Pimco defends treating dividends, capital gains as new inflows

Many fund companies, such as Fidelity and Vanguard, back out dividends and capital gains from their net flows calculations. So does Morningstar

Mar 14, 2016 @ 1:26 pm

By John Waggoner

When bond manager Bill Gross abruptly bolted Pacific Investment Management Co. in September 2014 for rival Janus Capital Group, nearly $80 billion fled the company over the next four months.

But Pimco, which was already suffering from subpar performance even before Mr. Gross's departure, in 2015 started to calculate its net inflows and outflows differently. Pimco now accounts dividends and capital gains that flow back into their funds as new money — which makes the practice the exception than the rule among money managers.

The Newport, Calif., fund giant says it did so to align its calculations with its parent company, not to soften the appearance of its outflows.

Many fund companies, such as Fidelity and Vanguard, back out dividends and capital gains from their net flows calculations. So does Morningstar, the Chicago investment trackers. “We feel that including dividend and capital gains distributions as inflows is counting what was already there,” said Alina Lamy, senior analyst at Morningstar.

Pimco's change counted capital gains and dividend distributions as inflows. The different calculation method made the difference between an inflow and an outflow for Pimco in December 2015. Morningstar estimated that Pimco had a net outflow of $1.6 billion, while the company calculated a net inflow of $1.3 billion.

Pimco defended its calculation. “Including reinvested dividends is consistent with general accounting treatment, which characterizes anything that leads to the creation of new shares as an inflow,” Pimco spokesman Michael Reid said. “Reinvested distributions reflect the choice by an investor to put that payment back into the fund, thereby creating new shares.”

The company is not alone in the way it computes its net inflow. Blackrock, the nation's largest asset manager, has included capital gains and dividends in its flow calculation for years. The company notes the seasonal influence of capital gains distributions, which are typically doled out in December.

Pimco says it has noted the change consistently, and that it was being contemplated well before Gross's 2014 departure. “We have been consistent from the start of this process about being transparent with the press on this issue and even more so with the cap gains distribution in December when we very clearly stated on the record that, absent the distribution, the fund would have been in outflow,” Mr. Reid said. The company had also provided guidance that without capital gains and dividends, the company's net flows would have been in line with prior months — that is, negative.

Pimco's change also aligned it more closely with the way its parent, the Allianz group, calculates flows, Mr. Reid said. “While it's true that Pimco was under greater scrutiny from investors at that time, that made it all the more important to be consistent with the Allianz group in our approach.” As of January, Pimco had a net outflow of $1.1 billion, lower than any month in 2015 except December.

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