(August 1st, 2012) A recent article in New York Times by Geraldine Fabrikant put the salary of Bill Gross, the legendary manager of PIMCO Total Return Fund, at $200 million per year. The number two most recognizable name at PIMCO, Mohamed El-Erian, was reported to make $100 Million. The source for these numbers was not disclosed, and has come under criticism for being too high by Felix Salmon who writes for Reuters. I believe there is a strong argument to be made that even if Bill Gross made $1 billion per year that he would be undercompensated by several measures.
The New York Times article quotes Bill Gross as saying, “We all earn too much, but I can sleep because of the multiples we have provided for our clients over the years.”
Before I tell you why I think that Bill Gross is undercompensated, I would like to spend a moment on why this discussion is not relevant from the standpoint of investing in PIMCO funds . The compensation for Bill Gross and Mohamed El-Erian is paid via the fee revenue generated by the funds. If Bill Gross made $3 million dollars vs. $300 million dollars, the fees charged to investors would probably not be any different. The amount of Bill Gross’ salary has much more impact on the profits of investors of the parent company of PIMCO, Allianz SE, than on the investors in its bond mutual funds and ETFs.
An argument could potentially be made that PIMCO’s funds would have lower fees, if they did not have to pay big salaries to its top two managers. If Bill Gross and Mohamed El-Erian both worked for free and the savings were passed along to PIMCO’s clients in the form of lower annual expenses, how much lower would fees be? Assuming that they make a combined $300 Million and PIMCO manages $1.8 billion, the annual expense ratio would be reduced .015%. To put this in context, the PIMCO Total Return Fund charges its class A shareholders an annual expense ratio of 0.85%, so the potential impact on fees of this fantasy scenario is less than 2%. In other words, the salaries of Bill Gross and El-Erian have little impact on PIMCO’s management fees.
In my view, Bill Gross has two distinct but related jobs. There is Bill Gross, a very good, perhaps extraordinary portfolio manager, whose primary job is to deliver superior investment returns. But there is also Bill Gross the celebrity pitchman / marketer for PIMCO who is a permanent fixture on CNBC, and whose job it is to bring more assets into PIMCO’s funds. It’s hard to separate these roles, as Bill Gross would not be a successful pitchman if he did not have the reputation for being the “bond king”. However, for the purposes of figuring out compensation we will pretend that these are different roles.
The highest paid money managers start hedge funds, which typically earn 2 and 20 fees. The funds charge 2.00% of funds for money management plus share 20% of the funds profits. As the hedge funds are primarily owned by the star manager, a large portion of the fees end up in their pockets. According to Forbes, the top hedge fund managers earned:
|Forebes Rank||Manager Name (Fund)||Forbes Estimated Earnings 2011|
|1||Ray Dalio (Bridgewater Associates)||$3 Billion|
|2||James Simmons (Renaissance Technologies)||$2.1 Billion|
|9||Bruce Kovner (Caxton Associates)||$210 Million|
|11||Paul Tudor Jones II (Tudor Investments)||$200 Million|
|——-||Bill Gross (PIMCO)||$200 Million (NYT est.)|
The Forbes earnings estimates have been criticized for inflating the earnings of these money managers, by including in their “earnings” the profits they made by putting their own money in the funds. The compensation of Bill Gross would put him in the top twelve of hedge fund managers and perhaps even higher if you excluded the investment profits of the managers.
For the sake of this discussion, let’s say that Bill Gross’ returns have been severely impacted by the amount of money that he manages. The performance of his best ideas are diluted by the fact that he has to put hundred of billions of dollars in his second best ideas. If he only managed $60 billion, he could produce returns of 15% on average. Assuming he ran a $60 billion hedge funds and personally was able to keep ⅓ of the fees, Bill Gross would earn a billion dollars per year ($400 million from an asset management fee and $600 million from profit sharing fees.)
Is Bill Gross a great marketer? The answer is yes. Several actively managed core bond funds have similar track records to the PIMCO Total Return Fund over long periods of time. However, they have not been able to grow their assets under management to even a small fraction of the Total Return Fund.
|Mutual Fund Name||10 Year Average Return||Assets Under Management|
|PIMCO Total Return Fund (PTTAX)||6.65%||$263.4 Billion|
|TCW Total Return Funds (TCLMX)||7.03%||$6.3 Billion|
|Loomis Sayles Core Plus Bond Fund (NEFRX)||7.60%||$1.2 Billion|
While PIMCO has a great track record for a core bond fund, it does not have the best over the last 10 years. Yet, funds from well respected fund managers which have have performed better over the last 10 years have failed to attract a tenth of the assets over the last 10 years. Much of the credit goes to Bill Gross.
With the exception of Warren Buffett and Peter Lynch (who is no longer active), Bill Gross is the most well-known money manager in the last generation. The popularity has been fuelled by Bill Gross’ media friendly personality, quotable sayings like “the new normal”, and frequent media appearances. In short, Bill Gross is a walking advertisement for PIMCO, generating millions and perhaps billions of dollars worth of free media coverage for PIMCO.
How much is this media coverage worth? Well, lets start with how much mutual funds pay for “stock” brokers to market their funds. Typically, a mutual fund company will pay around 0.40% of assets to a broker such as Schwab to offer and market their funds to clients. However, a company like Schwab might offer several thousand funds to its clients. This marketing fee paid to the broker is really paying for the broker to make the mutual fund available, rather then sell them. There is no easy benchmark to base the worth of Bill Gross as a pitchman for PIMCO.
Many firms put around 8 – 12% of their revenues towards marketing. What if Bill Gross received half of this amount (6%) of PIMCO’s revenues? Felix Salmon estimates PIMCO’s revenues for 2011 to be about $14 billion. Using this calculation, Bill Gross should be making around $840 million per year.
Bill Gross should be paid between $840 – $1 Billion Dollars according to my calculations. However, I don’t think he is working for the paycheck. At $200M a year, he could have retired a long time ago.
Comments welcome as always.