Vanguard takes keys to Pimco's bond kingdom

The low-cost provider tops Pimco in bond assets in what may be interpreted as a triumph for index-based investing

Aug 18, 2014 @ 12:33 pm

By Trevor Hunnicutt

Vanguard has overtaken Pimco as the largest provider of taxable-bond mutual funds by assets, a title the West Coast firm has held for more than a decade.

The Vanguard Group Inc. now manages nearly $430 billion in the funds, while Pacific Investment Management Co. handles $425 billion, according to Morningstar Inc.

Vanguard has been gathering scores of assets across its divisions and is on pace soon to top $3 trillion in total assets (as of June 30, the figure stood at $2.93 trillion).

By contrast, Pimco and co-founder “bond king” Bill Gross have suffered withering outflows totaling nearly $94.6 billion over the last 14 months. Mr. Gross, the firm's chief investment officer, managed what used to be the world's largest mutual fund, Pimco Total Return Fund (PTTAX), until it was overtaken by Vanguard in that regard last year.

Vanguard's Total Stock Market Index Fund (VTSMX) now manages about $350 billion, compared with Total Return's $225 billion.

While Pimco has worked to develop offerings in equities and alternatives, it is best known as a bond shop. Investors and financial advisers flocked to Pimco in no small part because of Mr. Gross, whose record of performance as a portfolio manager bests nearly all his competitors over the last 15 years.

But the firm has struggled to stanch outflows over the last year as performance in the firm's flagship fund sagged and Mr. Gross' heir apparent, Mohamed A. El-Erian, announced his departure this year amid rumors of discontent in the firm's upper ranks.

“If you're an average wealth adviser and you're trying to make a good investment for your clients, you say, there's a lot of turmoil over there at Pimco, maybe I should just go with a Vanguard index fund,” said David Edwards, president of Heron Financial Group, who uses Pimco funds and describes Mr. Gross as “probably the greatest bond investor of all time.”

“You give a reason to lose confidence in your core offering and they will go elsewhere,” he said.

Pimco won the distinction of top bond fund manager from Vanguard 136 months ago, in March 2003, and it had maintained that title ever since, according to Morningstar.

The switch in dominance may also be a feather in the cap of passive investing. Nearly all of Pimco's fixed-income mutual fund lineup is actively managed, while about 60% of assets in Vanguard bond funds track a benchmark.

“Vanguard continues to see investors gravitate towards both traditional index bonds funds and bond ETFs,” the firm said in a statement.

Jeff DeMaso, director of research at Adviser Investments in Newton, Mass., which manages funds in Vanguard and Pimco products, said Vanguard's strength in the retirement business — it is the largest manager of defined-contribution assets in the U.S. — helps add assets to its indexed bond funds.

But some advisers think the increasing use of bond index funds could spell trouble for investors as interest rates rise.

“We're just a bit concerned by the duration and interest-rate sensitivity [of funds tracking bond indices],” Mr. DeMaso said.

Pimco did not respond to a request for comment.

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