Rising interest in alternative investments could give Pimco a needed boost as investors flee its core bond funds.
Over the last year, the firm's absolute-return strategies took in nearly $4.7 billion, according to Morningstar Inc. And from 2011 to 2013, Pimco accounted for a quarter of the top 15 new alternative funds by average monthly flows, according to Cerulli Associates Inc. and Strategic Insight.
In all, Pacific Investment Management Co. manages $48 billion in hedge-like and nontraditional bond funds, which are sometimes marketed as “liquid alts.” That's more than BlackRock Inc., the world's largest money manager, and MainStay Investments, a popular fixture in the alternatives space, combined.
That success is occurring as the firm faces daunting challenges — the inflows don't come close to making up the money the firm has lost in its traditional bond business, which is still the source of the vast majority of the firm's assets. And even strong flows to some alternatives funds have lost steam in recent months.
In the last year, 56 of the firms' nearly 100 funds lost assets. Overall, the firm has seen withdrawals of more than $77 billion over the last year, Morningstar estimates. Pimco co-founder Bill Gross has been the subject of public criticism by advisers for his performance both as an investor in recent years and as a reputedly abrasive manager of people.
But Pimco has worked quickly and successfully to launch exotic new products.
“Pimco's as hungry now as they ever were, and they want to prove to the world that they can still be the top dog,” said Greg Silberman, chief investment officer at Atlanta Capital Group and a former manager of a hedge fund of funds. “There are some wonderfully smart people — truly some of the smartest people I've come across have been at Pimco.”
Among the top-drawing funds in the U.S. this year are two absolute-return products launched by Pimco late last year (PLVBX and PLVVX). Both are based on both on derivatives of an international “smart beta” index licensed from Robert D. Arnott's Research Affiliates and managed in what Pimco describes as a benchmark-agnostic style by Scott A. Mather.
Despite the fact that the strategies are not generally expected to outperform in bull markets, they have won $7.5 billion in assets over the last year.
One of the other new deputies, Mark R. Kiesel, is managing another absolute-return strategy (PZCRX), which took in $1.2 billion in new money last year.
Pimco executives have said for several years that they hope to expand the firm's emphasis beyond traditional bond portfolios. But the success of newly empowered deputies and portfolio managers — many with scintillating curricula vitae — beyond Mr. Gross has taken on new import this year.
The firm's biggest alternative fund is the $22 billion Unconstrained Bond fund (PUBAX) — an offshoot of its core, fixed-income offering managed since December by the firm's legendary co-founder. Like Mr. Gross' Total Return (PTTAX) and the majority of its lineup, the fund has lost billions over the last year.
But the firm's successes are dominated by products with funds with a decidedly risk-conscious edge as advisers brace for rising interest rates and inflation, two outcomes widely expected as the Federal Reserve reduces the massive bond-buying program known as quantitative easing.
“Recently with returns perhaps expected to be lower prospectively than what investors have enjoyed for much of the last three decades,” Sabrina C. Callin, who leads liquid alternative market research for Pimco, said, “the focus on nontraditional sources of return and nontraditional strategy is increasing.”
At a time when Mr. Gross' judgment has been called into question, many investors have been willing to give a high degree of latitude for other managers at his firm to use their own tactical judgment with esoteric strategies, according to Josh Charney, an analyst at Morningstar.
Most of Pimco's still-successful products are specifically pitched as using strategies designed to provide high income, low volatility or a consistent return in what's become a widely-foreseen bear market. The industry's most successful alternatives launches include Pimco strategies invested in a market-neutral index (PWWAX, launched last year and now with nearly $3.7 billion in assets), a quantitatively managed futures fund (PQTAX, also launched last year) and a long-short stock offering by Geoffrey Johnson, a hedge fund manager hired by Pimco in 2012 (PMHAX).