(By Eric Jacobson) Given the firm's size and footprint in the investor community, it's always news when someone leaves PIMCO. Some departures, like that of Paul McCulley
a couple of years ago, are especially noteworthy, though. In McCulley's case, it was a matter of the firm losing an important voice on its investment committee, which drives the macroeconomic decisions for all of PIMCO's funds. Still, it's worth noting that co-CIO Bill Gross seems to believe that investment committee member Saumil Parikh may be a key filler of the gap
The upcoming departure of PIMCO GNMA (PDMIX) manager Scott Simon will likely have a different impact. As the leader of a PIMCO specialist desk focusing on agency mortgage-backed securities, Simon isn't involved in the day-to-day machinations of the firm's investment committee. Moreover, a cursory look at the funds for which Simon has been a named manager doesn't account for all that many assets when viewed against the backdrop of PIMCO's enormous $2 trillion asset base. That said, his efforts have been key to the success of PIMCO and its funds over many years.
A Big Footprint
For one, an enormous portion of the firm's assets under management are almost always invested in agency mortgages. As of Dec. 31, 2012, for example, the number totaled approximately $258 billion. That includes a significant chunk of assets formally managed by other teams. However, the firm's design is such that nearly every agency mortgage in those portfolios has somehow relied on the input of Simon and his team.
Those allocations had a meaningful impact on performance across PIMCO portfolios. Take PIMCO Total Return (PTTRX), for example. Most recently the fund held some 35% in agency mortgages, but that number has on occasion been much higher. Manager Bill Gross' decisions to allocate money to the sector, meanwhile, have often been right on target. Over the past 20 calendar years, PIMCO data suggests that the fund's mortgage allocations have constituted a meaningful contribution to the fund's performance relative to its Barclays U.S. Aggregate bond benchmark in roughly 15 of them. That's pretty notable given that the Barclays U.S. MBS Index has beaten the Aggregate in only six of the past 20 years.
A Meaningful Impact
And while Simon hasn't been a generalist manager or permanent member of PIMCO's investment committee in recent years, there's good evidence that he has had an impact on the firm's macroeconomic decision-making. That was particularly apparent--and important--during the years leading up to the financial crisis. Beginning in 2005, PIMCO initiated a so-called Housing Project, with Simon's team playing a key role in its execution. The goal was to improve the timeliness of the firm's housing data and, thus, to more accurately predict turns in the housing market. Papers on the project were published prior to and in the early stages of the housing crisis. Meanwhile, PIMCO proved vigilant in minimizing its exposure to riskier mortgages and managed to curb the kinds of portfolio risks that befell many competitors during 2008. Furthermore, PIMCO's actions strongly suggested that Simon and his colleagues (including the leader of the firm's nonagency mortgage team, Dan Ivascyn, who runs PIMCO Income (PIMIX)) helped inform the firm's big-picture understanding of the housing market's economic impact. Not every PIMCO portfolio avoided the carnage of the financial crisis, but PIMCO Total Return did a better job than most peers at avoiding the worst of its damage. It turned in gains in both 2007 and 2008, while roughly 50 intermediate-term bond funds lost 10% or more during the latter.
A Deep Bench
The silver lining of Simon's departure is that he leaves behind a very large and experienced team, which includes PIMCO GNMA comanagers Dan Hyman and Michael Cudzil, as well the aforementioned Dan Ivascyn of PIMCO Income. The firm has lost high-profile managers before, and to PIMCO's credit, it has generally managed to backfill their openings with very capable replacements from within the organization. Notwithstanding McCulley's absence from the investment committee, for example, a key successor, Jerome Schneider, doesn't appear to have had much trouble picking up where McCulley left off at PIMCO Short-Term (PTSHX). It therefore remains to be seen whether Simon's departure will ultimately leave investors any worse off, but there's very little question that his contributions to the firm's overall success are likely to be missed.