Pimco Manager’s Selective Bets Have Paid Off

Fresh out of college, Bill Gross parlayed $200 into $10,000 at the Las Vegas blackjack tables, and he lives on Monte Carlo Drive in Laguna Beach. Sound like the kind of guy you’d want handling your investment portfolio?

In fact, William H. Gross--Ohio native, Vietnam veteran, Duke University undergrad, UCLA MBA--has become one of the nation’s most trusted asset managers. Using shrewd bets on the bond markets since the early 1970s, Gross has built Pimco Advisors Holdings of Newport Beach into a mutual fund group with $250 billion in assets.

Gross, who declined to comment Wednesday about the company possibly being acquired by German insurance giant Allianz, has attributed his success to monitoring frequently overlooked economic indicators such as rail shipments, raw steel production and the help-wanted ads.

“I try to look for anything the market isn’t looking at,” Gross said in a 1997 interview.

Gross, 55, who lives in a gated development in Laguna Beach, was named fixed-income manager of the year for 1998 by Morningstar Inc., the Chicago mutual fund tracker, which said he and Pimco have prospered “by making plays on undervalued sectors.”

Many bond managers limit returns by sticking with a few investment types, while others take risky plunges into low-quality bonds, Morningstar noted. But Gross, it said, “has gained an edge by making small, selective plays on undervalued areas of the market, such as foreign bonds, high-yield issues and adjustable-rate mortgages.”

Pimco’s flagship Total Return Fund has ranked in the top half of bond funds for 11 years straight, said Russ Kinnel, editor of Morningstar’s mutual fund coverage. “And his funds are not only well-run but low-cost,” Kinnel said.

Achieving such high returns from an essentially conservative approach is the most impressive thing about Gross, Kinnel said. “A lot of people who appear to be bond geniuses later turn out to have just been making huge bets that blow up in the end.”

Despite his success in a tough field--his stake in Pimco is worth more than $22 million--associates say the reed-thin Gross has retained a small-town, soft-spoken attitude in his approach to business and the world.

“He’s not the typical Wall Street guy who’s so full of himself that you get turned off,” said Raymond Watson, who spent 22 years on the board of Pacific Mutual Life Insurance Co., where Gross began his financial career. Pacific Mutual created Pimco in 1971, and under Gross it soon became a major profit center for the insurer, which retains about 33% of the fund company.

“He doesn’t say, ‘I know what the bond market will do,’ ” Watson said. “It’s more like, ‘Here’s what I believe might happen--but I’ve been wrong before.’ ”

Gross and his fellow founders at Pimco, William Podlich and James Muzzy, proved a tough problem for Pacific Mutual in the early days.

For the first decade of Pimco’s existence, it reported weekly to the insurer’s investment committee. But with its increasing success, Pimco began demanding independence--and a piece of the profits.

“They didn’t want to ever come to committee meetings at the insurance company,” Watson recalled, praising then-Pacific Mutual Chief Executive Walter Gerken for eventually granting Pimco’s demands. “It was pretty revolutionary at the time.”

Gerken, still Pacific Mutual’s board chairman, also declined to comment Wednesday. In an interview last year with Institutional Investor, he said he reluctantly signed the contract in 1982 that gave Gross and the other Pimco managers autonomy and a quarter of its earnings--a percentage that later was dramatically increased.

“No CEO should have to go through this kind of negotiation more than once,” Gerken said. “But you didn’t have to be a rocket scientist to understand we didn’t have the troops to put into Pimco if they waltzed. The alternative was owning zero.”

For Gross, who is managing director of Pimco unit Pacific Investment Management, it was just another test of his faith in himself--a faith that surfaced clearly in the five months after he received his bachelor’s degree from Duke. He headed for Las Vegas, where he spent 16 hours a day counting cards at the blackjack tables--successfully enough that he wound up being booted out of several casinos.

Soon he joined the military, where as a “24-year-old, baby-faced naval officer” he wound up “sailing upriver near the Mekong Delta, delivering a cargo of Navy Seals at dusk and bringing them back to the mother ship at dawn,” he recalled in a recent column for Pimco’s Investment Outlook newsletter.

“I sweated bullets, even if I didn’t fire many, and there was blood on my hands in a figurative if not a literal sense,” he wrote.

Saying that “the masses will always trudge behind in blind obedience to a leader commanding a jingoistic headline,” he suggests that the huge flow of money pouring into the bull market for stocks will one day seem as big of a herd-mentality mistake as Vietnam.