Contact Bates Today

Bates Group is with you every step of the way. Contact us today for more information on how our End-to-End Solutions can help your firm.

Get My Solution Started

Bates Group Logo

We’re looking for talent! Interested in a career at Bates Group? Visit our Careers page.

Bates Research  |  10-16-14

PIMCO Total Return Fund

It has been a bad year for PIMCO's Total Return bond fund, normally a stalwart presence in fixed income markets. After the performance of the fund fell from the top to the bottom quartile of its peers, the fund has faced a steady wave of withdrawals. At the same time, the SEC has been investigating the exchange traded fund (ETF) version of the well-known fund for potentially misleading investors by valuing securities at higher prices than it bought them for. The ETF version of the Total Return fund has approximately $3.6 billion under management, and there are alleged instances in which it bought securities at one price and then immediately valued them at a higher price for purposes of reporting NAV. These instances appear to be concentrated in the fund's mortgage-related purchases. If the mortgage purchases were small amounts (so-called "oddlots") and were less frequently traded, perhaps because they were backed by a lesser-known financial institution, PIMCO would have been able to purchase them at discount prices. Revaluing them at a higher price could have been a result of valuing the underlying fundamentals of the assets, rather than using market prices, since that information may or may not be available on less-frequently traded securities (and would have been distorted by PIMCO's large purchases anyway). 

PIMCO has stated that it is fully cooperating with the investigation, but the large scale of redemptions, poor performance of the fund itself, and scrutiny from the SEC seems to have brought things to a head between PIMCO and its founder Bill Gross. Gross announced his departure from PIMCO for rival Janus Capital, leaving the firm without a Chief Investment Officer, and the Total Return fund without a manager. 

How important is Gross' exit from PIMCO? In the aftermath of the announcement, PIMCO moved swiftly, announcing that Dan Ivascyn will take over as CIO, and that company veterans Mark Kiesel, Scott Mather and Mihir Worah will take over the Total Return fund. Ivascyn used to run the PIMCO Income fund, which had been steadily gaining on the Total Return fund as PIMCO's most popular, gaining new investors at much the same rate as the Total Return fund was losing them. 

Despite the announcement, many pension funds and pension fund advisors announced that they were reviewing their investments in the Total Return fund.  Morningstar, an influential mutual fund rating company, downgraded the Total Return fund from "Gold" all the way to "Bronze". Both developments could signal increased investor redemptions, as investors look to outside sources to evaluate the impact (and importance) of Gross for the fund's future return prospects. So far, investors seem to distrust a Total Return fund not managed by him. In fact, according to data estimates generated by Morningstar, the Total Return fund has experienced nearly 50% of its net outflows for 2014 in September: the first eight months of the year saw approximately $21.9 billion leave the fund, while $16.7 billion left in September alone. This includes $447 million that exited the fund on Monday, September 29 (the first trading day after Gross' announcement). The chart below shows reported redemptions for the Total Return fund from January 2013 to March 2014, along with Morningstar estimated redemptions for January 2013 to September 2014. As seen below, Morningstar estimates are generally close to actual redemption behavior, meaning that the outflows for April to September will likely show a dramatic increase once they are reported.

{image_1}

Despite the market's vote of confidence, the future for Gross is far from certain. At Janus he will manage the much smaller Global Unconstrained fund, which has $13 million in assets compared to the Total Return fund's $220 billion. Many industry insiders say that the smaller portfolio will actually help Gross to recapture his high level of historical performance, as it will afford him more opportunities to invest tactically, without having to worry about putting such a large pool of money to work. But information emerging from PIMCO indicates that the star manager's decision making and behavior may have become erratic as of late. Consequently, investors will be watching the first year of his performance at Janus closely.