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Net Net: Promoting innovation and managing change

Gross running Janus? 'That's not going to happen'

Bill Gross

Talk about a big fish in a small pond: Bill Gross cast a long enough shadow at Pimco, something only exacerbated by his move over to Janus Capital.

In September, the so-called Bond King left Newport Beach, California-based Pimco, with its $1.9 trillion under management and the biggest bond fund in the world, for much smaller Janus, a $178 billion firm nestled in a leafy, slow-paced section of Denver.

By now, all of Wall Street knows the ensuing headlines well: Gross departed Pimco under a cloud of controversy, reportedly about to be fired after a two-year stretch of underperformance and investors flocking for the door.

A wave of speculation followed: Was Gross through? Had not only Pimco management but also fixed income investors tired of his eccentric ways, including the cryptic, opaque messages he delivered in monthly letters to clients that only seemed to magnify how he had lost his magic touch when it came to reading the tea leaves of the bond market? Would he be able to regain his mojo?

But while the rest of the investing world was contemplating Gross' demise, folks over at Janus were salivating over the chance to get someone justifiably regarded as an investing legend into the stable.

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While such a reaction would be normal from CEO Richard Weil—a longtime Gross pal—it wouldn't be unusual for other senior managers to view the sudden entrance of someone so high profile with trepidation.

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Not so, though, at least as far as could be told from a recent interview with several high-ranking Janus officials at their home office. The atmosphere, on the surface at least, is welcoming and enthusiastic.

"There's a lot of good that comes out of this," said Gibson Smith, the firm's gregarious CIO of fixed income whose position would seem most vulnerable to the new kid on the block. "The most important element is that it shines more light on us and what we've done. We've got a very strong and consistent track record. We're highly competitive versus virtually anyone else in the fixed income space."

Of course, that sort of company-line talk is exactly what you'd expect someone in Smith's position to say.

But he seemed genuine in discussing the benefits of Gross' arrival. He recalled the first time Weil approached him about what then seemed a purely theoretical chance of Gross joining the firm.

Two weeks later, he was with Janus, and Weil and Smith had a heart-to-heart.

"Dick and I sat down and talked about what this would look like. Dick was very direct in not disrupting the business we built," Smith said.

Gross was brought in to run a new vehicle Janus had launched—its unconstrained fund, which would, as its name implies, be able to focus on a variety of investment areas and risk objectives.

"We had just launched the unconstrained product. In the process of building the portfolio, we wanted to create a vehicle that investors could get to Bill with," Smith said. "Bill was very gracious. He said, 'I don't want to be disruptive.'"

Gross does not work at the main Janus office in Denver, preferring to remain in Newport Beach, where he was accused of exhibiting an autocratic style while running Pimco. Critics say he wasn't one to brook discontent, and he eventually feuded with former CEO Mohamed El-Erian.

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Such drama isn't likely at the Janus offices, for a variety of reasons.

"He's going to manage the unconstrained product in the way that he manages money, and (with) his views on the market," Smith said. "We're going to manage our business the way we manage our business—bottom-up fundamental, versus top-down macro for him."

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"Will there be times for us to talk markets and share ideas? Quite possibly," he added. "Is Bill going to set the macro backdrop and everyone has to invest it? No, that's not going to happen."

That may sound a bit territorial, and Smith insisted the philosophy is, indeed, to run "two disparate businesses, and let them flourish."

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"I really am excited to have him here and to be able to have conversations with him and tap into him. It's good for Janus, it's good for the overall company. I think it will be good for Janus' fixed income business," he said. "But it may be that Bill has different views on the market and different views on the economic outlook."

Investors so far have left little doubt on their feelings about the Gross-to-Janus move.

The flagship Pimco Total Return fund lost $50.2 billion in September and October, the largest-ever outflow for any fund over a two-month period, according to Morningstar. The fund, which once boasted nearly $300 billion in total assets, has shrunk to $170.9 billion.

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At Janus, money has been moving in the other direction.

The firm overall saw $1.1 billion in new cash for October, and the unconstrained fund took in $364 million during Gross' first month, bringing its total assets to $442.9 million, though its return has been a loss of 0.46 percent.

Smith said he sees Gross helping Janus take down the big boys.

"We're very conscious of how we're doing against the rest of the field," he said. "I don't think you're going to find a more competitive team than what we've assembled here. It's not about beating Pimco, it's about beating everyone."