Pimco Total Return ETF faces SEC investigation

$3.6B ETF is reportedly is being investigated over whether it artificially inflated asset prices to boost returns.

Pimco is under investigation by securities regulators into whether it artificially inflated asset prices to boost returns on its $3.6 billion Pimco Total Return ETF, according to published reports.
For months, the Securities and Exchange Commission has been looking at whether the firm — a leader in actively-managed ETFs — bought securities such as bonds at discounted prices while using higher valuations when it calculated those bonds’ value, the Wall Street Journal reported late Tuesday. Loftier pricing might have been possible because small amounts of lightly traded mortgage securities, for instance, were compared against a larger pool by outside valuation firms.
The PIMCO Total Return ETF is managed by Bill Gross, Pimco’s co-founder and the embattled totem of bond management.
Details on the probe are scant, and the SEC did not respond to a request for comment after normal business Tuesday.
“Pimco has been cooperating with the SEC in this non-public matter, and we take our regulatory obligations and responsibilities to our clients very seriously,” said Pimco spokesman Mark Porterfield, in a statement Tuesday. “We believe our pricing procedures are entirely appropriate and in keeping with industry best-practices.”
Pimco has faced continued skepticism from its core clients, including advisers. The firm saw nearly $64 billion in withdrawals over the last year.
That said, its nearly $3.6 billion Pimco Total Return ETF (BOND) saw some success in that period.
Since March 1, 2012, the Pimco Total Return ETF has gained 16%, compared with the 9.1% increase for its mutual fund counterpart and 5.6% return in the Barclays U.S. Aggregate Index for bonds, according to data compiled by Bloomberg.
This year, the Pimco Total return ETF has advanced 5%, compared with 3.6% for the mutual fund and 4.1% for the index.
The Newport Beach, Calif.-firm’s bond mutual fund is the world’s biggest, at nearly $222 billion.
ETFs, which have turned into one of the most popular investing vehicles over the past decade, trade on an exchange and can be bought and sold like stocks. While the majority of them mimic broad market indexes, some like Mr. Gross’s Total Return ETF employ an active strategy in which the manager selects securities.
Mr. Gross, 70, is a co-founder and chief investment officer of Pimco, which manages about $1.97 trillion in assets.
His Pimco Total Return mutual fund has suffered 16 straight months of redemptions as returns have trailed rivals and investors have turned away from traditional fixed-income strategies in anticipation of rising interest rates. Investors pulled a record $41.1 billion from the fund in 2013, and an additional $24.8 billion this year through August, according to estimates by Morningstar Inc. in Chicago.
Bloomberg News contributed to this story