Fixed IncomeSep 29 2014

Market risk as Pimco’s Gross quits for rival Janus

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ByBradley Gerrard and Matthew Jeynes

The departure of the world’s biggest bond fund manager, Bill Gross, from Pimco raises the threat of a liquidity shock in global fixed income markets, experts have warned.

If Mr Gross’s former employer is forced to sell holdings rapidly as investors pull out of his funds, which include the $221bn (£136bn) Total Return fund, the vast scale of transactions could lead to a breakdown in normal market dynamics with global knock-on effects.

The fund has already fallen sharply in size in recent months, as this year began with a public spat between Mr Gross and Pimco’s former chief executive Mohamed El-Erian, who left the firm in March.

Ryan Hughes, multi-manager at Apollo Multi Asset Management, said the bond market was already facing “interesting times” of low liquidity and Mr Gross’s move would have a “big impact”.

“Everyone knows Pimco will be a seller and once the market gets a sniff, pricing will be very difficult,” he said.

“People on the other side of the trade will bid them down and we could see prices across the board being affected because they may become a forced seller.”

Mr Hughes predicted the outflows “won’t be a slow trickle but will be fast and painful”, meaning the company might have to quickly sell its most liquid holdings and be left with troublesome illiquid holdings.

SVM Asset Management’s Colin McLean said the US high yield market was “not looking great even before Bill Gross’s exit from Pimco”.

“It could be a tough time to liquidate,” he added.

Brewin Dolphin’s head of research Guy Foster said Mr Gross was a manager on funds “which are mostly very liquid, and some unconstrained mandates.”

He said: “Some 60 per cent of the Total Return fund’s holdings are US government or agency securities.

“Investors should not be concerned with the fund’s ability to manage large withdrawals as a result of this announcement.”

However, he said there was “a risk of large withdrawals” in Pimco’s other less liquid funds and it was “difficult to judge how the market is going to cope”.

“We aren’t yet seeing any meaningful reaction in credit which is where the biggest risk would lie,” he said.

Chris Bowie, fixed income manager at TwentyFour Asset Management, was cooler on the prospect of immediate bond-market chaos.

He said such an issue would be unlikely to emerge in the first few weeks after the departure, but if there were “sustained outflows, then forced selling could lead to liquidity issues”.

“There is already a bit of nervousness in the bond market so this could be a catalyst, but I don’t think it will be an issue immediately,” he added.