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How the ‘bond king’ Bill Gross lost his crown

In 2015, the Smithsonian’s Museum of American History announced it would display the Bloomberg terminal keyboard of Bill Gross at an upcoming exhibition celebrating the history of business — a fitting tribute to a colossus of finance.

The year before, Mr Gross had been ousted from Pimco, the firm he founded in 1971, but his immediate arrival at Janus Henderson was cheered wildly by investors, even as they pulled billions of dollars out of funds managed by Pimco. No wonder, given that the yoga-practising, stamp-collecting Ohioan with a penchant for wearing ties loosely draped around his neck had dominated debt markets for four decades.

In an industry long populated by quieter, more studious fund managers, insurance companies and pension funds, Mr Gross emerged as a freewheeling and outspoken rock star, able to move markets with just a few sentences and make headlines with his more colourful investment letters.

Even governments paid heed. In early 2010, his warning that the UK’s sovereign bonds rested “on a bed of nitroglycerine” helped solidify the government’s post-crisis austerity drive. Other times he waxed lyrical over the pleasure of sneezing, mourned the death of his (female) cat Bob, and called himself a “70-year old Justin Bieber”.

“The industry owes Bill Gross a giant debt of gratitude, pun intended,” said Gabriel Altbach, founder of consultancy Asset Management Insights. “He made bond investing headline news and helped paved the way for countless other fund companies and portfolio managers.”

Yet on Monday, Mr Gross announced he was retiring, a long-expected move from a man left bruised and battered by the bond market he loved and long surfed with such aplomb.

Someone investing $10,000 into the Janus Henderson Global Unconstrained Fund when Mr Gross took up the reins at the end of September 2014 would now have about $10,224, according to Morningstar. Simply buying the broader US bond market would have yielded $10,972, according to the data provider, and last year the fund lost 3.9 per cent. As a result, investors have lost faith, deflating the size of the fund from a peak of $2.2bn to under $1bn at the end of last year, most of which was Mr Gross’ own money.

His retirement raises three linked questions:

  • Did the erstwhile “bond king” simply emerge at the right time to ride the three-decade bull market only to lose his footing when it fizzled out?
  • How much of his success was down to his own investing prowess and how much of it was thanks to his former colleagues?
  • And what exactly went so wrong at Janus Henderson?

In truth, the problems started much earlier, during his reign at Pimco. Although the giant bond house had a famously quiet but intense trading floor, Mr Gross was known for his volatile temper. Outbursts became steadily worse, and ultimately contributed to the exit of Mohamed El-Erian, Pimco’s chief executive, in 2014, according to people familiar with the matter.

The performance of Mr Gross’s flagship Total Return Fund — which managed nearly $300bn at its peak in 2013 — had already started to deteriorate, and without the steadying influence of Mr El-Erian the clashes inside Pimco became fiercer, with insiders describing an increasingly dysfunctional company.

Ultimately, some of Mr Gross’s lieutenants banded together and threatened to quit unless he was ousted. Anticipating the coup, he jumped ship to Janus, run by his former Pimco colleague Dick Weil, but given that the knife at Pimco was wielded by deputies handpicked by Mr Gross it was a suitably Caesar-like end to his imperial rule.

“For a firm to rise up against its founder and push him out is huge,” said one former colleague. “He had handpicked people he thought would be loyal, and then they turned on him.”

Initially it was seen as a huge win by Janus Henderson to snag the bond king himself, with its shares surging more than 40 per cent on the news. But instead of freeing Mr Gross from the shackles of managing hundreds of billions of dollars — as he touted it at the time — his years at Janus Henderson have been a bitter disappointment. In a statement on Monday, Mr Weil paid tribute to “one of the greatest investors of all time”, but in an interview with CNBC last year he admitted that Mr Gross had “made some bad bets”.

In some ways . . . the industry has evolved past the lone-wolf guru model that Gross exemplified

Longtime Pimco watchers and insiders point out that at Pimco the indisputably brilliant if erratic Mr Gross was surrounded and supported by a large group of equally brilliant portfolio managers, economists and analysts. “A lesser noted, but I think very important, point is that he worked with some very talented business people,” said Jim McCaughan, former chief executive of Principal Global Investors.

Indeed, one former senior colleague argued that while Mr Gross fully deserves his iconic status, his self-confidence morphed into hubris, leading him to believe his own hype and blinding Mr Gross to his real strengths.

“Many people did just ride the massive fixed income rally since the 1980s, but Bill really did innovate and excel,” he said. “But his greatest strength wasn’t coming up with trades, but selecting from the best ones presented to him. And at Pimco he had a lot of good ideas presented to him, and a lot of checks and balances.”

Towards the end of his reign at Pimco, those creative inputs, checks and balances broke down, and at Janus Henderson, they seem to have been absent. Physically still situated right next to Pimco’s Newport Beach headquarters rather than at Janus Henderson’s main US office in Denver, he grew obsessed with beating his former colleagues, and took risks that would make many rivals blanch.

“In some ways, though, the industry has evolved past the lone-wolf guru model that Gross exemplified,” Mr Altbach said. “From a risk management standpoint, firms have built large teams with processes, technology and more dispersed decision-making that Gross famously eschewed.”

Ultimately, this may be the enduring lesson of Mr Gross’s legendary stint at Pimco and his limper final years at Janus Henderson: Even investing stars need a supporting cast to excel, and forgetting this can be hazardous.

“It’s like Tom Brady and the Patriots,” said the former colleague, referring to the weekend Super Bowl victory of New England’s football team and their star quarterback. “If it wasn’t for [Julian] Edelman, Brady wouldn’t have done nearly as well.”

Still, even detractors readily admit that Mr Gross’s position in the pantheon of great financiers is undisputable, having reinvented and shaped bond market investing for four decades and built Pimco into one of the world’s biggest and most respected investment groups.

“He had a strong sense of what he wanted at Pimco. Many liked it, but many didn’t,” said Wayne Wickers, CIO of ICMA-RC, a pension fund. “His legacy is going to be associated with building one of the largest, most accomplished asset management organizations in the US.”

Additional reporting by Peter Smith, Owen Walker and Richard Henderson.

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