Philadelphia, Pennsylvania – (StockNewsDesk) – 11/05/2014 — PIMCO’s flagship fund, the Total Return Fund, suffered another month of outflows as $27.5 billion in investor money was pulled from the fund. The two main reasons for the outflows were the poor performance of the Total Return Fund relative to its peers, and the departure of superstar fund manager, Bill Gross.
Impact of Gross’ Departure
Gross suddenly resigned from PIMCO in September to join Janus Global Advisors to run his own bond fund amid rumors that his firing would be imminent after a clash with management at Allianz. Gross had actually built PIMCO from a tiny bond fund far away from Wall Street on the California coastline to become the world’s largest asset manager, by size. Eventually, he sold PIMCO to Allianz, netting himself billions in the process.
However, his renegade management style rubbed many people the wrong way. This behavior was tolerated while Gross continued to beat the benchmarks. In recent years Gross has stumbled, infamously with his call to exit treasuries just before they embarked on a massive run higher. This led to pressure from top management that culminated in Gross leaving the firm he founded over 40 years ago.
Gross’ exit accelerated the outflows, however, it had already begun as there were indications that Gross had lost his magic touch. The new team at PIMCO, led by Daniel Ivascyn, has worked diligently to reassure investors of their vision in an effort to convince them to keep their money at PIMCO. These efforts have led to less outflow than initially predicted.
Total Return Bond Fund
Under Gross’ stewardship, the Total Return Bond Fund acquired a mythical status among investors. It basically became the automatic option for any pension fund or large institution looking to park their money, safely, and still earn a decent return. In the same way that it is said that no corporate manager has ever been fired for hiring IBM, no money manager would ever be fired for choosing to put their money in the Total Return Bond Fund.
Of course, this myth was shattered with Gross’ disastrous bet on treasuries, as well as a litany of bizarre public appearances and a public, ugly feud with PIMCO CEO Mohamed el Erian. The total asset of PIMCO’s Total Return Bond Fund is $170.9 billion versus $293 billion at its peak. Many of the largest investors in the fund are massive institutions which make decisions by committee over a long period of time, so many are speculating that this is only the beginning.
Effects of Outflows
The two main types of investors in PIMCO were those who were confident in Gross’ investing acumen and those who were there for the benchmark beating returns. Neither of those factors are in place at PIMCO. Thus, money is leaving PIMCO and following Gross to Janus, as well as moving into funds delivering market beating returns, most notably Double Line’s Jeff Gundlach. Gundlach, in recent years, has been anointed the new “Bond King”, and he has the record to back up this coronation.
High yield bonds have been in turmoil in recent months, and some are attributing this to outflows in PIMCO. In a bid to make up for his underperformance, Gross reversed course and piled into high yield instruments. Many of these are thinly traded and of questionable quality, and some saw this as a desperation move. Now with the outflows, PIMCO is a forced seller in many of these instruments, driving the price lower, so they can return cash to investors. Ironically, the outflows are putting downward pressure on the price of these high yield bonds, which only makes PIMCO’s returns worse, leading to another round of outflows.