Fund outflows could give Pimco headaches, Morningstar says

In update on bond giant, research firm says fund performance could take a hit as investors pull cash

Apr 21, 2014 @ 2:45 pm

By Trevor Hunnicutt

Outflows aren't just damaging to the ego of fund managers, they also can make it harder for them to do their jobs. And that fact could be important to watch at Pimco, according to Morningstar Inc.

That message came Monday from the research firm as it raised the rating of one Pimco fund and downgraded two others.

Morningstar is keeping its eye on Pacific Investment Management Co., the only top-10 mutual fund sponsor to experience net outflows in the first quarter this year not attributable to a one-time reclassification.

Most of the focus has been on Pimco Total Return (PTTAX), the flagship fund managed by bond guru William H. Gross. More than $8 billion was withdrawn from the fund, making it responsible for a sizable portion of the overall outflows for the quarter.

But Morningstar said the fund seems to have successfully weathered that stress.

“Outflows from Pimco Total Return, while huge in dollar terms, haven't been as staggering in percentage terms,” according to Morningstar. “They also don't appear to have been debilitating to the fund thus far, but it is difficult to assess the impact of significant outflows from some portfolios.”

(See also: Gross sticks with shorter-maturity debt even after Yellen roils bet)

The analysts, Michael Herbst and Eric Jacobson, said that while outflows can make a fund manager's life difficult — forcing the premature sale of securities, for instance — the Total Return Fund is diversified and exposed to fairly liquid bonds and consistent sources of income, maintaining about a third of its exposure to U.S. Treasuries, for instance.

But the analysts said the “shrinking asset base” of Pimco Global Multi-Asset (PGMAX) and outflows from Pimco High Yield (PHDAX), along with other smaller funds, are “more troubling.”

Pimco High Yield witnessed nearly $1.5 billion in outflows last quarter, while Pimco Global Multi-Asset saw nearly $680 million in outflows during the same period, according to Morningstar.

The analysts said “more than a few” Pimco funds are dependent on flows from Pimco All Asset (PASAX) and Pimco All Asset All Authority (PAUAX). In one case those funds' position in two other Pimco funds — Pimco High Yield Spectrum (PHSAX) and Pimco Emerging Markets Currency (PLMAX) — accounted for nearly eight in $10 in the underlying accounts.

That means a 1 percentage point reduction in the funds' positions in those funds could create outflows of roughly 15% to 20% for the underlying funds, according to Morningstar analysts.

(Don't miss: Advisers ratchet up scrutiny of Pimco)

“Our understanding is that the portfolio managers of the underlying funds have the ultimate say on the timing of those redemptions, but such outflows may still be detrimental if poor market liquidity or the size or timing of the redemptions effectively handcuffs those managers. It also potentially limits their ability to take advantage of market opportunities. It's unfortunate that Pimco hasn't taken more steps to segregate the funds used extensively by its funds of funds in order to protect the underlying funds' shareholders,” the analysts wrote. “Over the longer haul, sustained outflows across the Pimco funds complex could make it more difficult for the firm to attract or retain top notch personnel.”

Meanwhile, Morningstar raised its rating on the Pimco CommoditiesPLUS Strategy to silver from bronze and lowered its ratings on the Pimco Unconstrained Bond fund and Pimco EqS Pathfinder, both to neutral from bronze.

Last month, Morningstar lowered its “stewardship” grade and another rating for the Pimco after the departure, announced in January, of former chief executive Mohamed El-Erian. The firm said uncertainty about the firm's leadership shakeup in the aftermath of Mr. El-Erian's departure contributed to the downgrade.

A spokesman for the fund house, Mark Porterfield, did not respond to a request for comment.


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