His departure in September 2014 sparked a crisis as Pimco haemorrhaged assets and clients, causing the government to reach out to financial firms to ensure the $100trn bond market did not become destabilised. After a period of poor performance, which saw Gross reportedly underperform 77% of his peers in 2011, he misjudged the impact of the Federal Reserve’s suggestion it would unwind its bond buying programme resulting in the biggest loss for the fund in almost two decades. The outflows began as clients pulled money on fears interest rates would soon rise, but tensions within the firm also mounted.
In January 2014, then-CEO Mohammed El- Erian resigned. In a move indicative of Gross’s management style at the time, a witch hunt soon began for sources leaking information about internal clashes to the press, which led to a failed attempt by Gross to oust two senior figures, one his deputy investment chief. He was quoted in Bloomberg last June saying: “I’m not especially known for people management.”
Matters escalated further and, eventually, on 26 September Janus Capital Group announced Gross was joining them. The move sparked massive outflows from Pimco’s Total Return fund as AUM more than halved from its peak. By the end of 2014, investors had reportedly pulled $105bn. Outflows continued with another $25bn departing during the first quarter of 2015 cutting AUM to $110bn.
DOES CULTURE AGGREGATE?
The Pimco example is also interesting because of the challenge it sets Janus. While Pimco is left licking its wounds, Janus has arguably exposed itself to a significant cultural challenge in taking on such a dominant and flamboyant personality, which will inevitably impact its own culture.
As one senior representative of a large institutional investor says: “There is much more risk to Janus of bringing Gross on board than the other way round. The question really is why Gross needs Janus at all? I don’t understand why he doesn’t go out on his own.”
In instances like this, where a star manager joins an existing firm, or where a whole team is brought on board, or where two managers merge, there is inevitably a degree of cultural change that must accompany these developments.
According to Towers Watson’s Urwin: “ Culture is in danger of diluting as companies grow and take on more people unless it is actively maintained. Typically cultural problems are dealt with over a longer period than many other management problems and could easily take five years. However, in the case of a merger, the process is accelerated and much could happen within five weeks.”
Nikulina, meanwhile, reports: “One of the most difficult challenges when merging is to sustain the culture or create something new. If firms are not able to get it right, assets move away very quickly so it can rapidly destroy a business. From an manager research perspective, merger means reassessing the combined entity and having the firm on the watch-list to see how the leadership manages the sensitive period.”
And this is exactly what investors would expect their consultants to do.
Martin Mannion, head of trustee services at the John Lewis Partnership pension fund says: “We are always wary of a merger as they tend to mean organisations become inward, rather than outward looking. Culture is important because combining two opposing cultures, or just two different compensation structures, could mean people become unhappy. If there is even a whiff of consolidation, a manager would probably get downgraded in the short-term.”
There have been examples when mergers have not proven to be value additive for the end clients. One of the most frequently cited examples is the acquisition of Mercury Asset Management by Merrill Lynch in 1997. Although old, its impact is still felt today.
“The merged entity didn’t work,” one senior investment independent expert says. “They were very different cultures that came together badly.” After stuttering through a few years, Merrill Lynch then merged it’s asset management business with Blackrock in 2006. Everything was subsequently run under a single brand, which, in 2009, also enveloped iShares. The three organisations came from very different cultural backgrounds.
“The merger created business efficiencies,” the investment industry expert says, “but it is arguable whether it has been value-additive for clients. The quality of Blackrock’s performance is good, but not outstanding. The same is true of their products. It is a product proliferation machine so the underlying model is not consistent with excellence.”
One senior asset allocator believes the fall out from the poor cultural fit “still feeds confusion for some investors about what Blackrock is really good at”.
Of course, the optimal culture for an asset management house depends to a large degree on the nature of its business. At one end of the spectrum, the culture within a company offering passive management vehicles, such as iShares, would be significantly different from one offering specialist hedge funds.
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