NEW YORK -- Stock investors didn't wait around to assess the implications of Bill Gross' departure from Pacific Investment Management Co. -- they sold.
Pimco's Global StocksPlus & Income Fund slipped 5.7 percent to $23.67 at the close in New York, while the firm's High Income Fund decreased 6.1 percent to $11.69, the biggest drop in 16 months. The Pimco Corporate & Income Opportunity Fund slid 6.6 percent to $17.18, and the Pimco Total Return ETF declined 0.3 percent to $108.57.
The retreat whipsawed investors who were used to hearing Gross praise the same securities as a good way to navigate his "new neutral" era of slowing growth and falling interest rates. He owned shares in 14 Pimco closed-end funds as of the start of July after adding almost $60 million of his own money in May and June, data compiled by Bloomberg showed.
"Gross was a big supporter with his own personal purchases in them and coming out and making comments in the past about how they're great investments, it certainly helped them trade at a premium," Aaron Izenstark, chief investment officer and co-founder of Northbrook, Illinois-based Iron Financial, said by phone. "That's why it's so shocking. It's bringing the unknown into the situation."
Closed-end securities bore the brunt of the selling because they aren't subject to the same arbitrage processes that keep exchange-traded funds near the price of their underlying assets. For instance, as of Thursday, the Global StocksPlus & Income fund traded at a 78 percent premium to its net asset value, while the High Income Fund cost 46 percent more than the value of its bonds.
"Closed-end funds are the ultimate place where this selloff would happen," Ben Wallace, a portfolio manager at Westborough, Massachusetts-based Grimes & Co., said by phone. "If people are selling and no one's buying, the price is going to move irrespective of value, whereas an ETF trades much closer to the NAV."
Gross, co-founder and chief investment officer of Pacific Investment Management Co., will join Janus Capital Group after presiding over the world's biggest bond fund for almost three decades. The Newport Beach, California-based investment company is likely to name Daniel Ivascyn chief investment officer of the $1.97 trillion bond firm, according to a person familiar with the matter.
Gross spoke glowingly of closed-end funds, which can use borrowed money to amplify returns, after unveiling his investment outlook for the next three to five years, predicting an era in which interest rates will stay low and growth will be slow and stable.
"I love 'em," he said in a June 19 interview in Chicago. "If you can borrow cheaply and lend like a bank, it's the perfect time for a new neutral to allow for relatively safe alpha creation," he said, referring to market-beating performance.
The Global StocksPlus invests at least 80 percent of its money in securities "that provide exposure to stocks and/or produce income," according to Pimco's website. It has about $147 million of total assets and a market cap of more than $240 million, according to data compiled by Bloomberg. About 23,700 shares are sold short, according to data compiled by Markit.
Pimco's High Income Fund's market value is six times larger than Global StocksPlus at $1.4 billion. The security produced a total return of 18.3 percent from the start of the year through July, when junk bond prices began a retreat. About 136,000 shares are sold short, Markit data show. Among other Pimco funds down on the news of Gross's departure are the firm's Dynamic Credit Income Fund, which declined 1.6 percent to $21.98, and the Pimco Dynamic Income Fund, which fell 0.9 percent to $31.81.
Allianz, the German insurer that owns Pimco, slid 6.2 percent in Frankfurt trading. Shares of Janus Capital Group rallied 43 percent to $15.89 in U.S. trading.
"A lot of people bought into Pimco because of Bill Gross, who was the face of the organization, and so they're shooting first and asking questions later," Bill Mann, chief investment officer of Alexandria, Virginia-based Motley Fool Asset Management, said by phone. "Regardless what kind of hand he had in all the products being impacted, investing is a personal business and the market is saying it trusted Bill Gross."