Key Points

Bill Gross resigned from his role as PIMCO’s Chief Investment Officer to join Janus Capital. The PIMCO funds on the current edition of Schwab’s Mutual Fund OneSource Select List TM   are not managed by Gross. There are no PIMCO ETFs currently on Schwab’s ETF Select List TM . A list of funds formerly managed or co-managed by Gross is available below.

A surprise change in management at Pacific Investment Management Co. or PIMCO, one of the largest global fixed income investment houses, occurred on September 26. Here’s what you should know about the change.

What is happening at PIMCO?

Bill Gross resigned from his role as PIMCO’s Chief Investment Officer to join Janus Capital. Daniel Ivascyn was elected to serve as PIMCO’s Group Chief Investment Officer, succeeding Gross. In addition, the firm appointed Andrew Balls, CIO Global; Mark Kiesel, CIO Global Credit; Virginie Maisonneuve, CIO Equities; Scott Mather, CIO U.S. Core Strategies; and Mihir Worah, CIO Real Return and Asset Allocation. Douglas Hodge, PIMCO’s Chief Executive Officer, and Lew “Jay” Jacobs, President, will continue to serve as the firm’s senior executive leadership team.

PIMCO also appointed Mr. Mather, Mr. Kiesel and Mr. Worah as Portfolio Managers for the well-known PIMCO Total Return Fund, replacing Gross.

How important is the departure of Gross?

Gross was probably the most important individual at PIMCO and was the face of the organization. His departure matters, but PIMCO has a deep and capable investment staff.

Does this event have an impact on the Mutual Fund OneSource Select List TM ?

The following PIMCO funds are listed on the current edition of the Schwab Mutual Fund OneSource Select List: PIMCO Income, PIMCO Foreign Bond (USD-Hedged) and PIMCO CommoditiesPLUS Strategy.

Gross was not a portfolio manager on any of the three aforementioned funds.

Does this event have an impact on the ETF Select List?

There are no PIMCO ETFs currently on the ETF Select List.

What information should investors consider when reviewing their PIMCO funds or strategy holdings?

As with any investment, the decision to continue holding a fund is a function of your own individual situation and the extent to which the nature of the fund and the market environment in which the fund operates matches your needs, objectives, and preferences as an investor.

When considering whether to hold or sell, it is important to understand the consequences, risks, and opportunities associated with each path.

In addition, consider the following factors that are particularly relevant in this case.

• Management turnover. Whenever there is a significant change in the portfolio management team of a strategy, it is important to consider the experience, tenure, and philosophy of those who take over the portfolio and what, if any, changes will be made to the portfolio management philosophy. It is important to realize that Gross was not directly involved with every product at PIMCO.
• Redemptions. When a widely-held fund whose management is in the public eye such as PIMCO’s loses its portfolio manager who also serves as the firm’s chief investment officer, there is always the possibility of accelerated redemptions from the fund. Fund redemptions can potentially harm the performance of a fund, but this is dependent on the size of the fund and the liquidity of the securities held in the fund. While the global bond market (including fixed income derivatives) is larger than it’s ever been, the size of, for example, PIMCO Total Return at roughly $220 billion is immense. It is difficult to immediately know the extent of any redemptions and the impact they may have on the fund’s NAV.
• Manager diversification. A key element of Schwab’s investment philosophy is diversification. This applies not only at the asset class level, but also within an asset class. If a large portion of an investor’s fixed-income exposure is in a single fund, we suggest considering whether diversifying into other funds will help reduce manager-specific risk in the portfolio.

Is the fact that PIMCO Total Return isn’t on the Select List a reason to sell?

The fund was removed from the Select List in April 2014 as Schwab’s proprietary mutual fund evaluation fell relative to other options in the intermediate term bond category.

Removal from the Select List is not equivalent to a sell recommendation; it only means that we no longer consider the fund to be as attractive an option relative to other alternatives.

Do any of Schwab’s affiliated asset managers hold PIMCO funds or ETFs, and if so, how are they handling this event?

On September 30, 2014, Charles Schwab Investment Advisory (CSIA), the Schwab affiliate which manages Schwab Managed Portfolios, sold all of its holdings of the PIMCO Total Return fund following the departure of Bill Gross. Although PIMCO has a deep bench of investment professionals and the firm has named Gross’ successor on the Total Return fund, it is unclear what, if any, changes will be made to the portfolio management philosophy of the fund. Since Total Return is a widely held fund with a fund manager in the public eye, CSIA also was concerned about the potential impact of accelerated redemptions on fund performance. These sales were in mutual fund accounts managed by CSIA only.

Some SMP accounts only hold ETFs (exchange-traded funds). SMP may hold other PIMCO ETFs which were not currently affected by the changes.

Charles Schwab Investment Management (CSIM) removed the PIMCO Total Return Fund from the Schwab Target Date mutual funds that it manages due to continued organizational changes at the firm, effective September 29, 2014. For more details, see www.schwabfunds.com .

Charles Schwab Bank Collective Trust Funds Investment Committee elected to remove PIMCO as a sub-advisor to the Schwab Institutional Core-Plus Fixed Income Trust Fund (Fund), which is also an underlying investment for the Schwab Managed Retirement Trust Funds (SMRT). Liquidation of the strategy began Tuesday, September 30. For more details, see www.schwabbankfunds.com .

Which PIMCO funds were managed or co-managed by Gross?

In a press release, PIMCO provided the following addendum with current and past management/fund assignments.

Portfolio management/Fund assignments