15 Oct 2014 13:50

New York

EVENTS at Pimco this year have resembled a soap opera, but at this point, the spectacle is creating a real-life headache for retirement savers.

The Pimco Total Return bond fund, managed by William H Gross from its inception in 1987 through his abrupt resignation last month, is the most popular bond fund offered in 401(k) accounts, according to BrightScope, a retirement plan rating firm.

And there has been a solid reason for that: Returns, until recently, have been excellent. The fund is offered in nearly half of the more than 55,000 plans that BrightScope tracks, and 401(k) savers had US$88 billion riding on the fund at the end of 2012, the latest data available for 401(k) plans.

Now that Mr Gross has exited, should the fund get the boot from your retirement portfolio?

What’s happened isn’t a confidence builder, says Marilyn Cohen, chief executive of Envision Capital Management, an investment advisory firm specialising in bond portfolios. You don’t want drama from your bond portfolio of all places.

There’s been plenty of that of late. Here is a quick recap: After a standout decades-long record that earned Mr Gross the sobriquet the bond king, performance at Pimco Total Return wobbled in the past few years. A misplaced big bet in 2011 against US Treasurys produced a return that ranked in the bottom 13 per cent of intermediate bond funds that year, according to Morningstar. This year’s performance through September ranked in the bottom 30 per cent of similar funds.

And Pimco was in serious damage-control mode even before the recent upheaval.

In January, Mohamed A El-Erian, co-chief investment officer with Mr Gross and his heir apparent, abruptly resigned. Friction with Mr Gross emerged as one contributing factor.

In the wake of the split, Mr Gross’ management style at the firm he built received plenty of media attention. A flamboyant presentation at an investment conference in June — wearing sunglasses, Mr Gross, 70, compared himself to Justin Bieber — wasn’t a confidence booster.

Investors were already getting anxious before Mr Gross’ exit; nearly US$69 billion was withdrawn from the fund in the 16 months through August. In September, which included three trading days after Mr Gross resigned and said he was joining the Janus Capital Group, nearly US$18 billion more, net, was withdrawn from the Total Return fund. Its US$202 billion in assets at the end of September was down from a peak of nearly US$293 billion in April 2013, according to Morningstar.

Rusty Vanneman, chief investment officer at CLS Investments, says the post-Gross Pimco Total Return, now run by a team, could actually be a better fit for 401(k) investors who are most interested in the basic risk-dampening diversification that bonds provide, rather than outsize bets on one sector or strategy.

Where you used to have one person in charge, now there are three with input, Mr Vanneman says. Having more voices typically moderates a portfolio’s investment bets. Mr Vanneman’s firm manages more than US$2 billion in assets, including nearly US$130 million invested in Pimco bond exchange-traded funds.

Current investors should also be calmed by the fact that the new team comes from a deep internal bench that had been working with Mr Gross for years. Daniel J Ivascyn, Morningstar’s fixed-income fund manager of the year in 2013, oversees the fund’s three-manager setup, which includes Mark R Kiesel, Morningstar’s fixed-income manager of the year in 2012.

It’s not as if they went outside to fill the position, says Jon Hale, director of manager research at Morningstar. The new team has been part of the process and the culture. Still, it can take time for new teams to jell, and there’s no guarantee they will. Morningstar downgraded Pimco Total Return from its gold designation (best of breed, based on Morningstar’s assessment of five key metrics) to bronze (still positive, but less so). It said it wanted to watch Pimco closely for a while to see how the new management team coalesced. It will also check on outflows in coming months.

That close monitoring of Pimco is similar to the approach being taken at LPL Financial’s retirement plan division, where all Pimco funds that had been run by Mr Gross have been put on a watch list. If performance tumbles, we’d be concerned, but in the absence of that, we are comfortable with Pimco’s deep bench of managers, says David Reich, head of LPL’s retirement division.

Over the near term, redemptions are another concern. Mr Hale says the September outflows, while significantly higher than the approximately US$4.3 billion monthly average over the previous 16 months, were not overly troubling, and he expects outflows to moderate in the coming months. Pimco Total Return has sizable assets in Treasurys and other highly liquid assets that can be sold to meet redemptions. NYT