Pimco Rises Under a New Team at the House That Bill Gross Built
(Bloomberg Markets) -- The sun hasn’t yet lit up the California sky when Daniel Ivascyn and Emmanuel “Manny” Roman join each other at side-by-side desks on the 20th-floor trading room of Pacific Investment Management Co. From their aerie overlooking a luxury shopping mall in tony Newport Beach, the pair brace for another grinding day in the market. Together, they are in charge of the $1.77 trillion fixed-income colossus built by Bill Gross, the vaunted “Bond King.” But things are different since Gross decamped four years ago, pushed out in an awkward coup. For one thing, the era of one-man rule is over, replaced with a partnership whose approach is far less monarchical.
Teamwork is the new way at Pimco, and that’s evident right at the top. Whereas Gross once ran the show, Ivascyn and Roman embrace their shared responsibilities. Ivascyn is head of investing while Roman, as chief executive officer, runs operations. They each do different jobs, yet they somehow manage to do their different jobs together as one. And the message they signal by their proximity on the trading floor, like roped-together mountain climbers, is the importance of mutual respect and co-dependence. “It’s a shift in mindset,” says Ivascyn, 48, during a rare joint interview with Roman. He’s not just speaking about the seating arrangement. In his French-accented English, Roman, 54, chimes in, “I don’t think there’s a single important decision we don’t make together.”
Ivascyn hails from Boston, still roots for the Red Sox, and has a fondness for the Polish sausages his grandmother used to make. He’s best known over the last decade for co-managing the $112 billion Pimco Income Fund. (The world’s largest actively run bond fund has outperformed 98 percent of its peers for the past five years.) He arrives every morning in his Tesla Model S after a six-mile ride from his 13,000-square-foot hillside mansion, then assumes the seat in the corner of the L-shaped trading floor he’s occupied since Pimco moved into this tower four years ago.
Roman, a native Parisian, never learned to drive. So for the last two years since joining the company, he’s been Ubering to the office from his oceanfront house with floor-to-ceiling windows perched on the rocky cliffs of Laguna Beach. While he’s primarily responsible for managing operations, Roman, often in a Hugo Boss cardigan and stylish slim black tie, begins the day by immersing himself in the markets, just like Ivascyn, whose style veers more toward button-down Oxford shirts, no tie, and rolled-up sleeves.
It’s tempting to see the two men as a clichéd odd couple. But their collaboration is more complicated. “Manny’s a real businessman,” says Scott Simon, a retired Pimco portfolio manager who sees both Roman and Ivascyn socially. “Dan is a great investor. Put the two together, and it works incredibly well.”
Something is clearly clicking. About 85 percent of Pimco’s funds have a three-year record beating their benchmarks. Ivascyn’s Pimco Income Fund attracted about $36 billion in new assets since the start of 2017 through April. Its international counterpart, the Pimco GIS Income Fund, reeled in more than $48 billion over the period. The firm’s total assets have increased by $300 billion, growing each of the five quarters since Roman joined in November 2016 from London-based Man Group Plc. “It’s great to have a good year like we did in 2017, but the reality is it was a low-degree-of-difficulty year,” says Ivascyn. Those kinds of numbers may be hard to keep going now that interest rates are rising and bond prices falling, but Ivascyn and Roman vow they’re up to the task. “Our clients,” Ivascyn says, “rely on us as active managers to navigate difficult periods on their behalf.”
Ivascyn and Roman are writing the latest chapter in one of the great sagas of the fixed-income industry. What started out in 1971 as a unit of Pacific Mutual Life Insurance Co. grew into a powerhouse using an investing strategy pioneered by Gross: make money from both bond-interest payments and active bond trading. In 1987, Gross launched the Pimco Total Return Fund, offering retail investors a mutual fund that delivered near-equity-like results during rising stock markets as well as the downside protection of bonds when stocks fall. By the 1990s he became a celebrity money manager, mentioned in the same breath as Warren Buffett and Peter Lynch. In 2010, Morningstar Inc. named him fixed-income manager of the decade, declaring: “No other fund manager made more money for people than Bill Gross.”
But soon all was not well at Pimco. Many of the talented money managers lured there by Gross’s prominence bristled at his sometimes imperious temperament. Gross, in turn, tried to oust those he suspected of disloyalty. When executives at Pimco and its parent, Allianz SE, threatened to fire him for his workplace conduct, he quit, leaving a handwritten note of resignation dated Sept. 26, 2014, at 6:29 a.m., one minute before the New York markets opened.
Pimco’s executive leadership elected Ivascyn as CIO the day Gross quit, a sudden exit that prompted investors to pull more than $350 billion. Even as Ivascyn proceeded to preside over market-beating returns, he and other Pimco executives decided they needed an infusion of talent to refresh the firm’s marketing, products, and client relations. In 2016 they turned to Roman. “Someone says you can go and play for the Red Sox or the Yankees,” Roman says (he credits Ivascyn for teaching him such knowing baseball talk). “You get that phone call once in your life if you’re lucky, and you want to know if you’re good enough.”
Roman made his name ramping up Man Group, the world’s largest publicly traded hedge fund firm. He executed a series of acquisitions at Man while also embracing new technology, data gathering, and quantitative analysis. At Pimco, Roman’s focus has shifted to luring top tech and finance talent to give the bond trading giant a new edge.
In February, Pimco hired Dirk Manelski as chief technology officer from JPMorgan Chase & Co. It put Keami Lewis, a human resources professional formerly with the New York Times newsroom and Facebook Inc., in charge of talent and organizational development in March. And in April it announced four new portfolio managers in quantitative equities, agricultural commodities, high yield, and Asian fixed income. The number of investment professionals has climbed to more than 725 from about 650 when Roman started. The Pimco website listed more than 130 job openings on May 1.
Perhaps the most striking sign of Pimco’s push—and Roman’s role in it—is the decision to open a new office in Austin later this year. About half of the 200 people there will be tech specialists, according to Roman, with others in marketing, wealth management, and operations. “It’s difficult to recruit tech people in New York and Newport,” he says.
Roman knows what it’s like to pick up and move. Pimco’s sunny California-bred ambiance is far from the mostly slate-colored skies of his youth in Paris. An only child to artist parents, Roman grew up in an apartment with books lining the walls. His father’s paintings, he says, were influenced by Freudian psychoanalysis as well as the style of Balthus. Dinner conversations veered toward the austere and intellectual. There was no TV. But there was a little white Grundig radio. Roman would listen to it for hours, tuning in to sportscasts of his beloved soccer club, Association Sportive de Saint-Etienne Loire. “Football,” he says, “was a way for me to escape.”
It wasn’t his last escape. After earning a bachelor’s degree from the Université Paris-Dauphine, Roman moved across the Atlantic to earn an MBA from the University of Chicago, then landed a job at Goldman Sachs Group Inc. His mentor was Robert “Coach” Mnuchin, father of the current U.S. secretary of the Treasury and the person he credits with nicknaming him “Manny” because, he says, “Emmanuel” was too difficult to pronounce. Roman spent 18 years with Goldman, rising to co-head of the European equities division. In 2005 he jumped to GLG Partners Inc. as co-CEO of the New York-based hedge fund group.
Five years later, Man Group bought GLG for $1.6 billion. But a few years later, many investors bailed after a stretch of management missteps and mounting losses, leading to the ouster of its CEO in 2012. Roman got the job, and his first move was to write down almost half the value of the GLG purchase. Inflows resumed at Man, and the stock more than doubled in price during Roman’s first two years.
Outside the office, Roman, a yoga practitioner, is a bit of a renaissance man. He added an award—the Man Booker International Prize for a single book translated into English—to the distinguished literary competition sponsored by his company. He serves on the boards of the University of Chicago, the Paris Review, and the Tate Foundation, which oversees some of Britain’s most prestigious museums. He’s a wine connoisseur whose favorite place in the world is Flagey-Echézeaux, a Burgundy village where the tradition of grape cultivation and winemaking dates back almost 1,000 years. Since joining Pimco, Roman has developed an appreciation for certain California vintages, mainly pre-1990 cabernets by Caymus, Beringer, and Heitz. “We bought some old Caymus from the ’80s. God, was it good.”
One of Roman’s first tasks as CEO was settling a lawsuit Gross filed in 2015, claiming wrongful termination. Gross, who took home about $300 million in 2013, accused Ivascyn of leading a “cabal” of executives who plotted his ouster so they could take a bigger share of the company’s bonus pool and boost revenue by pushing high-fee products on clients. Pimco denied the allegations. “By suing the investment management firm where he made his career, Mr. Gross seeks to salvage a personal legacy that he undermined with his own self-destructive behavior during his final year at Pimco,” the firm said in its response to the lawsuit.
Roman knew the company needed to move swiftly to put this dispute behind it. In March of last year he agreed to a payment of $81 million, which Gross pledged to give to charity. The company also dedicated a founders room at corporate headquarters to Gross and other leading Pimco lights from the past, their names emblazoned on one wall. “Pimco has always been family to me, and, like any family, sometimes there are disagreements,” Gross said in a statement at the time. “I’m glad that we have had the opportunity to work through those.”
Well, not entirely. Ivascyn says he has nothing but respect for Gross’s investments at Pimco. There’s less to admire in Gross’s performance at the $2.2 billion Janus Global Unconstrained Bond Fund, which Gross took over after leaving Pimco in 2014. In April, Ivascyn sent an email to Gross that included a mention of the fund’s lackluster results, saying Gross may be handicapped without Pimco experts to rely upon. “Your recent performance was not as good,” Ivascyn wrote in the email. “Your long-term performance was exceptional, no question about it. Would guess it is harder without the strong team behind you.” The message from Ivascyn infuriated Gross, whose lawsuit said Ivascyn was “foremost” among the group who sought his ouster from Pimco “for their own personal financial benefit and egos.”
Others who’ve worked with Ivascyn paint a more favorable picture. “Dan’s an easy guy to work with,” says Doug Hodge, Pimco’s CEO before Roman. “He’s super humble,” Roman says. “We sat face-to-face for 13 1/2 years,” says Simon, who managed mortgages and asset-backed securities with Ivascyn from 2000 to 2013. “The star system doesn’t make sense to him. It’s a lot easier, if you have 10 smart guys pulling in one direction. It works a lot better than one guy pulling in one direction.”
If Roman’s job is to find tech talent, Ivascyn’s is to put it to use to enhance investing performance. Think of it as the investing world’s equivalent of automobile technology. Pimco isn’t trying to build the financial equivalent of a self-driving car. Instead, the firm is using technology to help portfolio managers avoid costly accidents and make more money than the other guy. Risk managers already are refining analytics tools to integrate themselves more deeply into portfolio teams. The goal is to use technology to recognize tendencies of individual money managers who may hold losers too long or sell winners too soon, Ivascyn says.
A big-data and artificial intelligence project headed by Mihir Worah, who before joining Pimco worked as a theoretical physicist specializing in antimatter at the Stanford Linear Accelerator Center, is mining Pimco’s internal records dating to its inception to track pricing, size, and the timing of each trade. Pimco is already using the research to identify patterns that affect returns, such as rising defaults or prepayments in mortgage-backed securities. “It’s all about getting an edge on forecasting,” Ivascyn says.
The son of a school superintendent and a nurse, Ivascyn remains loyal to not just his Boston sports teams but also to his hometown cuisine. For him, there’s nothing better than a bowl of Maine steamer clams or a lobster roll from the Black Cat Tavern in Hyannis, Mass. Like Roman, Ivascyn would fall asleep as a boy while listening to the radio. But instead of soccer, he’d tune in to Bruce Williams, a talk show host specializing in personal financial advice. Williams’s discussions about real estate, inflation, and the stock market first sparked Ivascyn’s passion for investing. “Bruce Williams had the most soothing radio voice in the world,” Ivascyn says. “I used to be a bit of a nerd, a little bit of a weird kid.”
He headed west to attend Occidental College in Los Angeles, followed by an MBA at the University of Chicago, then stints at Fidelity Investments, T. Rowe Price, and Bear Stearns & Cos., where he became a mortgage specialist. Ivascyn moved to Pimco in 1998 as a portfolio manager of mortgage- and asset-backed securities. He was almost let go two years later in a wave of job cuts that followed the firm’s sale to Allianz. Simon intervened, telling their boss that he wouldn’t let him get rid of Ivascyn. “He worked his butt off,” Simon says. “He was supersmart. Pretty much everything he said was smart or right.”
Ivascyn, along with Simon and Jenn Bridwell, led the expansion of Pimco’s private funds, which include hedge funds, distressed credit, and private equity-like corporate investments with more than $30 billion of assets. Ivascyn began the Income Fund in 2007, which has consistently wed benchmark-beating returns to low volatility, a performance attributed to a shrewd mix of mortgages, Treasury bonds, currencies, credits, swaps, and other derivatives. It averaged 9 percent returns over the 10 years through April, outperforming 94 percent of peers in 2014, 98 percent in 2015, 88 percent in 2016, and 97 percent last year.
Pimco’s investing division kept its footing after Gross left, but Ivascyn and others there saw the need for new leadership on the firm’s business side. What’s more, Hodge was feeling ready for a change after all the drama and stress surrounding Gross’s departure. When a search committee proposed to Roman that he interview for the Pimco CEO job, what he knew about the firm came mainly from news reports of its remarkable investing record and, of course, Gross’s acrimonious ouster. “I understood why I could be the right guy,” he says. “The question was: Did I like the people? Did I trust them?”
Roman had never set foot in Newport Beach until he flew out in May 2016 and met Ivascyn at the Balboa Bay Club, a local landmark where Hollywood legends such as John Wayne, Humphrey Bogart, and Lauren Bacall would board yachts sailing for Santa Catalina Island. Ivascyn and Roman opened their interview by discussing their big-picture vision for asset management, the challenges for active managers to outperform indexes, the pressure to reduce fees, and the rise of computer-assisted trading. The conversation shifted to their personal histories, including their common MBAs from the University of Chicago, where the curriculum was dominated by the behavioral economics theories of future Nobel Prize winners Eugene Fama and Richard Thaler, both of whose research probed how human tendencies such as risk aversion and confidence bias lead investors astray.
Looking back to that day at the Balboa Bay Club, Roman says, “We have this view, both of us, that markets are mostly efficient, so it’s hard to make money. We both thought that if you wanted to run a top-rated organization, you need to find a way to make intelligent decisions.” Something else they concurred on was that Pimco, which under Gross attempted several times to broaden into equities without much success, should build on its core competency, bond management. And winning: They agreed on that, too. Glancing at Ivascyn during their joint interview with Bloomberg Markets, Roman says, “We agreed on one thing right away. And that was that we’re going to be the best in fixed income and we’re not going to try to be all things to all people.”
Toward the end of their first meeting, Roman jotted down a few points on a notepad and handed the slip of paper to Ivascyn with his terms for taking the job. There was no mention of performance incentives or relocation costs or other matters that often bog down hiring negotiations. “Either we trusted each other—and it wasn’t about reading a detailed contract—and we said we’re going to work together, or there was no point in doing it,” Roman recalls. “We just shook hands, and we were done.”
Gittelsohn covers investing for Bloomberg News in Los Angeles.
©2018 Bloomberg L.P.