2006, he left Pimco to take over the university’s $26 billion fund. Though it did well under his management, he quit after less than two years and returned to Pimco. The endowment subsequently faltered, and several experts on endowments criticized what they called an abrupt departure and attributed some of the fund’s subsequent problems to his investment strategy.
Mr. El-Erian said that he “cannot speak to how the endowment was managed after I handed over the reins.”
Since 2009, aside from his broad management responsibilities, Mr. El-Erian has also been a co-manager of Pimco’s $5.4 billion Global Multi-Asset Fund, which is made up of other Pimco funds. Its performance has been relatively lackluster. That has also been the case at the $4.7 billion Global Advantage Strategy Bond fund, which he oversees with two other money managers.
Mr. El-Erian, who often speaks in the language of finance, says Multi-Asset delivers “upside while hedging against sharp losses,” while Global Advantage offers access to a “global investment set.” While both underperformed its peer group over the last three years, Morningstar continues to recommend them.
Certainly, Mr. El-Erian has an unusually sophisticated background, starting with a peripatetic childhood.
He was born in Egypt, where his father was a law professor at Cairo University. The family moved to New York when the elder Mr. El-Erian took a post at the United Nations, and then to Paris when he was named Egypt’s ambassador to France. In 1973, the family moved yet again, this time to Geneva, where Mr. El-Erian’s father took part in peace negotiations involving the Arab-Israeli conflict.
Mohamed El-Erian later studied economics and eventually took a job at the International Monetary Fund, where he spent 15 years. He rose to become deputy director of the Middle Eastern department.
Then he departed for Wall Street, starting with a brief stint at Salomon Smith Barney. But one gray November day in London he got a call from Pimco. Would he be interested in running its emerging markets fund? He accepted and headed west.
Over the years, Mr. El-Erian has been on the radar for the top job at the I.M.F. In 2004, he was mentioned as a contender for that post, but it went to Rodrigo Rato, who served as managing director until 2007.
It was about this time that Harvard came calling. Soon, Mr. El-Erian was headed east and people were buzzing. Some wondered if he was taking the job to cultivate a relationship with Lawrence H. Summers, a former Treasury secretary who was then Harvard’s president, in the hope of finally landing atop the I.M.F.
Mr. El-Erian calls such speculation “absurd,” adding that “I was attracted by the combination of academia, investment management and the mission” of the endowment.
Evaluating Mr. El-Erian’s contributions at Harvard is difficult. He took over in September 2006, and in the first fiscal year that he ran the endowment it posted a strong return of 23 percent. But after less than two years at the helm, he rejoined Pimco. As the financial crisis struck and the markets reeled, Harvard’s endowment fund plunged by roughly 27 percent.
While his successors at the endowment presided over the collapse, Mr. El-Erian had made several changes that, in the view of some financial experts, turned out to be ill-timed. Critics like David Salem, then head of the Investment Fund for Foundations, said that part of the problem was that Harvard had too many illiquid investments that it simply couldn’t sell.
Who knows how events might have played out had Mr. El-Erian stayed at Harvard. At the time, he said his wife and daughter were unhappy in Boston and wanted to return to the West Coast.
BY the time Mr. El-Erian returned to Pimco, Mr. Gross and the co-C.E.O., Mr. Thompson, knew that they needed to line up a successor.
As Mr. Gross recalled it, “Mohamed had left for Harvard, and there were not any local choices and we were both approaching 65.”
A year later, Mr. Thompson retired. By some accounts, his departure left a hole in Pimco — while Mr. Gross sometimes riles employees, Mr. Thomson was Pimco’s people person. “He was the one who smoothed over ruffled feathers,” said a former colleague of Mr. Thompson’s.
Mr. Jacobson at Morningstar said, “Now the gloves are off.”
Like Mr. Gross, Mr. El-Erian has turned up the heat on Pimco’s employees. And Mr. Gross does not disagree that the atmosphere has become tougher. He said of Mr. El-Erian: “He has a sense that for an organization to stay healthy, you have to trim the branches. I think that when Mohamed came back, there was a sense that you had to run fast.”
Pimco has always prided itself on a strong dialogue among its top money managers. The main forum is an eight-member investment committee that meets four times a week and has three rotating visitors.
One concern is whether, inside the new Pimco, people are willing to speak their minds. The firm has grown large and rich, and the temptation is to keep the bosses happy.
“That committee went from four guys in a room trying to go long or short or buy German bonds to a public forum that reminded me of students at Harvard Business School trying to get airtime,” says a former Pimco executive who spoke on condition of anonymity because he did not want to publicly discuss his former employer. “There is more posturing. People are trying to catch Bill’s attention.”
Mr. El-Erian counters that Pimco’s culture rewards people who challenge conventional wisdom.
One important change was the departure in 2010 of Paul A. McCulley, a managing director and, in effect, Pimco’s chief economist. Mr. McCulley’s work helped prepare Pimco for the financial crisis in 2008.
Mr. El-Erian himself offered his views on the global economy in a well-received 2008 book, “When Markets Collide.” In Mr. Gross’s view, Mr. El-Erian is now the one to listen to at Pimco.
“I think that Mohamed, with his experience with the I.M.F. and his history and his knowledge of sovereigns and how it plays out and having been a participant, has kind of taken Paul’s place in terms of focusing the investment committee on the big issues,” Mr. Gross says. “Do we miss Paul? Yes. But we have picked up the slack, I think.”
Mr. El-Erian adds, “We always knew that Pimco would have to navigate the generation changes.”If last week’s financial turmoil is any guide, it will have to navigate more wild markets, too.
Mohamed El-Erian Is the Bond Market’s New Leading Man - NYTimes.com