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The rise of the bond barons

November 19, 2011|David Sarno
  • Bill Gross, left, founder of Pimco, and Larry Fink, co-founder of BlackRock, laugh during a rare public appearance together at a UCLA Anderson business school alumni event in Beverly Hills on Thursday. They graduated within five years of each other.
Bill Gross, left, founder of Pimco, and Larry Fink, co-founder of BlackRock,… (Bloomberg )

Reporting from New York and Los Angeles — When the U.S. government needed expert help in evaluating the bonds that caused the 2008 financial crisis, there were only two men it could turn to.

Larry Fink, the founder of investment giant BlackRock Inc., and Bill Gross, the founder of Pacific Investment Management Co., are the generally acknowledged kings of the bond universe.

Together, the companies they run hold approximately 7.5% of all outstanding bonds. The $1.2 trillion managed by BlackRock and the $1.1 trillion at Pimco dwarf the holdings of the next largest bond players, according to data from Pensions & Investments.

Fink and Gross mastered the famously complex bond market early in their careers. They have become towering figures in the industry not only because of the size of their companies but also because of their bold market analysis and public visibility. When the government had to untangle the mess created by mortgage bonds, "you really couldn't turn to anybody but BlackRock and Pimco, frankly," said Morningstar bond analyst Eric Jacobson.

"They've come to be the poster children for the bond market," said Roy Smith, a professor of financial history at New York University.

The gregarious Fink, 59, and the more reserved Gross, 67, have very different personalities and run very different companies. Fink's asset management company, based in New York, has a much broader business model than Gross' more focused operation in Newport Beach, but their ascension to the top of the bond world has some striking parallels.

Both men created upstart behemoths in a financial industry that tends to favor experience. Gross was one of Fink's first big clients when he began trading bonds, and Fink used Gross as an advisor when BlackRock launched in 1989.

More strikingly, before starting their companies, they were both free-spirited California boys — Gross from the Bay Area, Fink in the San Fernando Valley. And the business training they received came not from some ivy-cloaked East Coast academic institution but at the less aristocratic business school at UCLA. They graduated within five years of each other.

"Maybe the laid-back philosophy allows you to think longer term," Fink said, only half in jest, during a recent interview at his New York office.

Their views have shaped the returns of the countless individual investors, pension funds and sovereign wealth funds parking money in bond funds run by Pimco and BlackRock.

But their views have also had more geopolitical consequences. Although bonds have traditionally been overshadowed by stocks, the U.S. is coming off of a financial crisis caused largely by mortgage-backed bonds. And there are new fears about plunging values in European government bonds shoving the global economy back into a recession.

As the world grapples with these problems, the opinions of Gross and Fink have defined the debate and sometimes swayed the direction of bond prices.

Their dominance has raised concerns among some critics who say it is dangerous for two companies to control such a large share of the bond market. But their relationship has more often than not been defined by their contrasting views on topics such as the prospects for economic growth and the future of Treasury bond yields.

Their differences were in full relief recently when Gross and Fink made a rare public appearance together, at an event for other alumni of UCLA's Anderson business school.

Gross laid out his pessimistic outlook, fretting that growth in developed countries could be weighed down for years by debt problems in Europe and high unemployment in the U.S.

Fink said he sees "all the same problems, and the problems are enormous." But he's more optimistic because the underlying "vitality" that fed the success of U.S. companies such as Apple and Facebook remains intact.

"I agree with almost everything Bill is saying, except my conclusions are generally less bearish than his," Fink said.

One point on which the two men agreed: The public's outrage at Washington and Wall Street is legitimate.

"I'm actually very happy with Occupy Wall Street," said Fink, a lifelong Democrat. "I'm going to admit it as part of the financial community: We let down a lot of people."

Gross nodded his assent.

"How can one not sympathize with their predicament?" Gross said of working Americans. "To not have sympathy with Main Street, as opposed to Wall Street, that would simply be to have blinders" on.

The surprising parallels between the backgrounds of the two men came up primarily as a subject for jokes at the UCLA event. But the California connection has the appearance of something more than a coincidence in the $29.6-trillion bond market.

When industry experts list the world's best-known bond companies, BlackRock and Pimco are usually followed swiftly by another Southern California firm, Pasadena's Western Asset Management Co. — and two other Los Angeles firms, TCW and DoubleLine Capital, are among the most respected bond managers.

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