Fixed Income

Pimco’s loss could be these fund companies’ gain

BlackRock and Legg Mason are among the firms poised to pounce on Pimco's outflows now that the face of the firm has flown the coop.

Pacific Investment Management Co.’s chief executive Douglas Hodge said the firm is expecting and is ready for client redemptions following the departure of co-founder Bill Gross.

In a conference call with analysts Monday, where he was joined by top executives at Pimco parent Allianz SE, Hodge said management changes have triggered reviews with some clients. Hodge said it is too early to estimate redemptions at Pimco.

Investors including the The California Public Employees’ Retirement System, the largest U.S. pension fund, the Florida State Board of Administration, and New York City’s five pension plans said they are monitoring the situation after Gross’s surprise Sept. 26 announcement that he was joining Janus Capital Group Inc. Sanford Bernstein said in a report that day that Pimco could see withdrawals of 10 percent to 30 percent.

Calpers, which has about 1.5 percent, or $1 billion of its fixed-income assets in a Pimco international bond fund, doesn’t have plans to change its investments with Pimco. It will monitor developments and conduct thorough analysis.

“Calpers has respect for both Bill Gross and Pimco investment professionals,” the pension system said in an e-mailed statement.

WHO BENEFITS?

With Pimco’s most famous face gone, the investment firm’s competitors will be hungry to snag a share of the fixed-income assets likely to follow him out the door.
The new residence of Mr. Gross, Janus Capital Group, is likely to attract a chunk of that money, of course. The markets certainly expect it to — the firm’s shares closed up 43% Friday.
But advisers and institutional investors may hold back to see if Mr. Gross can replicate his success, some analysts said, so other investment companies might stand to gain from Pimco’s loss.
BlackRock Inc., Legg Mason Inc. and AllianceBernstein Holding are three firms Citibank analyst William Katz believes will be recipients of assets that may flow out of Pimco following Mr. Gross’ exit.
“No question, we think the departure will drive redemptions as Mr. Gross managed roughly $450 billion in retail AUM, including $225 billion in the flagship Total Return fund,” Mr. Katz wrote in a note Friday.
It remains to be seen, however, what products that money will end up in, he said.
Todd Rosenbluth, director of ETF and mutual fund research at S&P Capital IQ, agreed that Blackrock is a good bet, as its iShares is the largest fixed-income exchange-traded-fund provider.
“We think investors will move out of Pimco’s Total Return fund and look to go into a low-cost passive alternative through an ETF,” Mr. Rosenbluth said.
Three other firms he expects to benefit are Loomis Sayles, Doubleline Capital and Dodge and Cox, which have funds with bond strategies offering attractive returns.
Scott Burns, Morningstar’s global director of manager research, said fund companies could benefit from a talent exodus as well as additional assets.
Two of the firms that go head-to-head with Pimco in fixed income include Franklin Templeton and J.P. Morgan, he said.
Pacific Investment Management Co. was already bleeding assets before the recent double dose of bad news: Mr. Gross leaving for Janus and securities regulators investigating how managers are reporting returns for the Total Return Bond ETF.
The announcement that investment guru Mohamed A. El-Erian was leaving in January was an earlier blow to Pimco, which has had 16 straight months of redemptions from Mr. Gross’s $222 billion Total Return Bond mutual fund.
“If you are a smart bond manager, you’re sitting around the conference table with partners trying to figure out how to spin this,” said Doug Wolford, president of Convergent Wealth Advisors. “We’re in for a very interesting three- to six-month news cycle; bonds are finally getting interesting. “
An analysis of who’s been taking inflows during Pimco’s outflows doesn’t forecast any clear winners, as assets were spread across the industry, said Jeff Tjornehoj, head of Lipper Americas Research Thomson Reuters.
“I don’t think there was any firm that felt they had absconded with Pimco’s purse,” Mr. Tjornehoj said. “On the other hand, that leaves dozens of firms out there to lick their chops this morning.”
This story was supplemented with reporting from Bloomberg News.