GO
Loading...

The Bond Market Discovers a New Leading Man

Recessions, crackups, bailouts — these are profitable times for Mohamed A. El-Erian.

Pimco's Mohamed El-Erian
CNBC.com
Pimco's Mohamed El-Erian

Mr. El-Erian is the crown prince of the multitrillion-dollar global bond market, the figurative heir of its long-reigning king, William H. Gross of the mighty Pacific Investment Management Company, known as Pimco.

From the company’s trading floor here in Newport Beach, some 2,500 miles from Wall Street, this odd couple, Pimco’s co-chief investment officers, preside over the world’s biggest bond funds — funds where many investors turn in uncertain times.

Mr. Gross is the maestro behind the biggest of all, the $263 billion Pimco Total Return fund. But as the financial world has come unhinged — first in 2008, with the subprime fiascoes in the United States, and now in Europe, where the debt crisis flared anew last week — Mr. El-Erian has come into his own, stepping out of the long shadow of Mr. Gross, one of Pimco’s founders and his former boss.

On many mornings, you can spot Mr. El-Erian, who is also Pimco’s chief executive, on CNBC, BBC or Bloomberg, or somewhere in the financial pages, expounding on the financial crisis of the day. He cultivates financial reporters and presses Pimco’s message with flair on the conference circuit, occasionally flanked by financial illuminati like Christine Lagarde, the managing director of the International Monetary Fund, as if he were an I.M.F. supremo himself rather than a fabulously wealthy money manager.

Indeed, even by the standards of Wall Street, where many financial types pull down eye-popping paychecks, Mr. El-Erian and Mr. Gross make gobs of money. Mr. El-Erian, 53, was paid about $100 million last year, according to a person with knowledge of Pimco’s finances who spoke on condition of anonymity because the firm, a unit of Allianz, the big German financial company, doesn’t disclose compensation.

To put that in perspective, Jamie Dimon, the chief executive of JPMorgan Chase and one of the most powerful figures in American finance, got a quarter of that. Mr. Gross, 68, made about $200 million last year, according to the person with knowledge of Pimco’s finances. (As for how much he and Mr. El-Erian are paid, Mr. Gross, in a joint interview with Mr. El-Erian, said only this: “We all earn too much, but I can sleep because of the multiples we have provided for our clients over the years.”)

ON Wall Street, Mr. Gross is something of a legend, and not just because of his mega paydays. Over the last five years, Pimco Total Return has returned nearly 9.5 percent, annualized, trouncing once-celebrated stock market funds like Fidelity Magellan and even that old standby, the Vanguard 500 Index fund.

Yet Mr. El-Erian, a former I.M.F. official and an admired economic thinker, is increasingly becoming the public face of Pimco — a one-man marketing machine for the company, its views and its agenda. Last week, for instance, as Spain’s financial troubles shook world markets, Mr. El-Erian was once again in Europe — he declined to say where — assessing the situation. In an e-mail, he said things in Europe would get worse before they got better.

Still, the question on many minds is whether Mr. El-Erian, who previously made headlines with a brief — and somewhat controversial — run as the investment chief of Harvard, can possibly replicate Mr. Gross’s success.

Mr. Gross, who made his first serious money at blackjack tables in Las Vegas, relishes high-stakes bets. He doesn’t simply sit back and clip bond coupons; he trades, and trades well. Mr. El-Erian, by contrast, tends to be more deliberate and cerebral, a big thinker who likes to fly in the rarefied circles of global economic policy making.

“Mohamed is my heir apparent,” Mr. Gross said in the joint interview, which took place earlier this year at Pimco’s headquarters here. “He is more conservative than I am. I am the risk taker.”

And yet Mr. El-Erian has quietly moved away from sharing power with Mr. Gross and William S. Thompson Jr., who retired not long ago as co-C.E.O. Pimco, which oversees $1.8 trillion in assets, quite simply is Mr. El-Erian’s to lose.

“He is the succession plan for Bill,” Marilyn Cohen, who runs Envision Capital Management in Los Angeles, says of Mr. El-Erian and Mr. Gross. “I think it has worked masterfully. They have doubled-clutched it together or singularly.”

Not everyone is so enthusiastic. While Mr. El-Erian has years of experience at the I.M.F. and Pimco, some people wonder if he can successfully navigate the world’s increasingly tumultuous bond markets. Unlike Mr. Gross, Mr. El-Erian isn’t a trader by nature.

“Why would somebody with so little bond trading experience be in line for the top job?” asks Sylvain R. Raynes, a co-founder of R & R Consulting in New York, which helps investors measure risks associated with bond investments. “There are other candidates who are less flamboyant.”

Others go further. An investment executive who manages money for endowments says he is comfortable keeping funds at Pimco as long as Mr. Gross is around.

“I think once Bill is gone, we take our money away immediately,” says the executive, who spoke on the condition of anonymity so as not to jeopardize his relationship with Pimco.

But given Pimco’s growth in recent years, assessing the big economic picture — Mr. El-Erian’s purview — seems to matter more than ever. Questions of macroeconomics will have a bigger effect on a fund’s performance than the particular bonds a manager picks, says Eric Jacobson, director of fixed income at Morningstar.

“El-Erian’s expertise is more as a macro thinker,” Mr. Jacobson says.

ON most mornings, Bill Gross wakes early at his beachfront home in Laguna Beach, south of here, and is on Pimco’s trading desk by 6 a.m. He says he is working harder than ever and has no plans to retire anytime soon. Mr. El-Erian, he says, has energized Pimco — and him.

Mr. Gross once used to work in a little golf in the afternoons and then return to his office. Not anymore.

“You can’t help but be affected by someone who comes in at 4:30 a.m. when you are coming in at 5:30 or 6 and not know that there is an example that is being set,” Mr. Gross says of Mr. El-Erian as the two sit at a round table in Pimco’s offices.

“To some extent, I wish that I could go over and hit golf balls like I used to at 3:30, but I have not hit balls in three and a half years,” Mr. Gross says. “Mohamed did not tell me not to hit balls, but his behavior basically said that this is a different company moving at a faster pace.”

For all the buzz surrounding Mr. El-Erian inside and outside of Pimco, his track record for managing money is mixed.

From 1999 to 2005, as head of Pimco’s Emerging Markets Bond fund, Mr. El-Erian turned in an impressive annualized return of 18.4 percent, about 3 points ahead of the competition. He turned heads with a bold call on Argentina in 1999, when Pimco, alarmed by the outlook for that country, dumped its holdings of Argentine bonds. Two years later, Argentina defaulted, and bondholders lost big.

Mr. El-Erian attracted more headlines during his time atop Harvard’s endowment.

In 2006, he left Pimco to take over the university’s $26 billion fund. Though it did well under his management, he quit after less than two years and returned to Pimco. The endowment subsequently faltered, and several experts on endowments criticized what they called an abrupt departure and attributed some of the fund’s subsequent problems to his investment strategy.

Mr. El-Erian said that he “cannot speak to how the endowment was managed after I handed over the reins.”

Since 2009, aside from his broad management responsibilities, Mr. El-Erian has also been a co-manager of Pimco’s $5.4 billion Global Multi-Asset Fund, which is made up of other Pimco funds. Its performance has been relatively lackluster. That has also been the case at the $4.7 billion Global Advantage Strategy Bond fund, which he oversees with two other money managers.

Mr. El-Erian, who often speaks in the language of finance, says Multi-Asset delivers “upside while hedging against sharp losses,” while Global Advantage offers access to a “global investment set.” While both underperformed its peer group over the last three years, Morningstar continues to recommend them.

Certainly, Mr. El-Erian has an unusually sophisticated background, starting with a peripatetic childhood.

He was born in New York City. His father was a law professor at Cairo University. The family moved to New York when the elder Mr. El-Erian took a post at the United Nations, and then to Paris when he was named Egypt’s ambassador to France. In 1973, the family moved yet again, this time to Geneva, where Mr. El-Erian’s father took part in peace negotiations involving the Arab-Israeli conflict. Mohamed El-Erian later studied economics and eventually took a job at the International Monetary Fund, where he spent 15 years. He rose to become deputy director of the Middle Eastern department.

Featured

Contact Bonds

  • CNBC NEWSLETTERS

    Get the best of CNBC in your inbox

    › Learn More