Jeff Benjamin

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Pimco is losing assets to DoubleLine, MetWest, BlackRock and others

Unconstrained bond funds, one of which Bill Gross will be managing at Janus, are the big magnets

Oct 3, 2014 @ 2:20 pm

By Jeff Benjamin

Right or wrong, the market has been loud and clear over the past week that it believes Bill Gross' sudden departure from Pimco marked the ultimate sell signal for the Pimco Total Return Fund (PTTAX).

The big issue now is where that money will land and why.

Spoiler alert: Mr. Gross and unconstrained bond funds are part of the answer.

The world's largest bond fund reported $23.5 billion in outflows for September. Dropping the asset level to $198 billion, that amount was nearly seven times the $3.5 billion that exited the fund in August.

Lipper Inc. analyst Jeff Tjornehoj logically concluded that $20 billion had raced out of the fund during the final three trading days of September, after Mr. Gross resigned Sept. 26.

“Before the announcement, we assumed the outflows for September would be similar to August,” Mr. Tjornehoj said. “I've never seen anything like this.”

BLEEDING ASSETS

And, keep in mind, we're talking about only one of the funds at Pacific Investment Management Co., a company that has been hemorrhaging assets for more than a year.

Mr. Gross, who starts work at Janus Capital Group Inc. on Monday, was involved in managing a number of bond portfolios at Pimco but was most closely associated with the Total Return Fund.

With billions of dollars in motion, some obvious candidates emerge that could work as at least temporary proxies for Pimco's flagship fund.

Some of the early net-flow reports for September show that the $34 billion DoubleLine Total Return Bond Fund (DBLTX), and the $32 billion Metropolitan West Total Return Bond Fund (MWTIX) have been among the beneficiaries of the Pimco fallout.

Representatives from BlackRock Inc., Legg Mason Asset Management and Janus have also acknowledged, without offering specifics, that they have seen increased interest in their bond funds over the past week.

But the other point to keep in mind is that such a tectonic jolt to the bond fund space could shake some long-held beliefs, which means that brand-name total return funds might end up being temporary hideouts for recently orphaned fixed-income allocations.

“People look at equities as a hugely diverse asset class, but only recently have investors started to understand that there's huge variety in bond funds as well,” said Jason Brady, a portfolio manager and managing director in charge of taxable fixed income at Thornburg Investment Management.

UPENDING THE APPLE CART

Mr. Brady believes that by upending the apple cart that is Pimco, Mr. Gross might have unintentionally driven investors and financial advisers to start re-evaluating their overall fixed-income investing strategies.

“It's a moment the financial advice industry has been moving toward for some time, in realizing that one bond allocation won't answer all their needs anymore,” Mr. Brady added. “I think most advisers' eyes were already open to that idea, but they knew they weren't going to get fired for holding the kinds of safe and basic funds they've been holding. Maybe now, we'll see some breaking of the inertia.”

In essence, with interest rates being held deliberately low by global central bankers, the days of a static and mindless allocation to a big-brand-name bond fund are gone. Possibly forever.

Besides, such a basic strategy doesn't do justice to what the bond market has become. For instance, just since 2007, the global investible bond universe has swelled by $30 trillion to more than $100 trillion.

Over that same period, the global investible equity universe has shrunk by $4 trillion to $54 trillion.

This brings us to the up-and-coming category of unconstrained bond funds, which Morningstar Inc. measures at more than $152 billion across 88 funds, including the fledgling $13 million Janus Unconstrained Bond Fund (JUCTX), Mr. Gross' new project.

“There's not a lot of return available in Treasuries today, so you have to have the flexibility to take on more risk,” Mr. Brady said. “Unconstrained is a category that was born out of a problem, and the good news is that there are lots of different kinds of risk that can be used in fixed income.”

Even with that in mind, it's still way too early to advise jumping into Mr. Gross' latest venture.

But the overall unconstrained bond fund category? It certainly appears to be going in the right direction.

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