Pimco funds may face Morningstar analyst cuts

After visit to money manager, research firm cites 'higher degree of uncertainty' in aftermath of El-Erian departure

Mar 18, 2014 @ 4:49 pm

Morningstar Inc. analysts may downgrade their ratings for Pacific Investment Management Co.'s mutual funds after a review of the firm's regulatory issues, board quality, manager incentives, fees and corporate culture.

The research firm downgraded Pimco's stewardship grade to a C from B following a visit to the Newport Beach, Calif.-based fund company by Morningstar analysts March 10. The highest grade is an A and the worst is an F. One of the categories used for Morningstar's analyst ratings that looks at the priorities of the firm was also downgraded to neutral from positive. Analyst ratings are qualitative, and different from the firm's five-star rating system, which is based on risk-adjusted returns.

(See also: Drama, poor performance haunt Pimco)

“Those changes reflect a higher degree of uncertainty around the firm's recent personnel changes and lower manager investment alongside fund shareholders,” Morningstar analysts Eric Jacobson and Michael Herbst wrote in an article Tuesday.

Pimco co-founder Bill Gross has been entangled in an ugly split from his former heir apparent, Chief Executive Officer Mohamed El-Erian, who left the firm this month. The firm, which had $1.9 trillion in assets as of Dec. 31, has also been under pressure in the past 12 months amid underperformance and withdrawals from its largest fund, Total Return.

LEADERSHIP CHANGES

Reports of phone surveillance and public humiliations have painted a picture of Mr. Gross as an autocratic leader struggling to maintain his composure. After Mr. El-Erian said he was leaving Jan. 21, the firm named six deputy CIOs to replace Mr. El-Erian and promoted Doug Hodge, formerly chief operating officer, to CEO.

Mark Porterfield, a spokesman for Pimco, didn't respond to an e-mailed request for comment on Morningstar's report.

Morningstar is known for its star-rating system for ranking mutual funds, which is used by retail and institutional investors when making selections. These won't be affected by today's announcement.

Pimco funds may be affected by the downgrades as analysts reassess their individual ratings on a case-by-case basis, Chicago-based Morningstar said. The firm provides data on about 446,000 investment offerings, including 155,000 mutual funds.

CORPORATE CULTURE

The departure of Mr. El-Erian, as well as other executives since 2008 such as Pasi Hamalainen, Zhu Changhong and Bill Powers, who were all members of Pimco's investment committee that sets guidelines for all Pimco funds, “has helped drive material changes in Pimco's corporate culture,” Morningstar said. The analysts raised questions of whether the deputy CIOs, most of whom are now on the investment committee, will feel comfortable voicing their opinions, and whether competition for the top job could prove contentious because there is no longer a designated successor.

There are also concerns about the fees and size of the $236 billion Pimco Total Return (PTTRX) Fund, which lost its title as the world's largest mutual fund in October, yet is still the largest bond fund, according to Morningstar.

The fund declined 0.5% in the past 12 months through Monday, trailing 82% of rivals and underperforming the Barclays U.S. Aggregate Index, according to data compiled by Bloomberg. This year, the fund has advanced 1.8%, in line with 50% of peers.

Another fund, the $15 billion Pimco High Yield (PHIYX), could face difficulty generating high returns given its size, Morningstar said.

(Bloomberg News)

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