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McCulley's Return Offers Comfort to PIMCO Investors

Having Paul McCulley back as a mentor to the new generation of PIMCO leaders is an advantage, but it doesn't erase worries about succession, says Morningstar's Eric Jacobson.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. PIMCO announced this morning that Paul McCulley will be rejoining the firm as chief economist and will also be occasionally chairing the investment committee. I'm joined today by Eric Jacobson, our co-head of active fixed-income strategy manager research, for his take on what this could mean for PIMCO and also for investors in PIMCO funds.

Eric, thanks for joining me, today.

Eric Jacobson: Good morning. Thank you.

Glaser: Let's start with what PIMCO is getting out of this deal, having McCulley come back into the fold. Why do you think that they were searching for someone to fill this role?

Jacobson: I think there are a few different reasons. I think certainly the biggest one is to some degree sort of a corporate decision that--especially with everything that's gone on earlier in the year with Mohamed El-Erian leaving and a couple others, very senior people either going on sabbatical or also leaving--it's just good for the optics and something good to show to investors that PIMCO has a very, very senior person onboard with a lot of experience sitting on the investment committee and influencing things. It's anything to help stabilize the conversation in terms of what's being going on there.

Glaser: Do you see McCulley as stepping in as a replacement for Mohamed El-Erian? Will they have similar responsibilities?

Jacobson: I don't think he or PIMCO necessarily view it that way overall. However, I do think that some of his responsibility is going to be acting as sort of a public face for the company, especially with regard to policy discussions and academic sort of discussions, but also because he has an investing background. But again, doing some public speaking, also being in front of a lot of different PIMCO clients and so forth, I think is going to be a big thing for him.

Glaser: McCulley had previously retired. What do you think got him to want to come back? Or what do you think his motivation is for getting back to the working world?

Jacobson: It's very interesting because one would think that not only with his retirement, but the fact that he almost certainly made plenty of money before he left, he doesn't really have, I'm sure, a need to come back.

However, he has always signaled that he has really enjoyed the sort of academic and policy and macro-related issues of being in this position, and I think he is very excited not to have what one might think of as the burden of having to be responsible for running so much money as a manager, which he did before he left. He was responsible overall for almost $500 billion, and now not having to worry about that, he gets to do the three things that he has described that he really loves to do, which he says are thinking, writing and speaking.

And I think being able to do that on a very, very big stage that is PIMCO, having the ability and knowing that he'll have the ability to really influence the direction of things at the company from an investment perspective, is probably exciting. It sounds like it's almost kind of the best of both worlds for him personally.


Glaser: But he isn't going to be running money. If I'm an investor in a PIMCO fund, should I really care that he is coming back? What impact would it have on investors?

Jacobson: I do think investors should care. On the surface just because he's going to be chairing the Investment Committee somewhat often during each month probably--it's not entirely clear whether it's a couple of times a week or every other week--he is definitely going to have an influence there as a very, very senior person. And what's particularly interesting is just the fact that he views himself certainly as being able to do that. I think that is interesting for people to understand given all the noise that we've had about [PIMCO manager Bill] Gross and his personality and everything else.

Glaser: We've talked in the past about how succession is a worry that you have about PIMCO. What happens after Bill Gross leaves? Who runs those funds? Does this help mitigate any of those worries at all? Is McCulley a potential successor to Bill Gross?

Jacobson: It's not my impression that he or they view him as a successor at this point, and I doubt that that's really what he is after. However, I do think it's probably very reassuring to investors or at least it should be that within the next few years, God forbid, something happens to Bill or he needs to step down for some reason, there is a very, very senior experienced person in-house who can help take care of things if and when that would happen, even if it means on an interim basis.

I also think that there is a really interesting situation there from the perspective of, they have several new deputy chief investment officers as a result of this reorganization that they did earlier in the year. And we've talked before about how most of them are just brilliant people with tremendous experience and talent, but it's not entirely clear whether any of them at this moment in time are really ready to take over Gross' role should that become necessary. And I think even if it just would be an issue of a handful of more years of developing and seasoning those folks, having McCulley in place as an influence and a mentor I think is really likely to be a very big advantage for the firm.

Glaser: It sounds like overall you think that there is a lot of upside to his appointment?

Jacobson: I do. Again, it's hard to say without him actually running money how much of that influence [there will be], or obviously, I've described that his involvement in investment committee is a big deal and so forth. And I think from an analyst perspective, it's got to be a net positive. I do think, however, that the signal that PIMCO is trying to send and the potential for investors to sort of be comforted by that has got to be a really big reason that they are choosing to do that. I don't think that's bad, but I think it's part of the narrative.

Glaser: Eric, I certainly appreciate your thoughts on this this morning.

Jacobson: Glad to be with you, Jeremy. Thank you.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.