Obsession

February 25, 2014

After reading the Wall Streets Journals page-one piece on life at Pimco under Bill Gross, Felix Salmon has decided that Gross has no choice but to retire and walk away from the bond-trading behemoth that he built. Neither Gross nor Pimco will ever be seen the same way again, and indeed, if Gross cares at all about the long-term fortunes of the company he built, the best thing he can do right now is simply retire, Salmon wrote on Reuters.

That isnt going happen. Nor should it. It would be the worst-possible outcome for Pimco investors.

Its not that Bill Gross is a bond-trading genius who can do no wrong. (Weve previously pointed out when hes had rocky runs .) And under Gross, Pimcos trading floor is clearly not the most pleasant place to work in the world.

But if Gross were to walk away now, youd likely see a riptide of investor cash pour out after him. Thats because, for most investors, Bill Gross is Pimco. Its Grosss public personaall the hits on CNBC, the years on Barrons roundtable. the accolades from Morningstar and the Pimcos track record under Gross that have drawn money into the Pimco complex. Its hard to imagine his departure wouldnt drive a fair chunk out. And those outflows would be painful to investors. Large-scale outflows hurt performance as they box-in the ability of traders to take advantage of market movements, forcing them to sell out of positions they believe in so that they can raise money to meet redemptions.

Basically, the situation at Pimcowhich became a unit of German financial giant Allianz after the bond-trading firm was purchased in 2000is a textbook example of key man risk, when a companys business may suffer due to the departure of an important individual. Clearly thats a problem. Heres what one analyst told the Journal:

Pimco needs to avoid becoming an upside-down pyramid balanced only on Bill Gross, says Alex Friedman, global chief investment officer of UBS Wealth Management. Were hoping others emerge to replace Mohamed.

Unfortunately, Pimco already is that upside-down pyramid. But thats a problem that can be fixed. Succession plans can be put in place. Gross can empower a new generation of traders with more responsibility. Over time, the 69-year-old bond market legend should start to shift some of his duties onto them. And gradually, he should do more yoga and stamp-collecting and less trading.

It might be tough for Gross to do. But that firms problem is its reliance on Gross. Unfortunately, until Pimco fixes that problem, Gross is in the best position to solve it. A disruptive departure is in no ones interest.