Vain, bickering and powerful
"I’m tired of cleaning up your (expletive)."
Words straight from the mouth of a rebellious teenage boy? Sadly not.
They were levied by 55-year-old Mohammed El-Erian, CEO of noted Pimco, the noted California bond investment firm. El-Erian’s target: "Bond king" Bill Gross, the company’s 69-year-old co-founder, who had transformed Pimco into a $1.9 billion mutual fund and investment behemoth. Their spat was described in a horrifying and hilarious chronicle published in the Wall Street Journal.
But, because there were billions of dollars at stake, this more than just office sniping. Both the bond market and Gross’s own investment bets weren’t doing all that well; El-Erian’s attempts to move Pimco into stocks added to create friction. Most significantly, the Total Return Fund -- Pimco’s flagship -- lost 2 percent in 2013, lagging 94 percent behind of all its rivals, in what was otherwise a great year for financial markets. In the 12 months before Feb. 28, Pimco had lost a net $58 million, while the Total Return Fund alone had seen investors flee as if from the bubonic plague.
That would have been bad enough.
But then there’s the now-public trash-talking, which culminated in the very public departure of El-Erian from the firm he was supposed to lead when Gross retired. "I have a 41-year track record of investing excellence," the Wall Street Journal records Gross as chiding El-Erian in front of two witnesses. "What do you have?"
Alas for Pimco, what both men have is an outsized public profile -- so when they argue, it indicates deeper trouble.
Morningstar has jumped into the fray, lowering its rating on Pimco’s corporate culture (its stewardship) to a C from a B. El-Erian’s departure was the last in a long series of departures and leaves Gross without a hand-picked successor. It’s not a failing grade -- and Morningstar points out that Pimco has plenty of experienced managers in the wings -- but it highlights the risks to both a mutual fund company and its investors of a starry corporate culture.
And so the trash-talking, unusually, is starting to spill over into the business.
The phenomenon may predate CNBC, but the proliferation of 24-hour business news channels, online news forums, the advent of the blogosphere, Twitter and other forms of social media, to name only a few factors, has given the star money manager with a talented marketing team even more opportunities to sparkle and shine.
They swagger. They strut. They show off. They tweet. (Bill Gross has 116,000 followers; El-Erian, who joined more recently, a relatively modest 18,300.) Some of them even compare notes over which TV studios have better green rooms, coffee and makeup artists. (Sad, but true.) Billionaires Bill Ackman and Carl Icahn took to CNBC and Twitter to insult each other over a disputed stock. Nat Rothschild, a descendant of one of the world’s most storied banking families, took to Twitter to berate a business rival about a company he called "a steaming pile of turd."
If we haven’t yet seen a reality television show devoted to mutual fun managers, complete with behind-the-scenes temper tantrums over who gets top CNBC billing, I’m sure it’s only a matter of time.
The tricky part, of course, is that we can’t just write them off as self-important twits -- these guys do matter. They control money, and some of it ours. The reason they end up as stars in the first place is that for a certain point in time, they’ve done very, very well for their investors.
These guys matter, because each year pension funds and the 401k plan sponsors that decide what mutual funds we’ll be able to select from at work respond to marketing pitches from firms like Pimco, Fidelity and Legg Mason. Part of those pitches, of course, depend on the fund’s performance. But faced with several funds offering roughly similar performance, one led by a superstar and one by an anonymous team, who’s going to get the nod?
Finance stars are hard to find, which is why they act as if they can get away with anything. Their track records back them up. Fidelity’s Peter Lynch, famous for his insistence that you should "buy what you know," has never really left the spotlight even though he long ago left the business. Under his management, from 1977 to 1990, the Magellan Fund generated an average annual return of 29 percent. Bill Miller of Legg Mason picked right up where Lynch left off, trouncing the S&P 500 for a record 15 years, a streak that ended in 2005. But by 2013, he was back on top of the heap, beating the index again with a new Legg Mason mutual fund.
"The system glorifies stars, and billions and billions of dollars are invested on what they do -- or what they say they are doing," says Daniel Wiener, CEO of Adviser Investments of Newton, Mass., which invests $2.9B. (Only some of it goes to stars, he notes; also likes looking for great management teams that are still relatively unknown, like the four-person healthcare investing team at Wellington Management. Do you know Ann Gallo’s name? Wiener does, and thinks she’s smart.)
The system is geared to creating and promoting those stars, too. For three straight weeks at the beginning of every year, Barron’s is able to entice readers to pick up the magazine on newsstands by offering them insights from big name managers and other pundits. This year’s roster included not only Mario Gabelli but none other than Bill Gross himself.
By all means, stargaze at all the strutting stewards of capital. But remember that at least part of the spectacle is an optical illusion.
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