Editorial

The Bond King, Pimco and advisers

Mar 16, 2014 @ 12:01 am

By now, just about anyone who has money invested in stocks or bonds knows about the turmoil at Pacific Investment Management Co., the money management powerhouse founded and effectively run by Bill Gross.

As a refresher, in January, chief executive and co-chief investment officer Mohamed El-Erian said he would be leaving the firm this month. The news caused a stir in financial circles and blew up a few weeks later when The Wall Street Journal reported that the two disagreed over strategy, personnel and new products.

But that wasn't the end. This month, Mr. Gross apparently told Reuters that Mr. El-Erian had sought to “undermine” him.

Time to call in the crisis management team.

Meanwhile, financial advisers were doing what advisers do: carefully monitoring the situation and refraining from any rash moves triggered by the seeming chaos at Pimco, which, by the way, suffered a net $30.4 billion in redemptions last year after net deposits of $62.7 billion in 2012.

That marked the biggest drop among the 10 largest U.S. mutual fund families, according to Morningstar Inc.

Last week, Morningstar reported that Pimco's mutual funds lost $2.49 billion to client redemptions in February.

REDEMPTIONS

The firm's largest fund, the $236 billion Total Return Fund, which is run by Mr. Gross, suffered the heaviest redemptions in the industry, with a net $1.6 billion pulled last month.

Clearly, the firm's fund performance has been lagging. Pimco funds, on average, finished last year in the 63rd percentile, down from the 43rd percentile in 2012 and the 42nd percentile in 2011.

So at what point do advisers switch from carefully monitoring to actively managing the situation? Given the fund outflows, it would appear that some are heading for the exits, but that isn't necessarily the best move.

Research has shown that even funds ranked in the top quartile of performance for long stretches — say, 10 years — do suffer one- to three-year periods of underperformance.

If investors have confidence in the manager and strategy, they shouldn't jump ship at the first sign of trouble.

To be sure, it is a test of patience.

In Pimco's case, Mr. Gross' Total Return Fund has underperformed its peers two of the past three calendar years, according to Bloomberg, so that is a concern.

The other concern is that as he works to right the ship — he has named four new deputy CIOs and added a fund manager from Credit Suisse Group AG, among other actions — he won't be focused enough on turning around the performance at the Total Return Fund.

KEEP AN OPEN MIND

Advisers should continue to monitor the situation at Pimco closely, explore other options for assets that are housed at the company and keep an open mind. Above all, they should avoid emotional, knee-jerk reactions.

As Russel Kinnel, Morningstar's director of mutual fund research, told reporter Liz Skinner, Pimco has “very good” fund managers and a culture of investing excellence.

After all, one doesn't get the moniker Bond King for nothing.

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