In appearances public and private, Pimco's executives — including the legendary bond manager Bill Gross — have been touting what they've described as the performance “turnaround” of the firm's battered flagship Total Return fund.
The world's largest bond fund, which is trying to recover from more than a year of underperforming most of its competitors, is pointing to returns in the second quarter (up 2.37%) and June (0.37%) that ranked in the top 23rd and 13th percentiles, respectively, for the institutional share class (PTTRX). (Over 15 years, the fund's performance trounces 96% of its competitors, according to Morningstar Inc.)
"The Total Return Fund, long lambasted as underperforming, is
outperforming its index by a decent margin, before fees,”
said Mr. Gross at the Morningstar Investment Conference last month. “It does what a customer wants it to do and that's to outperform with less risk on a consistent basis.”
But performance metrics that take risk into account point to no such rebound — and may, in fact, point to increased risk. The fund has underperformed its competitors, and a benchmark index, on the Sharpe ratio, a key risk-adjusted performance metric, every month since October 2011.
The Sharpe ratio is intended to measure the amount of return generated by its volatility, a numerical proxy for risk. As risk goes up, the ratio decreases; as returns increase, the ratio increases.
The performance statistics are just one of several major hurdles that Mr. Gross' firm has to overcome as it looks to stanch withdrawals totaling $64 billion over the last 14 months, Morningstar estimates. Advisers have said that
management shakeups at the firm are also among the factors they've watched since the unexpected departure of the firm's chief executive, Mohamed A. El-Erian, earlier this year.
Risk-adjusted metrics will be closely watched by Pimco's institutional investors, some advisers and the fund manager researchers who will rely on them as they consider how and whether to outsource the management of their clients' core fixed-income exposures, according to Cullen Roche, founder of Orcam Financial Group, a fee-only advisory firm, and author of the book "Pragmatic Capitalism: What Every Investor Needs to Know about Money and Finance (Palgrave Macmillan).
He said total returns say less than many advisers imagine.
“By almost any quantifiable metric, the Total Return Fund hasn't been a good fund on a risk-adjusted basis over the last three years,” he said. “That's a fair way to measure it — I think it's probably the most important way to measure it.”
The firm's trailing-36-month Sharpe ratio was 1.09 in June, compared to 1.30 for the
Barclays U.S. Aggregate Bond Index, according to Zephyr Associates Inc., an investment-performance software provider.
Pimco representatives did not respond to requests for comment.
The Sharpe ratio, while widely used, isn't universally appreciated. However, there are other statistics that look under the hood of PTTRX, from standard deviation to downside “capture” that professional investors may find troubling.
“Pimco captured 130% of the worst period of its peers, so when everyone went down, it went farther and faster,” said Jeff Tjornehoj, head of Americas research for Lipper Inc., referring to the fund's performance during the weakest period of market performance over the 12-month period ended in June.
Over the year, in its best month (September 2013), the fund delivered better performance than all but six of its competitors. But in its worst month (August 2013), it was 39th out of 44 funds, according to Lipper.
“It suggests to me that there's quite a bit of volatility associated with this fund — that investors expecting a nice and easy ride aren't going to find it,” Mr. Tjornehoj said. “There have been changes in the portfolio that have caused this fund to drive to a more volatile side of the performance page.”
Mr. Tjornehoj said it can be difficult for analysts to glean the exact details of those changes from the firm's public disclosures.
But in the Chicago speech where Mr. Gross touted the fund's performance, he cited three strategies that he felt were “key” to the firm's “structural alpha,” its use of short- to intermediate-duration bonds, such as five-year bonds, interest-rate swaps in conjunction with short-term corporate and floating-rate notes that make Treasury holdings act more like corporate bonds and
insurance sales to investors looking to avoid the risk of market volatility as a “key” to the fund's success.
The strategies, he conceded, come with risks. But if inflation rises, duration risk will hurt bond exposures. And he said credit and volatility risks are effective bets in this market.
“Why are people willing to pay for insurance? They want to sleep at night. And so at Pimco, we're willing to sell that insurance; we're willing to sleep less,” said Mr. Gross. “We're willing to sleep less, but perform better.”
