EMPLOYEE BENEFIT FUNDS - PART VIII – PIMCO -A FASCINATING HISTORY
In PART VII, we discussed how RJR restructured its pension fund. One of the choices was PIMCO in Newport Beach. PIMCO’s long history has been so dramatic, and controversial, that it is worth special mention. The events surrounding RJR’s selection have remained in my mind, mostly because of what happened to the tiny company over the years. For those who do not know, it is the stuff of legends.[i]
HAMILTON UNCOVERS A LIKELY CANDIDATE
As the search for bond managers, Jim Hamilton and I were reviewing firms we might interview on the West Coast. This included the usual major names – Capital Guardian, Bank of America, Title Insurance, Trust Company of the West.
Jim mentioned, “AT&T has hired a little company in Newport Beach to manage bonds. (That put it on his “radar.) Since it is just down the coast from Los Angeles, we should take a look.”
So, Jim and I visited PIMCO its Fashion Island shopping complex office. It was a sunny morning in early 1978, and we had breakfast on their patio overlooking the Newport Beach harbor. We met with only four active principals of the firm, all noticeably young. A fifth person was a chairman from the parent company, Pacific Mutual Insurance. I later came to believe that he was there to add ‘gravitas” to a group who looked like they might be more at home in a fraternity house than running an investment business.
Their presentation went well, impressive. At one point Jim Hamilton asked, “you are all young and ambitious. What happens if someone tries to hire you away?” Bill Gross, who later brought fame to his home in Ohio and Butler Creek, answered, “I’m from Ohio. Look at this winter day. Look at the sun and the palms. Look at the beach. Why would we ever leave?” It was an excellent question, and Gross was as good as his word, none of them ever left.
THE FINAL TEST
PIMCO passed the initial screen. But they still had one last test. Jim Hamilton and I, with Joe Abely and John Dowdle, drove from Los Angeles to Newport Beach to meet for breakfast with the PIMCO team on October 3, 1978. We met with Ott Thompson, Jim Muzzy, Bill Gross, and Dean Meiling. Mary Childs in her new book about PIMCO recounts what happened:
In 1971, beginning with its $5 million portfolio, PIMCO found growth in scale as, one by one, it added big companies to its client roster, beginning with Southern California Edison, then Albertsons, the grocery chain. PIMCO was buoyed by the 1974 Employee Retirement Income Security Act (ERISA), which set standards for corporate retirement accounts and formalized money management as an industry. Then in 1977, PIMCO got its big break: AT&T.
The next year, the pension manager for R.J. Reynolds Tobacco Company visited Newport Beach, interested to hear from these young bucks, but also apprehensive: “We were talking about giving this vast sum of ten million dollars – which was a lot of money to us, and I think a lot of money to PIMCO – and here we’ve got these guys who look like children,” he recalls. There sincerity was striking.
“They were not slick. They had worked hard and looked like an up-and-coming shop.” And PIMCO’s fees were among the lowest of those of all the managers they were considering. So, RJR signed on. “I think PIMCO was really appreciative of getting a ten-million-dollar account and being able to put R.J. Reynolds Tobacco in as a client on their masthead.”[ii]
GREAT PERFORMANCE - EXPLOSIVE GROWTH
Fast forward 44 years. In 1999, German insurer Allianz bought 70% of PIMCO for $3.3 billion, making the founders wealthy beyond what they could have imagined in the beginning. Bill Gross’ net worth is reported to be $3 billion, much of which is in a charitable foundation. PIMCO has a twenty story, 400,000 square foot office tower, still at Fashion Island. It manages $2 trillion in assets (1,000 times the size in 1978) with 2,900 employees worldwide at 6 U.S. and 16 international offices.
MY BRAGGING RIGHTS
Hiring PIMCO has given me bragging rights for decades - that “I” had the foresight to recognize these geniuses when almost no one else did. Of course, most of the credit goes to Jim Hamilton, my bosses Abely and Dowdle, and a bit to good luck.
In 2003, my two little granddaughters and I visited PIMCO in Newport Beach. Jim Muzzy was gracious enough to spend time with us. He said, “You hired us when we were so small that you probably shouldn’t have.” Not true, of course. I replied, “We knew you were smart. But we had no idea how smart.”
We visited the PIMCO trading floor where my granddaughters got PIMCO sweatshirts. I explained that the visit would mean little to them at the time, but someday they could impress people that they had been PIMCO’s guests.
The PIMCO people had not forgotten RJR or me from their early days. We can take a lesson from this when good fortune comes our way. The country lass at the square dance had it right when she said, “I always dance with them what brung me.”
[i] A new book tells the story of Pimco in detail on the explosive growth over its 50-year history.
[ii] The Bond King: How One Man Made A Market, Built An Empire, And Lost It All, Mary Childs, 2022