Judging by the Bill Gross affair, the Great Man theory is alive and well among investors.
This demonstrates nothing more clearly than on what slender offerings the investment industry, with all its billions spent on people, processes and strategy, actually earns its money.
Gross, a 70-year-old with a fabulous long-term record of performance as a bond manager but some rocky recent data, resigned suddenly on Friday from Pimco to jump to smaller rival Janus Capital, a move reports said came just before he was to be dumped.
This led to several striking outcomes: Analysts began to predict mass redemptions by Pimco investors, with estimates ranging from between 10%-30% of its funds under management over the next several years, or potentially a number approaching a half a trillion dollars.
Shares in Pimco parent Allianz, a German financial services company, fell more than 6% in reaction as investors discounted outflows from a unit that accounts for about a quarter of the group’s operating profits.
Shares in Janus moved in the opposite direction, rising about a third, or as much as US$800 million in market cap, a number implying that something like US$30 billion to US$50 billion will flow to it on the news and stay with it for several years.
Bond markets themselves sold off, as traders moved to anticipate redemption-driven selling in certain sectors Gross favored.
That all of this was driven by the movement of one manager in what likely is the latter stages of his career presents a rather depressing picture of how capital is allocated, and how investments are bought and sold.
Don’t get me wrong – I am not attacking Gross’ abilities, nor the processes and organization he left behind at Pimco. I am rather questioning our ability to infer anything much useful from our observations about that.
Gross had a long and distinguished track record, something which both his recent history and much else we know about investing shows he may well not be able to recreate at Janus. He almost certainly will not be the lucky recipient of another 30-year bull market for bonds, not simply because this is itself unlikely but also because he’d be our first centenarian bond king at the end of it.
To be sure, the stock market could be wrong about all of this, and indeed Janus shares retreated somewhat on Monday while Allianz’ stabilized.
The man behind the screen
The key question is why Gross’ move would have such an electrifying effect on investors, or more to the point, on the advisers and consultants who serve as gatekeepers.
Of course, the fact that Pimco has lost both Gross and former co-Chief Investment Officer Mohammed El-Erian within the past several months does point to a certain amount of risk for investors and dysfunction at the firm, as does the dissension that led to the firm wanting to get rid of its bond king.
But that billions will go hither and yon based on the movement of one man is better explained by marketing and simple self-deception.
The operating logic behind much of this seems to be akin to the old Great Man theory of history, which attributed to certain exceptional individuals outsized abilities to shape events. This is a seductive world view, giving us the false belief that we too can be sheltered from events if only we choose the right leader, or in this case the right bond fund manager.
Note that Pimco seems to have learned its lesson about great men, and is now saying it will be a more “we” and process- oriented organization.
Gross himself was very canny about self-promotion, being both a fixture on financial television and a frequent and entertaining writer. This allowed him to become that thing which the 21st century tells us is at the top of the self-actualization pyramid: A Brand.
He was the world’s most easily identifiable bond manager, a title it is easy to snicker at but one that helped bring in investors in droves and their dollars by the billions.
That’s the crux of the problem this fracas illustrates.
It may well be that Pimco had, and has, great investment processes and served its clients admirably. But the implication seems to be that 10%-30% percent of them were there because they believed in the magic of one man.
Depending on one guy is no way to save for the future, and it says disturbing things about how we allocate capital.
Being a Great Man is, however, great work if you can get it.
(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at jamessaft@jamessaft.com)
