Advisers who fled Pimco Total Return pay a price in 2015

Funds that won money from Pimco lag Bill Gross' replacements this year

Sep 1, 2015 @ 2:10 pm

By Trevor Hunnicutt

Advisers who fled the Pimco Total Return Fund are paying a price.

So far this year, most of the mutual funds that compete directly with that Pacific Investment Management Co. product – once the world's largest mutual fund – are trailing the fund. Even the top managers that were most successful in taking in billions of dollars of inflows after Bill Gross left Pimco are also largely underperforming.

The short-term laggards include teams at Metropolitan West Asset Management, Loomis Sayles & Co., Dodge & Cox, Fidelity Investments and index funds by the Vanguard Group Inc. Collectively, those funds hauled in more than $100 billion in new assets over the past year.

However, they and others in the “intermediate-term” fixed-income category, which averaged a gain of just 0.07% this year through Monday and 0.43% over the last 12 months, have struggled to keep pace with Pimco Total Return's 0.72% and 1.09%, respectively. Those trailing funds include the popular Metropolitan West Total Return Bond Fund (MWTIX), the Loomis Sayles Core Plus Bond FUND (NERNX), the Fidelity Total Bond Fund (FTBFX) and the Vanguard Total Bond Market Index (VBTLX). Many of those funds have much stronger relative track records over longer periods of time.

27 MONTHS

Investors have pulled money out of the Pimco Total Return Fund (PTTRX) for each of the last 27 months, as of July, according to Morningstar Inc., an estimated $191 billion cascade that's without parallel in mutual-fund history. The pace of those withdrawals increased almost a year ago, on Sept. 26, 2014, when Mr. Gross left Pimco. He's now a portfolio manager at Janus Capital Group Inc.

But the team that's replaced him, so far, has managed to continue to stand out despite a freshly volatile market.

“Pimco's investment process identifies macro themes and investment opportunities that sometimes take months if not years to play out,” said Scott A. Mather, a manager on the Total Return Fund, in a statement. “Last year, we anticipated the rolling bouts of volatility that we've seen in the markets, and that's helped Total Return do well year-to-date.”

STILL THE RIGHT DECISION

Despite Total Return Fund competitors' lagging returns, advisers said it will take more than a few months of outperformance for Pimco to win back their business. And they said that the uncertainty around a major portfolio manager change still made it the right decision to move when they did.

“We just did not want to have our clients involved in the controversy of all the headline news, because much of Pimco Total was clearly based on an individual,” said Harold R. Evensky, chairman of Evensky & Katz/Foldes Financial Wealth Management. “The general conclusion was they may do well in the future, but for all intents and purposes, it's a pig in a poke.”

Mr. Evensky's Coral Gables, Fla.-based financial advice firm replaced Total Return with the Dodge & Cox Income Fund (DODIX) in client accounts last September. That fund has returned -0.43% this year. He said he feels confident in the switch, especially given the fund's longer-term, risk-adjusted returns and volatility. He said a year is too short of a time period to evaluate a manager.

“We can't buy yesterday's returns,” he said.

“In managing the Income Fund, we utilize a bottom-up, fundamental research approach combined with a long-term investment horizon," said Dodge & Cox spokesman Steve T. Gorski. He noted that the fund has outperformed competitors over three, five and 10 years.

Analysts said that advisers are not likely to regret their decision to leave Total Return.

“The fund has performed relatively well versus active managers in the past year as the new team made astute portfolio adjustments,” said Todd Rosenbluth, director of ETF and mutual fund research at S&P Capital IQ. “However, many investors did not like the uncertainty and are likely happier with a more stable investment team.”

Competitors to Pimco also said the short-term results may not be meaningful. Some of the funds that are being beaten by Pimco so far this year still top the fund's returns over a year or longer periods, including the BlackRock Total Return Fund (MPHQX), the Baird Aggregate Bond Fund (BAGIX), the MetWest Fund and the Vanguard Total Bond Market Index Fund (VBTLX). Over three years, the average fund in the category is up 1.66%, compared with 1.82% for Total Return.

“Vanguard tends to focus on longer-term performance, and we encourage our investors to do the same,” said Katie Henderson, a spokeswoman for the Valley Forge, Pa.-based firm.

A Fidelity spokeswoman, Sophie Launay, said the firm's Fidelity Total Bond Fund “has provided investors strong risk-adjusted returns over a number of market cycles.”

HOLDINGS MATTER

Peter W. Palfrey, a manager of the Loomis Sayles Core Plus Bond Fund, said his fund's performance this year is largely explained by their relatively light holdings of government bonds that have benefited from a “flight to quality” by skittish investors.

“We ultimately think that government markets are very expensive and that investors will be better served to be biased away from the government market,” he said. “The reality of the past 12 months is that investors who are well compensated being in high-quality instruments such as U.S. governments and they were penalized for being in credit securities or securities that were perceived as that of more developing market economies.”

A low-cost share class of the Loomis fund, with the ticker NERYX, has delivered an average 6.16% return per year for 15 years, better than nearly all competitors. Mr. Palfrey said the challenge for managers is to communicate, especially to new investors in their funds, that they expect to be judged over a longer-term time horizon.

Pimco may have experienced exactly that dilemma when its outflows started during 2013, a difficult market period known as the Taper Tantrum.

“People were judging them month-to-month, quarter-to-quarter, and that makes it difficult when you have a longer-term tactical vision and the markets are not behaving the way you wish they were,” Mr. Palfrey said.

A smaller group of top-selling funds are still doing better than Total Return this year. They include the DoubleLine Total Return Bond (DBLTX), managed by Philip A. Barach and Jeffrey E. Gundlach, as well as the Vanguard Intermediate-Term Bond Fund (VBIUX) and the JPMorgan Core Bond Fund (JCBUX). Mr. Gundlach's celebrity seems only to have grown since Mr. Gross left Pimco. The cheapest share class of his fund is up 1.99% this year.

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