Morningstar late on Monday downgraded Pimco's flagship bond fund, the world's largest, after the
departure of the fund's long-term manager, Bill Gross on Friday.
The ratings firm lowered its forward-looking "analyst rating" two notches to bronze from gold on the Pimco Total Return fund (PTTAX) even as it expressed confidence in the group of managers who have now taken over Mr. Gross' responsibilities.
"Morningstar remains positive overall on Pimco Total Return after the departure of Bill Gross but is downgrading the fund to bronze because of the resulting uncertainty regarding outflows and the reshuffling of management responsibilities," wrote Morningstar analyst Eric Jacobson. "The fund's bronze Morningstar analyst rating reflects Morningstar's high level of confidence in PImco's resources and overall abilities but also the uncertainty as to exactly how all of these parts will mesh in the wake of Gross' departure."
Mr. Gross, who boasts one of the best long-term track records in the bond-investing business, resigned Friday from the firm he co-founded in 1971 to
take a job at Janus Capital Group Inc, where he started work Monday.
Mr. Gross, who had managed Total Return since 1987, had come under scrutiny in recent months for his management style and spotty recent performance.
Advisers and investors withdrew $63 billion in the 12-month period ended Aug. 31, and a wide variety of analysts
predict those outflows to accelerate in the aftermath of Mr. Gross' departure.
Pimco said Friday the $222 billion Total Return fund will now be managed by Scott A. Mather, Mihir P. Worah and Mark R. Kiesel, each of whom manage top-performing strategies at the firm and were elevated to senior investment roles earlier this year.
Daniel J. Ivascyn, meanwhile, was
selected as "group chief investment officer," taking over firm-wide responsibilities once managed by Mr. Gross.
Mr. Jacobson said they appear poised to succeed "after the dust settles," calling them "experienced and well-respected."
Estimating outflows that "could total in the tens of billions of dollars," Mr. Jacobson said the fund's heavy positioning in easily traded investments, such as U.S. federal government debt, will bode well as the company works to manage any redemptions.
A spokesman for Newport Beach, Calif.-based Pimco did not respond to a request for comment after normal business hours Monday.
Morningstar's downgrade came on the same day it issued a report criticizing the Pimco's oversight by independent boards. Morningstar lowered a score it issues on board oversight to a D, from a C. (A is the highest.)
The firm said the loss of two independent trustees, William Popejoy and Vern Curtis, left just three independent trustees and five total. Morningstar has been critical of Pimco funds' fees, which it has said are not adequately disclosed or structured to return the benefits of the firm's declining costs to its clients.
“When there is turmoil at a fund company, it is especially important to have an effective board in place,” wrote Mr. Jacobson and another analyst, Bridget B. Hughes. “Longstanding issues … combined with newer concerns about the disruption to the funds' boards and their independence are enough to consider the current quality of the boards inferior.”
The last significant adjustment to Morningstar's rating of Pimco came in March, after the announced departure in January of Mr. Gross' heir apparent, Mohamed A. El-Erian.
At that time, the research firm lowered its so-called “stewardship” grade to C from B, saying that "Bill Gross is the founder around whom Pimco was built, and his essential nature as an investor, above all else, has been a critical foundation for the firm."
