Executives at Pacific Investment Management Co. hit the phones
Monday in a campaign to persuade clients to stick with the firm,
even as Wall Street traders placed bets against its holdings,
seeking to exploit the sudden departure of co-founder Bill
Gross.
Pimco executives, among them Chief Executive Douglas Hodge and
the firm's new portfolio-management team, hosted a string of calls
with financial advisers at Wall Street firms, including Merrill
Lynch and Morgan Stanley, to explain why the firm will thrive
despite Mr. Gross's exit, according to people familiar with the
matter.
"We're energized, we're prepared and we're strong," Mr. Hodge
said to a group of Morgan Stanley financial advisers Monday
afternoon on a teleconference, according to a person familiar with
the matter.
In Miami, Pimco Executive Vice President Joseph Deane had been
previously invited to talk to a gathering of about 300 Morgan
Stanley advisers about fixed-income markets. Instead, after a
question from a financial adviser about how Pimco was handling Mr.
Gross's departure, he made the case that they should remain loyal
to the firm because Pimco has smarter employees than those at
rivals, according to a person in attendance.
A spokesman for Pimco declined to comment.
Billions of dollars are at stake as Pimco fights to maintain its
position as the largest bond manager in the world. If rivals can
persuade clients to flee, the bond world would be reordered, Pimco
would see its star dim and new powers would emerge as billions of
dollars of assets are reallocated.
The Securities and Exchange Commission, the Financial Industry
Regulatory Authority and other regulators also are talking to Pimco
executives and other mutual-fund managers, hedge funds and
exchanges about how Mr. Gross's exit might cause instability in
financial markets, particularly if investors pull large amounts of
money from Pimco's funds, according to people familiar with the
matter. A Finra spokeswoman said the regulator is "always concerned
when there is the potential for a marketwide issue" and that it is
monitoring how the market might be affected. A representative for
the SEC declined to comment.
Over the weekend, large asset-management firms sent a barrage of
emails to financial advisers touting their own products, citing the
turmoil at Pimco as among the reasons investors should move their
money, according to people who have seen the appeals. On Friday and
Monday, some asset managers including J.P. Morgan Chase & Co.
and TCW Group Inc. said they began seeing new investments from
Pimco clients, including large institutions, according to these
people.
Consultants to pension funds and advisers asked Pimco's rivals
if they could handle large amounts of money taken out of Pimco,
according to some of those involved in the talks.
Some clients are still deciding what to do. Morgan Stanley's
financial advisers have withdrawn less than 20% of their clients"
money from Pimco funds, said a person familiar with the firm and
its plans. A decision on whether to stop sending the funds new
money will be made "within days," this person said.
Meanwhile, some hedge funds are trying to profit by shorting, or
wagering against, some of the largest holdings in Pimco's Total
Return fun, the $222 billion mutual bond fund that was run by Mr.
Gross. The traders could profit if clients continue to withdraw
money from Total Return or from other Pimco funds, forcing the firm
to sell these investments to raise cash to hand back to the
clients. The hedge funds also could score gains if the new managers
of the Total Return fund have a view that is different from Mr.
Gross's and decide to change the fund's holdings by selling some of
Mr. Gross's favorite assets.
On Monday, The Wall Street Journal reported that Pimco suffered
roughly $10 billion of withdrawals following Mr. Gross's departure.
The Newport Beach, Calif.-based firm, which is a unit of German
insurer Allianz SE, oversees about $2 trillion.
"Investors are eyeing Pimco's closed-end funds, others are
looking through other filings, looking for any outsize positions"
that could weaken if investors flee from Pimco and the firm has to
sell holdings, said Sam Diedrich, a portfolio manager at Pacific
Alternative Asset Management Co., which invests in hedge funds.
Taking advantage of a weakened investment firm is an age-old
strategy on Wall Street. A struggling hedge fund often attracts
rivals eager to sell the fund's largest holdings, assuming the fund
will sell those positions and drive down their prices if it
closes.
This time, traders are focusing on large or illiquid positions
held by Mr. Gross, who on Monday started his new job overseeing a
$13 million fund for Janus Capital Group Inc.
Pimco has been a seller of credit-default swaps, or derivatives
that serve as debt insurance, on countries including China, Mexico
and Brazil, according to filings. Selling this insurance was a way
for Pimco to bet on bullish developments in those countries. With
Mr. Gross having departed, some hedge funds wagered the firm would
exit from those positions. That is partly why CDS contracts on
China, Mexico and Brazil have weakened in the past day or so,
traders say.
Other hedge funds are shorting closed-end mutual funds managed
by Pimco. The Pimco Corporate & Income Opportunity Fund and the
Pimco High Income Fund each fell about 4.5% yesterday after falling
on Friday.
Citigroup sent a note to its clients saying its "main concern"
is that Mr. Gross's departure "could cause outflows and result in
forced selling, " though the overall market likely won't be
affected.
While municipal bonds represent a small portion of Pimco's
holdings, according to Citigroup, some of the firm's holdings "are
large enough to cause substantial market volatility if sold over a
short period of time, " the analysts said, pointing to holdings in
a key index that tracks credit-default swaps, bonds issued under
the Build America Bonds program and those sold under the Tobacco
Master Settlement Agreement.
"In our view, investors should be fading," or selling, "any
potential move in most affected assets," Mikhail Foux of Citigroup
wrote in the report. "Pimco's closed end funds" and the
municipal-bond index "could be vulnerable to more downside."
Some investors are trying to take advantage of Pimco's weakness
by buying, not selling, Pimco's holdings. Rajiv Sobti, founder of
$1 billion New York hedge fund Karya Capital Management LP, is
buying high-rated corporate bonds from Italy and Spain that are
similar to those Mr. Gross's fund held and have met weakness since
Mr. Gross's departure.
"If [client withdrawals] continue to be $10 billion every day,
that's an issue," said Mr. Sobti. He said additional redemptions
would mean more potential weakness for those corporate bonds. He
said the new managers of the Pimco fund, however, may be just as
enamored of those Italian and Spanish bonds as Mr. Gross was, as
may funds receiving money from clients fleeing Pimco, suggesting
the weakness in the bonds may be short-lived.
"I don't expect this to be a long-lasting situation," Mr. Sobti
said.
Justin Baer, Corrie Driebusch, Rob Copeland, Juliet Chung and
Min Zeng contributed to this article.
Write to Gregory Zuckerman at gregory.zuckerman@wsj.com and
Kirsten Grind at kirsten.grind@wsj.com
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