Bond mavens William H. Gross and Mohamed El-Erian have built a fund firm in Newport Beach, Calif. that, with just over $1 trillion under management, rivals big banks in terms of the assets at its disposal. Pacific Investment Management Co. got there because Gross and El-Erian have, through the years, presciently peeked over the investment horizon more often than they've stumbled.

When much of the world was piling into Treasuries early last year, Gross bought up the unloved preferred shares and senior debt of taxpayer-backed companies like Citigroup and AIG. His flagship Pimco Total Return fund (assets: $202 billion) ended 2009 up 13.3%, which was more than double the return on the Barclays Capital U.S. Aggregate Bond Index (known as the Lehman Agg before all the trouble started). For the past decade its 7.8% average return bettered that of the index by 1.3 percentage points a year.

Chief Executive Officer El-Erian, 51, is an Egyptian native who traded on Salomon Brothers' storied bond desk before becoming an economist for the International Monetary Fund. His most famous call came in 2001 when he dumped Argentinean bonds from Pimco's emerging markets fund, leaving rival managers to suffer the carnage from the sovereign default that followed.

These days Gross and El-Erian are singing from the same songbook. The name of the tune is "The New Normal," a term that Gross coined last March and that just might define the economic landscape for years, or decades, to come. "When the U.S. and global economy reset after the crisis, [the global economy] will look different," says El-Erian. "This has implications for investment strategies, how you run a business and what you offer your clients."

According to the Pimco party line, those implications are rather grim for the U.S. A year ago Gross told FORBES that our future will likely include a lowered living standard, high unemployment, stagnant corporate profits, heavy government intervention in the economy and disappointing equity returns. Nor, with interest rates already low, can investors expect much from bonds, other than their mediocre coupons.

Gross complained in his December investment commentary that 0.01% yields on money market funds are sending investors on a frantic search for higher returns elsewhere, regardless of the risks. Pimco's solution: Break with its heritage as a fixed-income manager and roll out equity mutual funds. No, it doesn't see a brilliant future for stocks, particularly the domestic variety, but Pimco does believe that amid the new normal they offer more promise than bonds.

"You have to be able to actively manage risk" in more ways than Pimco has in the past, El-Erian explains.

Looking far afield for returns has not always proved a winning strategy for El-Erian. Following his deft moves into and out of emerging market debt during his previous Pimco tenure, he headed east in 2005 to supervise Harvard's endowment. On his watch Harvard Management Co. doubled down on its hedge fund and private equity bets. The bad effects were felt after he left. The university, down to its last $26 billion, has deferred grand construction plans and taken away hot breakfasts from upperclassmen.

Returning to Newport Beach in late 2007, the Oxford- and Cambridge-trained economist operates these days out of Pimco offices decorated with a lavish but incongruous mix of paintings, sculptures and dark wooden paneling. Talking through a large mustache that looks strAIGht out of his native land, circa 1950, El-Erian digresses in fluent but grammatically quirky English, pauses to ask whether he's boring his listener and digresses some more. For a moment you forget whether you are talking to a fund manager or a professor of philosophy.

Then again, mixing brains and a bit of flash has long been a Pimco mainstay. In its latest go-around, in December it hired Neel Kashkari, the 36-year-old former Goldman Sachs whiz kid who, until five months ago, oversaw the Treasury's deployment of $700 billion in Troubled Asset Relief Program funds.

Kashkari, who will head Pimco's new investment initiatives, is not a fund manager himself. Instead, he adds a bit of star power (Alan Greenspan is already a Pimco consultant), plus Wall Street connections to lure the best fund managers to faraway Newport Beach.

Just who Pimco will seek to recruit is likely to be a reflection of its view that over the next few years inflation will kick up, the dollar sink and foreign markets outperform the U.S. Thus, its managers advise U.S. investors to move at least two-thirds of their equity holdings abroad and a big portion of their bond portfolio as well. To protect against rising prices, they recommend putting 10% to 15% of assets into Treasury Inflation-Protected Securities, commodities and utilities.

The first new recruits who will help Pimco investors implement such moves are already on the way. Anne Gudefin and Charles Lahr, former comanagers of the Franklin Mutual Global Discovery Fund, are moving to Pimco after returning 5% annually over their five-year tenure and handily beating the MSCI EAFE.

It's notable that Pimco's latest foray into stock funds involves an international, rather than a domestic, product and that it is constructing rather than purchasing a roster of money managers. At a time when Invesco is buying Van Kampen Investments and Société Générale is reportedly seeking a buyer for Trust Co. of the West, El-Erian doesn't express much interest.

"What we haven't done is the headline-grabbing acquisition, and that's not because we haven't looked at them," he says. In his view it's cheaper to start from scratch. Besides, there's always the risk that Pimco could pay a premium for someone else's shingle, only to have the best and brightest walk out the door. Instead, El-Erian boasts that some of the best managers are lining up one at a time to come to his firm.

"They're attracted by how stable Pimco is," he says.

"Stable" is an understatement. Gross has run the company since he cofounded it with two partners four decades ago. Although he sold it outright at the top of the market in 2000 to Allianz (and is himself now worth $2 billion, we estimate), the German insurer has left Pimco's managers to run the highly successful fund firm as they see fit.

What they see now is the need for Pimco, as well as its investors, to diversify. These days only 17% of its fund sales are through advisors, who collect commissions in exchange for their hand-holding. Last year it launched Pimco Advisory to bring in high-net-worth and institutional clients. The new equity products are designed to increase its appeal to this channel. At this rate Pimco may soon be going head-to-head with the likes of Fidelity, T. Rowe Price and Vanguard in the retail market.

No question, big thoughts about where the world is headed have played a big role in making Pimco the bond house to beat. The question for the company and the investors it covets is whether that formula will continue to work as it chases growth outside the territory where it made its name.