Advisers with clients in variable annuities are keeping a close eye on the subaccount version of the Pimco Total Return Fund, wondering whether clients will feel inclined to move to a different option.
After the Total Return Fund (PTTAX) lost a record $23.5 billion in September, it's tempting to look to the fund's subaccount to see if there will be comparable outflows. The latest data for that subaccount, however, is only available through the second quarter.
“It's going to be a waiting game to see how those flows look out of the subaccounts,” said John McCarthy, product manager of insurance solutions at Morningstar Inc. “Even with Bill Gross and his effect on the funds, we won't know anything until the fourth quarter flows.”
Third quarter flows will be negligible, Mr. McCarthy predicts, given that Mr. Gross left Pimco so close to the end of the third quarter.
The Pimco variable insurance
trust version of the Total Return Fund held some $7.13 billion in net assets as of the end of the second quarter, according to data from Morningstar, which measures subaccount data on a quarterly basis. That's up from where the massive fund was just a year ago, when it held $6.83 billion in net assets.
Notably, however, the VIT version of the Total Return Fund had experienced its share of outflows before Bill Gross' departure from Pimco. Data from Morningstar reveal the subaccount experienced net outflows in four out of the last five quarters. Some $253.1 million left that fund in the third quarter of 2013. The fund experienced a rebound in the final quarter of 2013, with net flows of $27.1 million, but money left the subaccount in the first and second quarters of 2014 to the tune of $101.6 million and $16.6 million, respectively.
For comparison, the overall taxable bond category for subaccounts experienced net outflows in three out of the last five quarters, according to data from Morningstar. When $253.1 million exited the Pimco Total Return Fund subaccount in the third quarter of 2013, the overall category of taxable bond subaccounts added $94.4 million. In the second quarter of this year, however, money left both the taxable bond category and the Total Return subaccount. The overall category saw $156.7 million in outflows, while Pimco experienced a $16.6 million outflow.
Advisers don't necessarily expect a wave of clients asking to move their bond allocations in a VA to something else, but they do plan to monitor that activity and to educate clients on the matter.
Mitchell Kauffman, managing principal of Kauffman Wealth Services, is putting together a note for clients on what Mr. Gross' departure from Pimco might mean for VA holdings.
“We're not experiencing clients calling with concerns, and we're not sure we're going to see much,” he said. “But any time there's news that's significant we want to make sure clients get some information on it.”
Mr. Kauffman anticipates clients who invest in the subaccount version of the Total Return Fund will stay put. “We're not concerned about clients leaving or wanting to move because Bill Gross left,” he added. “It's about how does his departure impact subaccount performance. If we see something that is of concern, that would be the impetus to recommend changes, as opposed to just the departure by itself.”
There are a handful of issues behind advisers' uncertainty of how VA clients might react to the developments at Pimco. For one thing, it's relatively easy for mutual fund clients to pull their money out of one fund and go elsewhere; they have a whole universe of investments to choose from. With variable annuities, however, clients are ideally supposed to keep their focus on the longer term, meaning they ought to be able to ride out turmoil at a given fund manager as well as anxiety on interest rates.
Further, the VA clients' ability to swap from one bond fund option to another is constrained to a great extent by the insurer and the options the carrier will offer on its investment platform. Another thing to consider: There aren't any taxable implications to moving from one bond fund to another inside a VA, while regular bond fund investors may face a tax bite when they decide to move from one investment to another.
So for now, the VA industry will watch and wait to see what the fourth quarter will bring for the Pimco Total Return Fund subaccount.
“It's going to be very interesting to see how the next few weeks and months unfold at Pimco,” said Carrie Turcotte, president of Crest Financial Strategies. “I would expect to see some movement in both spaces — the [Total Return Fund] versus the subaccount. I hope I'm wrong, but we'll see.”
