The Icarus-like career of a Bond King

In the early 1970s, when Bill Gross joined the bond department of Pacific Mutual Insurance Company, bonds were not traded. They sat idle in vaults. Institutional investors were happy to receive just the interest payouts and the principal. The only thought that went into buying them was to ladder their maturities so that the principal flowed back at regular intervals.

In those days, bond trading was deemed too risky and most institutional investors were averse to it. A trader named Howard Raykoff pitched the idea of bond trading to Mr Gross’s boss. The 1970s were a period of high inflation. Bonds were losing value as they sat passively. The idea of eking out some extra return through trading appealed to Mr Gross’s superiors. They formed a small cell to try out the idea and gave it a $5 million corpus. After a few hiccups, the bond traders led by Mr Gross began to make money. That small cell within the insurance company eventually mushroomed into Pimco, which currently has around $2 trillion asset under management (AUM).

Mary Childs, a financial journalist who covered the firm for several years, has written a fascinating account about the rise and fall of its founder.    

While Mr Gross already had an admirable track record, the financial crisis of 2008 catapulted him into the league of legends. In 2006, he concluded that the housing market was overheated. He invested in long-term bonds to profit from the times when the US Federal Reserve would eventually cut interest rates. Mr Gross’s call, while correct, was made early. For over a year, his Total Return Fund lagged peers. It was only from the latter half of 2007 that mortgage delinquencies began to rise, mortgage-backed securities lost value, and giants like Bear Stearns and Lehman Brothers eventually imploded.   

As the stock market crashed and the credit market seized up in September-October 2008, and many financial industry titans lost their track records, AUM, and reputations, Mr Gross emerged the knight in shining armour. Clients could not help but marvel at the fact that not only did Pimco protect them from downside risk, it even produced handsome returns amid all-round carnage. Money poured into his fund. Morningstar bestowed the ultimate accolade of declaring him the Fixed-Income Manager of the Decade.

Fund management, however, is a field that makes even legends eat humble pie. In 2011, Mr Gross decided to exit treasuries. His logic seemed impeccable. Treasury yields were low, and they were supported by the Fed’s purchases. But what would happen once the Fed stopped buying them? Yields were bound to shoot up.

Fate, however, intervened. The Greek debt crisis erupted. As its ripple effects spread across the Atlantic, capital fled into US treasuries, the ultimate safe-haven asset. Instead of rising, yields softened. Mr Gross’s call went horribly wrong. His Total Return Fund lagged peers and even witnessed outflows. His aura of invincibility was dented.      

In addition to these hits and misses on the investment side, Ms Childs captures the dark side of Mr Gross’s personality—his perennial insecurity, his tendency to humiliate senior colleagues publicly, and the relentless pressure he applied on employees. Whenever the Total Return Fund underperformed, Mr Gross’s mood soured and his employees steered clear of him.

In 2007, as part of the firm’s succession planning, Mohamed  El-Erian, who was then managing Harvard’s endowment fund, was hired as co-chief executive officer and co-chief investment officer of Pimco. The relationship soured soon. The larger-than-life founder was unwilling to relinquish control. Mr Gross’s regular U-turns on strategy, his loose cannon-like conduct, and his outrageous pronouncements in public ultimately led to Mr El-Erian exiting.

Instead of abating, the turmoil at Pimco grew worse. Mr Gross’s colleagues came to regard his erratic conduct as a threat to the firm. In 2014, they ousted him. The co-founder was forced to seek refuge in a smaller money management firm called Janus Capital.

Alice Schroeder and Roger Lowenstein’s landmark biographies helped install Warren Buffett in the pantheon of great investors. In due course, Ms Childs’ work is likely to do the same for Bill Gross. Her book is a must-read for anyone interested in money management, especially the bond side of it, where perhaps no person other than Howard Marks enjoys such an exalted status. She has captured the roller-coaster nature of a money manager’s life well.

At the same time, the author is not enthralled by her subject. She doesn’t shy away from the responsibility of portraying how a surfeit of money and fame can warp the human personality.

If there is one lesson readers should take away from this book, it is that however much money a person may earn for his clients and employees, he also needs to observe a modicum of propriety in public life. The price he could otherwise end up paying could be far higher than imagined.