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Exclusive: Pimco's Gross declares El-Erian is 'trying to undermine me'

The headquarters of investment firm PIMCO is shown in this photo taken in Newport Beach, California January 26, 2012. REUTERS/Lori Shepler
The headquarters of investment firm PIMCO is shown in this photo taken in Newport Beach, California January 26, 2012. REUTERS/Lori Shepler

By Jennifer Ablan

(Reuters) - Bill Gross, the co-founder and co-chief investment officer of Pacific Investment Management Co, has accused departing CEO Mohamed El-Erian of seeking to "undermine" him by talking to The Wall Street Journal about deepening tensions between the two executives who have been jointly running the world's largest bond house.

Gross told Reuters that he had "evidence" that El-Erian "wrote" a February 24 article in the Journal, which described the worsening relationship between the two men as Pimco's performance deteriorated last year, including a showdown in which they squared off against each other in front of more than a dozen colleagues at the firm's Newport Beach, California headquarters.

Gross, who oversaw more than $1.91 trillion in assets as of the end of last year and who is known on Wall Street as the 'Bond King', said in a phone call to Reuters last Friday: "I'm so sick of Mohamed trying to undermine me."

When asked if Reuters could see the evidence about El-Erian and the allegation he was involved in the article, Gross said: "You're on his side. Great, he's got you, too, wrapped around his charming right finger."

He said he knew that El-Erian, who had been widely seen as the heir apparent to Gross but is now due to leave in mid-March, had been in contact with Reuters as well as the Wall Street Journal.

Gross indicated he had been monitoring El-Erian's phone calls.

A Pimco spokesman said in an emailed statement: "Mr. Gross did not make the statements Reuters attributes to him. He categorically denies saying this firm ever listened in on Mr. El-Erian's phone calls or that Mr. El-Erian 'wrote' any previous media article."

He added: "As a regulated company, PIMCO is required to retain records of its employees' communications to help ensure compliance with the firm's policies."

Pimco's owner, German financial services company Allianz SE, was not available for comment.

El-Erian, who was named to a part-time position as chief economic adviser to Allianz last week, could not be reached for comment.

When asked about Gross's claim that El-Erian "wrote" the article, a spokeswoman for Dow Jones, the publisher of The Wall Street Journal, said: "This is an astoundingly incorrect claim about a thoroughly reported article that was in the best tradition of The Wall Street Journal."

El-Erian signed a non-disclosure agreement as part of his Pimco departure terms, according to a source close to him. Reuters couldn't ascertain the details of his exit package, including its confidentiality aspects or the size of his payout.

The February 24 Journal article detailed the unraveling of the once vaunted investment and management partnership between Gross and El-Erian. The article revealed the increasing strains between the two executives over Gross's combative management style and whether he should trust other investment managers more.

"I have a 41-year track record of investing excellence," Gross told El-Erian one day last June, according to the Journal article, which cited two witnesses as its source. "What do you have?"

"I'm tired of cleaning up your s---," El-Erian responded, referring to conduct by Gross that he felt was hurting Pimco, these two people recalled, according to the article.

A source who was present at the time confirmed to Reuters that the report of the exchange was accurate.

SOME PIMCO INVESTORS ON EDGE

The latest signs of a rift between Gross and El-Erian, who once praised each other fulsomely, come as Gross is grappling with clients who are also turning their backs on the very asset class that has made him famous.

That is happening partly because the Federal Reserve continues to reduce its controversial bond buying that has provided stimulus to the U.S. and world economies.

Pimco saw its assets under management shrink by $80 billion in 2013 due to outflows and negative returns, according to Morningstar.

In February, Gross's flagship Pimco Total Return Fund had $1.6 billion of net outflows, its 10th consecutive month of outflows, and it lagged 71 percent of its peers with a return of just 0.52 percent last month, according to Morningstar. In 2013, it suffered a negative total return of nearly 2 percent.

In mid-February, Gross sought to reassure the firm's clients about the new leadership structure he has put in place since Pimco's announcement of El-Erian's departure on January 21.

Gross called his announcement of six new deputy chief investment officers a "significant improvement" from Pimco's previous structure, which concentrated nearly all investment strategy decision making onto the shoulders of Gross and El-Erian.

"I've never seen Bill and Pimco scrutinized like this before. This is the most attention I have seen on them," said Eric Jacobson, Morningstar senior analyst who has covered Pimco for nearly two decades. "A couple of high-profile stumbles and mediocre showings, coupled with some outflows - and with no identified successor for life after Bill - clearly has some investors on edge."

Still, Jacobson said that Gross holds one of the best records in the bond industry with the Pimco Total Return fund's 10-year and 15-year annualized returns at 6.04 percent and 6.68 percent, respectively. The fund's returns are beating 96 percent of its peers for those time periods, he added.

(Reporting by Jennifer Ablan; Additional reporting by Jennifer Saba; Editing by Paritosh Bansal and Martin Howell)

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