Usually, we find that Friday morning headlines are not worthy of much commentary. However, today is the exception, with the surprising news that Bill Gross of Pacific Investment Management Co., longtime manager of Pimco Total Return Fund (PTTAX) and founder of the prominent fixed-income firm, is
leaving and moving to Janus Capital Group.
It has been a tough past year and a half for Mr. Gross and Pimco Total Return. The mutual fund suffered 15 straight months of outflows, Mr. Gross' then co-chief investment officer and Pimco's CEO, Mohammed El-Erian,
left in January and most recently, the Total Return ETF (BOND) is
being investigated by the Securities and Exchange Commission for how it calculates the performance of odd-lot bonds purchases.
PTTAX lost 2.3% in 2013, considerably more than the 0.3% decline for the average taxable bond fund. It was the first loss in more than a decade for this widely held fixed-income fund. While it has recovered in 2014 on an absolute basis, rising 3% through Sept. 19, it still lags the 3.5% gain for the average bond fund. As interest rates rose in the second half of 2013, we believe Mr. Gross and his team favored longer-term bonds. Yet they shortened the duration of the portfolio, unfortunately in time for the yield on the 10-year Treasury to hit a peak in early 2014 at 3% and decline notably to 2.5%. While the fund's 10-year record is in the second quartile of its Lipper Core Plus Bond peer group, the fund's one- and three-year records are below average, and its standard deviation is much higher.
In early 2014, following Mr. El-Erian's departure from Pimco, a new CEO, Doug Hodge, was named and six deputy CIOs were elevated, each with a different area of expertise such as credit and emerging markets. Four of the new leaders had a decade-plus experience at Pimco. We would expect a couple of them to take a more prominent role in working with clients and the media to explain Pimco's top-down macroeconomic views.
Pimco Income Fund (PONAX) is run by one of these deputy CIOs, Dan Ivascyn, and has a top-quartile three-year record compared with its multisector-income-fund peers. Another strong performer is Pimco Real Return (PRTNX), a TIPS fund run by Deputy CIO Mihir Worah. Though we believe Pimco has a deep bench of experienced fixed-income professionals, Mr. Gross was synonymous with Pimco. We think some investors have purchased funds not directly managed by Mr. Gross in part because of their confidence in his long-term fixed-income expertise.
In our opinion, management changes add risk for investors as the investment process can and often will be altered to reflect the new managers' preferences for assuming risk. However, in this case, we think the departure of Mr. Gross will cause some investors to move money elsewhere, whether to Janus or other fixed-income funds with strong long-term records under current management of the fund. We would caution those looking to move to Janus that unless more of Mr. Gross' team at Pimco similarly departs, his resources will be different.
Prior to Friday, the biggest news regarding Pimco was tied to its flagship exchange-traded fund. While we have no clarity on the SEC investigation, we believe the active management of a fixed-income ETF that provides daily transparency makes BOND somewhat distinct from other alternatives. While Mr. Gross was the named manager of BOND, an ongoing investigation at Pimco regarding how it values the bonds it holds will cause more investors to question whether there are better places to invest, particularly a passive ETF from iShares, Vanguard or others.
Overall, we remind investors that though they make mutual fund decisions with a long-term investment horizon, management and leadership changes often occur. As such, an ongoing review of what's inside your portfolio is imperative to make sure you are comfortable with who is running your money.
Todd Rosenbluth is director of ETF & mutual fund research at S&P Capital IQ
