Advisers ratchet up scrutiny of Pimco

Few pulling assets from the bond fund giant, but possibilities rise in wake of Morningstar report

Mar 21, 2014 @ 12:36 pm

By Trevor Hunnicutt and Jeff Benjamin

Pimco, Bill Gross, fixed-income, advisers, Morningstar
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Once and future Pimco chiefs El-Erian (left) and Gross. (Bloomberg News)

Pimco faced new scrutiny from financial advisers this week as the bond giant grappled with new questions about its management, but few were pulling money from the embattled fund manager.

Morningstar Inc. lowered its “stewardship” grade and another rating for the Pacific Investment Management Co. in light of “a higher degree of uncertainty around the firm's recent personnel changes” when “the firm's public reputation was shaken” following the announced departure of former chief executive Mohamed El-Erian, analysts Eric Jacobson and Michael Herbst wrote.

But the research firm, whose representatives visited with Pimco executives this month, said the management team remains “strong and capable.”

The closely watched decision by Morningstar provoked continued public discussion over Pimco's leadership — including its reportedly mercurial founder, bond guru William H. Gross — leading some advisers to reconsider their clients' positions in the firm's lineup of mutual funds.

“I have invested in Pimco, yes, but it has all been wound down, or it's in the process of winding down,” said Paul Schatz, president of Heritage Capital. “If something happens to Bill Gross, they've got major problems.”

Pimco spokesman Mark Porterfield did not make executives available. In an e-mail responding to inquiries, Mr. Porterfield pointed to a statement released earlier this week in which Morningstar maintained its "gold" or top rating for the asset manager's battered flagship, the Total Return Fund (PTTAX).

That fund and other open-end mutual funds from Pimco, the world's largest bond manager, have been hobbled by more than $56 billion in withdrawals in the 12 months ended Feb. 28, $8 billion of which have come since the beginning of the year, according to Morningstar. (In all, Pimco managed a total of $1.91 trillion at the end of 2013.)

Capping a bruising week, Pimco was replaced Thursday as the manager of a $1.3 billion bond fund sponsored by Columbia Management Investment Advisers.

Still, most advisers who invest in Pimco funds are taking a wait-and-see approach as Pimco's representatives work to shore up relationships with them.

A wholesaler for Pimco called Balasa Dinverno Foltz minutes after news broke about Mr. El-Erian's departure in January and then again after an adviser was quoted in a news article about the firm, according to wealth manager Chad Carlson.

“They were proactive on that,” said Mr. Carlson, who also said the firm is weighing its allocation to their funds.

“They have been exceedingly forthcoming explaining how they are managing these issues,” said Harold Evensky, president of Evensky & Katz., who said his allocation decisions will not be affected by Morningstar's rating. “Our concern has been related to the potential impact of the publicity the firm has been receiving on management's ability to solely focus on traditional business.”

Some advisers said Pimco has been a victim of a turbulent market more so than tensions around the firm's leadership.

“It has more to do with the market than with Bill Gross,” said Dick Wolfe, managing director of Saddle River Capital Management. “The bond market is in trouble now due to the low interest rates and government intention of raising them. We have had a lot of difficulty in our fixed-income allocations, which have been used to manage risk.”

David Young, a former Pimco executive who remains close to employees there, said investors should take a broader perspective on workplace strife at high-caliber investment firms such as Pimco.

“The focus ought to be, is the talent there,” said Mr. Young, chief executive of Anfield Capital Management, describing Mr. Gross as an irreplaceably brilliant “wizard” and “task master” with a strong group of senior investment managers underneath him. “These are smart, competitive, driven — sometimes to the point of being obsessive — people. The stakes are high and the singular most important thing that matters is performance.”

In terms of performance, the Pimco funds, on average, finished 2013 in the 63rd percentile, down from the 43rd percentile in 2012, and the 42nd percentile in 2011, according to Morningstar.

The trouble began when Mr. El-Erian announced his departure from Pimco on Jan. 21. Mr. El-Erian, who declined to comment, hasn't addressed questions about the circumstances of his decision to leave. A number of other management changes were announced shortly thereafter. After considerable speculation about the reasons for the departure, an article in the Wall Street Journal last month reported heated disputes between Mr. Gross and Mr. El-Erian over a range of business decisions.


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