In mid-February, a group of current and former PIMCO employees were invited to a private farewell party for Mohamed El-Erian on March 10, to mark his impending departure as chief executive of the world’s largest bond fund.

El-Erian soon realized it was not a good idea, according to three sources who had received the invitations and are in contact with him.

On Feb. 24, the Wall Street Journal published a report describing how El-Erian’s previously close relationship with PIMCO co-founder Bill Gross had soured as the firm’s investment performance deteriorated last year. Then Gross told Reuters that his one-time lieutenant was trying to “undermine” him and that he had “evidence” El-Erian “wrote” the Journal article.

El-Erian postponed the party soon after the March 6 Reuters report, suggesting to colleagues and friends that he did not want things to become awkward for his guests, and out of respect for the tense situation at PIMCO, the sources said.

One of these individuals, who subsequently spoke with others on the guest list, said some people had also declined to attend, worried that they could get caught in the bitter clash.

El-Erian, who has a nondisclosure agreement with PIMCO (full name Pacific Investment Management Co.), declined to comment for this article.

A spokesman for PIMCO, which is a unit of German insurer Allianz SE, declined to make Gross available for an interview and declined to comment for this article.

El-Erian officially left the firm on Sunday. But interviews with institutional investors, consultants, and current and former PIMCO employees show that the U.S. money manager will likely be dealing with the fallout of his departure long after he is gone from its Newport Beach, Calif. headquarters.

Investors, as well as some employees, are alarmed by the firm’s subpar performance and outflows over the past year, according to these interviews. PIMCO’s flagship Total Return Fund, which Gross manages, trailed roughly 70 percent of its peers and saw $1.6 billion in outflows in February, marking the 10th straight month of outflows, according to investment research firm Morningstar. Last year, $41.1 billion left the Total Return Fund.

They worry whether Gross and his new team of managers can heal the wounds that have opened up as a result of El-Erian’s departure and once again deliver the stellar returns that made PIMCO into a bond powerhouse with $1.9 trillion in assets.

Ever since El-Erian’s departure, several sources said, Gross has held multiple meetings with staff and spoken with clients, trying to contain the damage but also sometimes showing his anger.

Soon after the news first broke in January, PIMCO took down photos of El-Erian around headquarters and removed his trading seat, according to one source close to El-Erian who has been briefed on the changes by PIMCO employees. It also replaced a photo of them both on its Twitter stream with the firm’s logo. This was weeks before he was due to leave.

Eric Jacobson, a senior analyst at Morningstar, said when he spoke with Gross in February, “Gross made it very clear he had a poor view of El-Erian’s investment performance record. He was also very upset with El-Erian’s decision to leave PIMCO and also with the way that Gross says El-Erian handled that decision and its aftermath.”

One of the sources close to El-Erian said Gross and PIMCO’s top executives should not have been surprised by his departure, as El-Erian had told them late last summer about his desire to leave. Gross and others asked El-Erian to stay at the time, according to the source.

Allianz Shares Hit

The troubles are also affecting Allianz, whose shares have weakened more than 9 percent since the announcement of El-Erian’s departure, compared with a 4 percent drop for a European insurers index. Last month, Allianz lowered its expectations for PIMCO’s contribution to the group in 2014. Morningstar expects PIMCO’s share of the group’s total operating profit to fall to 26 percent from around 30 percent.

Allianz declined to comment for this article.

In late February, Allianz CFO Dieter Wemmer told Reuters TV that the insurer is closely involved in all aspects of running PIMCO except the investment strategy.

El-Erian, who sources said is well-liked by Allianz executives, has been named to a part-time position as chief economic adviser to the insurer.

While the drama between the two men plays out, PIMCO has been diligently trying to assuage concerns among investors. Two sources close to the asset manager said the firm’s representatives called more than 3,500 clients after news of El-Erian’s resignation in January.

The representatives made sure they reached the clients in person. If they got voicemail or had to leave a message, they followed up until they could speak with them, the sources said.

Gross has promoted six portfolio managers to deputy chief investment officer roles and revamped the investment committee. The deputy CIOs have been positioned as possible successors to Gross, who is known as the “Bond King” and turns 70 next month. El-Erian, 55, was long seen as the heir apparent at PIMCO.

The sources close to PIMCO said investors have been giving them positive feedback on the new structure.

Headline Risk

Despite those efforts, some existing and potential investors in recent days have been expressing nervousness about PIMCO’s returns, El-Erian’s departure and the headlines about the falling out between the two men, according to several sources familiar with the investors’ thinking.

For example, an official at the Municipal Fire and Police Retirement System of Iowa, which had $2.1 billion in assets as of Dec. 31 and has been looking for a money manager, said PIMCO is one of the four finalists for its account. He said ever since the dispute became public, PIMCO has probably gone to the bottom of that list. He added that the headline risk will weigh on their decision but stressed that they have to do more due diligence.

The sources close to PIMCO said many clients see the firm as the target of a “media feeding frenzy.” PIMCO has been telling them the hyperbole does not describe the actual situation between Gross and El-Erian, the sources said.

Some big investors say that PIMCO’s message is persuasive.

David Hunter, chief investment officer of North Dakota’s Retirement and Investment Office, said PIMCO made contact with his fund shortly after the news of El-Erian’s departure came out. Since then there have been several other conversations, with the frequency of contact being more than the typical monthly or quarterly calls. It has about $400 million invested with PIMCO.

“They’ve been very proactive in getting the message out,” Hunter said. “They were very professional, very diligent.”

Even so, the North Dakota board and several other state and local pension funds have also put PIMCO on their “watch lists,” a signal that they will keep a much closer eye on its performance than usual. It could eventually lead to reductions in the amount of money they allocate to funds at the firm.

The Aftermath

In recent days, Gross has become more contemplative, according to Jacobson, who met him again on March 10.

“Gross clearly views a lot of the things he has said with some regret and takes responsibility for having said things that have added to the drama rather than calmed the situation,” Jacobson said.

Gross also said he would like PIMCO’s culture to be one where his managers can work through issues internally, without feeling like they have to pull their punches out of fear of crossing him, Jacobson added.

Several former employees described the firm as an unforgiving, cut-throat place to work at, where people are regularly humiliated for stumbles, fired for mistakes and where Gross’ bad temper has to be put up with.

One former employee, for example, recalled nights he was so scared of being fired for mistakes that he could not sleep. Another said if someone showed up to an investment committee meeting unprepared or just didn’t sound coherent and concise, they were unlikely to be asked back.

According to one of the sources, over the past few weeks Gross has met more than two dozen senior portfolio managers individually for half an hour each and asked them how they were doing and what was on their mind.

Such meetings with Gross are unusual. Several former employees said he usually speaks to only a few people at the firm and prefers to communicate by email.

Jacobson said Gross now seemed anxious to make it easier for managers to get their ideas heard “without feeling as though they’re walking on egg shells.”

Focus on Alpha

Referring to the new investment committee, Jacobson said, “According to Gross, those folks very clearly feel more comfortable speaking their minds and sharing their ideas than was the case during earlier iterations of the committee.”

PIMCO’s previous structure concentrated nearly all investment strategy decision-making onto the shoulders of Gross and El-Erian.

However, some former employees said they were skeptical that after the dust has settled much will change at PIMCO.

Some investors may not even want change. The aggressive culture has yielded high returns; for more than 15 years, PIMCO’s Total Return Fund posted one of the best results of any bond fund.

Investment consultant NEPC said in a report based on meetings with PIMCO officials on Feb. 25 that the plan to restructure the investment committee had been developed by El-Erian more than 12 months ago and was simply accelerated after he resigned.

NEPC came away from the meetings with the sense that the deputy CIOs would perpetuate the investment culture at PIMCO, which it said “can be characterized as an intense and competitive environment that has been developed over many decades.”

“This extreme focus on alpha and competition is embraced at PIMCO and in many ways differentiates the firm from its competitors,” NEPC wrote in a report for its client, the City of Fresno Retirement Systems.

It recommended that the Fresno systems place money with PIMCO.