Room for error

The huge news in the financial universe right now is that legendary “Bond King” Bill Gross, who founded and built PIMCO into the global leader of fixed income investing, has left for Janus funds.  Gross will be running an uncontrained strategy at Janus, and I imagine there will be other products launching behind that. The news was a shock to the industry and will be followed by much chatter and speculation about what is next for PIMCO and what may happen with Gross at Janus.

But investors in Gross’s funds, including the flagship PIMCO Total Return fund, are faced with a big question: what’s next?  Should they stick with the storied fund or follow after the legend to his new digs?  Perhaps it’s time to throw in the towel on 69-year-old Bill Gross and jump ship to so-hot-right-now Jeff Gundlach and his DoubleLine Total Return fund? Or does the old dog still have it? Investors who stick around PIMCO will very likely be in a mutual fund experiencing dramatic outflows, which adds a layer of difficulty and complexity to whoever takes the reigns.

This drama reveals one of the quietly difficult parts of choosing active managers for your stock or bond portfolio, whether with a single star manager or not.  Personnel changes at mutual funds happen every day as teams depart for greener pastures, managers retire, internal conflicts drive professionals from organizations and new talent rises from below.  We have to remember that there are living, breathing people behind these strategies who have lives, families, careers and egos. In an already complex investment world where we face market risks, economic risks, geopolitical risks, interest rate risks and inflation risks, is it worthwhile to add manager risk to the equation?

In addition the the overwhelming odds that the fees paid to the active manager will not result in better performance, there is the very real risk that your manager will jump ship, retire, quit, or just be distracted by divorce, personal finances, workplace politics and outside interests.  Even if your “star” manager is lucky enough to deliver on his performance promise, you could be faced with a difficult decision like many PIMCO investors have today. On top of the additional legwork and expense of searching for and hiring an active manager for part of your portfolio, the act itself adds a potential point of failure to your investment plan, on more thing that can go awry with your investments.

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