By Svea Herbst-Bayliss
BOSTON (Reuters) - Mohamed El-Erian, heir apparent to Pimco co-founder Bill Gross, will step down as chief executive and co-chief investment officer, raising questions about the future course of Pacific Investment Management Co, the world's largest bond fund manager.
Neither the company, which announced the changes on Tuesday, nor El-Erian gave a reason for the departure, which comes at a time when many investors are turning their backs on the kind of bond investments Pimco is famous for offering. Customers withdrew $41.1 billion of money from Pimco's flagship Total Return Fund last year, a record amount for the $2 trillion manager, according to investment research firm Morningstar.
El-Erian, 55, had increasingly been Pimco's public face, appearing regularly on cable television and at industry conferences. Bill Gross, 69, who built Pimco over the course of decades into the colossus it is today, said two years ago that when he retired he expected El-Erian to take over.
On Tuesday, Gross tweeted "PIMCO's fully engaged. Batteries 110 percent charged. I'm ready to go for another 40 years!"
The departure reverberated around the investment industry where Pimco plays an outsized role. Jeff Tjornehoj, senior research analyst at Lipper, said "Mohamed El-Erian helped set the strategic direction of the company and it certainly makes a difference when someone who is used to making such headlines leaves a company."
He added: "We don't know what kind of impact it will have yet but it will have an impact."
Douglas Hodge, chief operating officer, will step into the chief executive role when El-Erian leaves the firm in mid-March, Pimco said in a statement. Gross, who shared the title of co-chief investment officer, will become the sole CIO.
Andrew Balls and Daniel Ivascyn, long seen as rising stars at the firm, will be deputy chief investment officers, positioning them for a possible promotion to the CIO spot when Gross retires.
El-Erian will remain a consultant at Allianz,
El-Erian himself sought to quell speculation that he would be the next Gross. Two years ago he told Reuters, "Bill's not going anywhere. I often joke that he will outlast me. I would be considerably worse off, in every single way, if Bill wasn't here."
A SECOND TIME LEAVING
Trained as an economist, El-Erian rose to a deputy director spot at the International Monetary Fund before moving to Pimco in 1999. In 2006, he became chief executive of Harvard University's investment arm, racking up a 23 percent gain in his first year on the job there.
Gross wooed him back to Pimco just before the financial crisis. Soon after he left Harvard, the Ivy League university's endowment tumbled 27 percent, a drop that some critics said El-Erian deserves at least some of the blame for.
In 2013, the $237 billion PIMCO Total Return Fund dropped 1.9 percent, its first annual loss since 1999 and its worst performance since 1994, according to fund data firm Morningstar. The performance beat just 40 percent of its peers, Morningstar data showed
The fund has underperformed the benchmark Barclays U.S. Aggregate bond index in just 7 of the 25 full years that it has existed, Morningstar data show.
For years, the Total Return Fund, managed by Gross, was among the industry's best performers. It has posted an annualized gain of nearly 8 percent since its inception on May 11, 1987. That period was marked by broad gains in bond prices as interest rates globally fell, but the fund also beat 97 percent of peers, according to Morningstar data.
As the news spread of El-Erian's departure, he emailed friends, including journalists, about his intention to leave, but failed to shed more light on the decision.
With El-Erian's departure, investors will shift their focus to Hodge and the two deputy chief investment officers.
Ivascyn joined Pimco in 1998 and is head of the firm's mortgage credit portfolio management team and a lead portfolio manager for Pimco's alternative investment strategies, Pimco said. Ivascyn and Alfred Murata, co-managers of the $29.9 billion Pimco Income Fund, won Morningstar's 2013 U.S. Fixed-Income Fund Manager of the Year award. The fund rose 4.8 percent last year, beating 82 percent of peers, according to Morningstar.
(Reporting by Svea Herbst-Bayliss, Jennifer Ablan in Davos, Switzerland, Sam Forgione and Luciana Lopez in New York and Edward Taylor in Frankfurt; Editing by Mike Collett-White and Jonathan Oatis)