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Is the Bill Gross & Mohamed El-Erian Spat a Reason to Avoid Pimco Funds?

The bond world has experienced something new and unusual in recent weeks: excitement.

The California-based asset manager Pimco found itself in the spotlight following a Wall Street Journal article revealing a conflict between the company’s chief, Bill Gross, and Mohamed El-Erian, former co-chief investment officer. This dispute eventually led to El-Erian’s departure from the firm, according to reports, and it has been followed by weeks of revelations regarding the nature of the relationship between the two managers.

The drama has prompted various clients to put Pimco on “watch” or considering pulling assets from the firm to minimize the impact of potential distractions in the board room. Indeed, Pimco funds especially Pimco Total Return Fund (PTTAX ) have suffered outflows so far in 2014, even as bond funds in general have experienced renewed inflows.

So, if major advisers are bailing on Pimco funds, does that mean you should too?

Bill Gross vs. Mohamed El-Erian: A Distraction?

At this point, it’s time to take a step back.

It’s true that many investors don’t hold Pimco’s mutual funds due to their loads, but the firm offers 20 exchange-traded funds covering various areas of the financial markets. Foremost among these is Pimco Total Return ETF (BOND ), which still has nearly $3.5 billion in assets despite the recent outflows. This makes BOND only the third-largest Pimco ETF, behind Pimco 0-5 Year High Yield Corporate Bond Index ETF (HYS ) and Pimco Enhanced Short Maturity ETF (MINT ).

The company has a combined $14.4 billion in ETF assets, so clearly there are plenty of investors with a potential decision on their hands.

The primary issue in deciding whether to sell or hold Pimco funds right now is whether the continued attention on the dispute between Bill Gross and Mohamed El-Erian will remain a distraction that weighs on performance.

Despite some media reports to the contrary, that just doesnt make sense. Asset-management operations are highly complex, with traders, analysts, portfolio managers and others all playing a role. Pimco, for its part, states on its website that it employs no fewer than 738 investment professionals. Are we truly to believe that all of these Pimco officials are being distracted by events taking place at the CIO level?

Or is it more likely that bond-market reporters who only rarely see their articles gain widespread coverage are pursuing this storyline because it creates a sensation and provides a rare glimpse into the office politics of a major firm?

The fact that the story involves Bill Gross, the reigning Bond King, only makes it that much more compelling.

So why are advisers skittish? Take this quote, from Harold Evensky of Evensky and Katz Wealth Management, as reported in Bloomberg :

“We are considering reducing exposure to Pimco and having those conversations with our investment committee right now. No matter how good someone is, with all that hype and disruption, combined with the headwinds in fixed income, that could have an impact on everyone’s ability to pay attention to their daily job.”

Perhaps, but theres another why we’re hearing quotes like this right now: performance.

Pimco Funds Arent Cutting It

If Pimco were still knocking the cover off the ball, it’s unlikely the Gross-El-Erian dust-up would be getting as much attention as it is.

Take Pimco Total Return Fund, for instance. If the fund were putting up the level of outperformance it did earlier in its history, boardroom politics would be a non-issue. Instead, the fund is below its Lipper average for the five-year period, and it has only outpaced its benchmark in three of the past six years.

The performance issue isn’t specific to Total Return, either. The table below shows the percentage of Pimco funds that have beaten their Lipper peer groups in each time period. These numbers make it obvious that while longer-term returns remain strong, more recent performance has been abysmal.