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Yet another story from Bloomberg on Bill Gross of PIMCO. Interesting
insights in the lifestyle of one of the major bond market movers of this
time.
Gwenn
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From: "GWENAEL GAUTIER, CAISSE DES DEPOTS ET" <GGAUTIER@xxxxxxxxxxxxx>
Subject: (BN ) Why Bill Gross, Pimco's $443 Million Man, Rules the B
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Why Bill Gross, Pimco's $443 Million Man, Rules the Bond Market
3/13/0 3:1 (New York)
Why Bill Gross, Pimco's $443 Million Man, Rules the Bond Market
Newport Beach, California, March 13 (Bloomberg) -- Bill Gross
did it again.
Just back from the gym, tie loose around his neck, Gross on
the last day of February bought $700 million of 30-year U.S.
Treasury bonds with some of the money he oversees at Pimco
Advisors Holdings. Within seconds, the $3.2 trillion U.S.
government market raced higher.
``That's driving the market at this moment,'' he said,
sitting in Pimco's Newport Beach, California, trading room
overlooking the Pacific Ocean. ``People will know it was Pimco.''
Gross has always been watched. Based in large part on his
ability for spotting changes in the economy that affect the bond
market, his flagship $30.3 billion Total Return Fund has ranked in
the top 3 percent in its category in the past three, five and 10
years, according to Morningstar Inc. research. The fund's average
annual return over 10 years was 9 percent.
With Gross as investment chief, Pimco has done so well that
German insurer Allianz AG is buying 70 percent of it for $3.3
billion -- diluting its own per-share earnings through 2002 -- and
laying a $443-million payoff in Gross's lap.
Lately, the bond investor's reputation has grown still more.
Though he tries to keep his moves secret, Gross can't seem to make
a routine trade at the behest of a customer, as he did Feb. 29,
without sparking a buying frenzy by imitators.
That's because in January Gross bought $8 billion of Treasury
bonds maturing in 20 to 30 years, betting they would rally after
an awful 1999. In just four weeks, 30-year bond yields tumbled 66
basis points to 6.09 percent, earning investors 9.4 percent
including reinvested interest in that time. Pimco made $300
million.
Following the Leader
``Bill Gross is one of those market leaders that if he's
thinking something now, everyone else will be thinking it in a
week or a month,'' said Richard Medley, chairman of Medley Global
Advisors in New York, whose predictions on the economy also have
been known to move the market.
So what is Gross thinking now? He isn't buying any more
Treasury bonds after his coup. His flagship $30-billion Total
Return Fund now has 40 percent invested in mortgage-backed
securities, 19 percent in Treasuries, 22 percent in corporate
bonds and 19 percent in cash. He said his next big bet probably
will be in Treasury securities maturing in seven to 10 years.
Gross figures yields on two- and five-year Treasury notes
will creep up to 7 percent, from 6.52 percent and 6.59 percent,
respectively. As they do, they will slow the nine-year U.S.
economic expansion.
``I sense that's approaching,'' said Gross. He would then bet
on a bond rally by doing what bond managers call extending their
duration, or taking on more interest-rate exposure, to increase
their chance for gains if rates do drop.
Herr Gross
After the Allianz takeover, Gross will oversee the $130
billion the Munich-based insurer has under management in addition
to Pimco's $185 billion. He will not, at least initially, be
managing the $91 billion of assets at DWS Investment GmbH, which
Allianz is expected to acquire following the merger of Deutsche
Bank AG and Dresdner Bank AG, announced earlier this month. Pimco
shareholders are expected to approve the sale of the 70 percent
interest to Allianz on April 28. The other 30 percent of Pimco
shares will remain in the hands of Pacific Life Insurance Co.
For transferring his market savvy to Allianz, the 55-year-old
Ohio native will get a rare payday for a fund manager. He stands
to earn $40 million for each of the next five years in cash and
stock. He'll also get a $243 million windfall for selling his
stake in Pimco.
``What Allianz is getting in Pimco is largely Gross, so not
locking him up would have been a much costlier proposition'' if he
had walked, said Lawrence Lieberman, managing director at mutual
fund executive search firm Orion Group in Princeton, New Jersey.
`I Like the Game'
The mild-mannered, Catholic convert is the first to admit
that $443 million is too much money for anyone. He and his wife
Sue celebrated with a bottle of seven-year-old champagne, but
Gross generally prefers beer and meatloaf and insists the family
stays at a $50 dollar-a-night Holiday Inn when they take their 11-
year-old son Nick to Quebec to play in hockey tournaments.
``It has never been my objective to make money,'' said the
lanky investor, who only quit running marathons when he turned 50.
``I like the game.''
As Gross told it, his $300 million gain for Pimco in January
and February was good defense rather than a great offense. He said
he failed to start buying bonds -- with proceeds from selling $5
billion in mortgage-backed securities and $3 billion in
intermediate-maturity Treasuries -- until several days after the
U.S. government said Jan. 13 it would use its budget surplus to
buy back as much as $30 billion in longer-term debt this year.
Within a few days, Pimco's own buying had made the bonds too
expensive. ``It got away from us,'' Gross said. ``We would have
done a lot more if the long bond had stayed at a higher yield.''
It didn't help that trades that were supposed to be
confidential leaked out from Wall Street dealers with ``amazing
accuracy,'' said Bill Powers, a Pimco fund manager. Pimco once had
tried to maintain secrecy for its trades by contacting 10 or more
dealers for each transaction. Now it tries to trade through just
one dealer. Nothing works.
Humility an Asset
Gross said he also made an error by not buying $3 billion or
so of 30-year bonds at the February Treasury sale. So for all his
genius, he merely saved himself from looking bad among his peers.
Pimco's Total Return Fund was up 0.72 percent for the first two
months of the year compared with an average of 0.67 for all U.S.
bond funds, according to Morningstar.
Gross's self-criticism -- after a bad move, he will take the
stairs at work rather than face colleagues in the elevator -- is
part of what makes him successful. ``He's constantly asking
himself what he did wrong and that helps him to learn,'' Medley
said.
He puts similar demands on his staff of 20 money managers.
``He has given our group a strong sense of humility,'' said
Powers, who has worked with Gross for the past 10 years.
The Pimco team arrives between 5 a.m. and 6 a.m. and works
until the same hours in the evening. They keep offices at home and
often check trades in the middle of the night.
They must read. Gross wants them to have an opinion on every
new development that might move the bond market. And when he calls
a meeting of his seven senior managers, as he does when he takes
the funds in a new direction, he demands a lively debate. Paul
McCulley, another fund manager, said, ``Being a yes-man to Bill is
not a way to advance your career.''
Lessons from Las Vegas
Gross showed a knack for making money from an early age.
Fresh from Duke University, at age 22, Gross had turned a $200
stake into $10,000 at the blackjack tables in Las Vegas. It taught
him a valuable lesson: ``The game is the same no matter what the
stakes,'' he said.
He was hired in 1971 to work in Pacific Life's private-
placement bond department for $12,000 a year by Walter Gerken, now
Pimco's chairman. Two years later, he and two colleagues persuaded
the company to give them $5 million to start a bond-trading mutual
fund called Pacific Investment Management Co. Gross would do the
trading. ``Gross was clearly a very cerebral guy,'' said Gerken.
The Pimco threesome flew all over the country selling their
funds. Gross traded bonds from the road. By 1977 the company had
$400 million under management and was profitable. Along the way,
Gross adopted some favorite economic indicators, including rail
shipments, birth rates, and now, of course, the Nasdaq stock
market index.
Today Gross does little traveling. He said he will go to
Allianz's headquarters no more than once a year and will instead
send an investment team to Munich to help Pimco tap Europe's
rapidly growing market for corporate debt.
For the U.S. market, Gross said he expects the Treasury to
buy back more bonds for the next few years but that the budget
surpluses that finance the repurchases won't continue much longer
than that. He also predicted several more interest-rate increases
from the Federal Reserve this year that will push up shorter-term
Treasury yields.
The Fed moves would set the table for Gross's next big
trading move. And he can be sure the whole market will be
watching.
--Perri Colley McKinney in Newport Beach, California, through the
New York newsroom (212) 318-2603/dp/lw
Story illustration: To graph the performance of the benchmark 30-
year bond, type {GT30 <GOV> GY <GO>}.
News on companies:
PA US <EQUITY> CN
ALV GR <EQUITY> CN
DBK GR <EQUITY> CN
DRB GR <EQUITY> CN
News by category: Monitors:
NI BON Bond Market USD <Go>
NI USB U.S. Treasury Bond Market USA <Cmdty> GIP <Go>
NI GBN Government Bonds ECO <Go>
NI NOB North American Bonds BTMM <Go>
NI ECO Economy
NI BON Bonds
NI COR Corporate bonds
NI FED Federal Reserve
NI FEA
NI WIN
NI TOP
NI WNEWS
NI FND
NI MOR
NI BNK
NI INS
NI MNA
NI FIN
Other codes related to this story:
ECOSTAT Economic statistics
TRE U.S. Treasury
Regional news:
NI US
NI GER
NI EUROP
NI CA
People in the news: For news about any of the people mentioned
in this story, type WHO followed by the person's name and <GO>.
For more news on U.S. bonds and the economy: TNI USB ECO.
-0- (BN ) Mar/13/2000 3:01
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