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 The reaction to Gross's sudden exit has put some money in rival bond
funds that charge higher fees, produce lagging returns, have limited
track records and in some cases, riskier holdings.
"Investors have made a knee jerk reaction away from Pimco, but in
doing so they need to make sure that what they are buying is a
better alternative," said Todd Rosenbluth, director of mutual fund
research at S&P Capital IQ.
Some funds with very short track records have shown inflows that
coincide with the Pimco money exodus.
For example, the two-year-old, $576 million JPMorgan Global Bond
Opportunities Fund GBOSX.O, received $346 million in inflows since
Sept. 26, the day Gross quit, according to Morningstar Inc. The fund
has returned 4.54 percent for the past year, ranking it among the
top 30 percent of its peers, according to Morningstar.
Still, the fund's year-to-date total return of 3.56 percent lags the
4.74 percent total return of the $162.8 billion Pimco Total Return
Fund PTTAX.O, which Gross ran for 27 years. And the JPMorgan fund
costs more, with a net expense ratio of 0.66 for its institutional
shares.
It is rare to see a less established fund gather that much in assets
so quickly, Rosenbluth said.
"Usually investors like to see a three year track record," he said.
JPMorgan attributes the flows to its performance, low volatility and
investor comfort with the manager, Bob Michele, who has been
managing unconstrained funds for 10 years, a spokeswoman said.
Wells Fargo Advisors moved assets in its Freedom managed account
platform from Total Return to at least three portfolios: the MetWest
Total Return Bond Fund MWTNX.O, the AMG Managers Bond Fund MGFIX.O
and the Fidelity Advisor Strategic Income Fund FSIAX.O, sources told
Reuters.
Schwab dropped the Pimco Total Return Fund from its 10 target date
funds and collective trusts, and temporarily reallocated the Pimco
assets in its target date funds to the Schwab Total Bond Market Fund
SWLBX.O and the Loomis Sayles Investment Grade Bond Fund LIGRX.O.
A Wells Fargo spokeswoman declined to comment on the changes, but
said the decisions were made based on "the long term view for
clients."
At Schwab, the temporary reallocation to the two funds aimed at
maintaining the overall risk/return characteristics of the Schwab
Target Funds' fixed income portfolios rather than pick the
"historically best performing" replacement funds, a spokeswoman
wrote in an e-mailed statement. The firm expects to choose a
permanent replacement for the Pimco fund in the first quarter of
2015, she wrote.
In November, the Pimco Total Return Fund, under a new team led by
long-time Pimco portfolio manager Scott Mather, posted returns of
1.00 percent, beating 99 percent of its category, according to
Morningstar. By contrast, in the 18 months ending in September,
Total Return gained 0.49 percent, trailing 83 percent of its peers,
according to Morningstar.
Indeed, outflows from Pimco are slowing. In November, the Pimco
Total Return Fund bled $9.5 billion, but that compares with a record
$27.5 billion of withdrawals in October and $23.5 billion reported
for September, according to the firm.
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"We've been very stable in implementing our investment process from
the first day of Bill's departure," Dan Ivascyn, who replaced Gross,
told Reuters Tuesday. "From that perspective, we've been in very
good shape."
The bulk of money leaving Pimco went to reasonably priced and
top-performing funds managed by BlackRock BLK.N, TCW's Metropolitan
West Asset Management, DoubleLine Funds and The Vanguard Group.
LAGGING PEERS
But Wells Fargo, for example, chose to replace Pimco offerings with
Fidelity's strategic income fund and its short fixed income fund
that have lagged a majority of their respective peers for the past
three years, according to Morningstar.
And while the MetWest fund has outperformed 94 percent of its peers
for the past three years, with a total annualized return of 5.76
percent, the Wells Fargo clients who had money in the Pimco Low
Duration Fund, which Gross also managed, were moved to the Fidelity
Advisor Short Fixed-Income Fund FSIX.O. That has lagged the Pimco
fund for the past 10 years, according to Morningstar.
The Fidelity short fixed income fund has beaten its benchmark for
the past five years and is less volatile than most of its peers, a
Fidelity spokeswoman said.
Though the AMG Managers Bond Fund has outperformed over the past 10
years, total expenses for institutional shares of the fund, which
are usually the cheapest class, are 91 basis points, almost double
the 46 basis points of Pimco Total Return.
"Right now investors have been rewarded despite the higher costs,
but there have been times, like in 2008, when the fund has
significantly underperformed its peer group," Rosenbluth said.
The AMG fund fell 16.31 percent in 2008, compared to the category
which dropped only 4.7 percent, according to Morningstar.
Schwab's decision to put Pimco assets into its own Total Bond Market
Fund and the Loomis Sayles Investment Grade Bond Fund has had mixed
results – while the Loomis Sayles fund is a top performer for the
past one, three and five years, the Schwab fund has underperformed
its peers for the past three, five and 10 years. However, the fund
is only 29 basis points, analysts note.
"Because it is cheap it might make sense on a short-term basis, but
the performance is weak and it raises questions on whether it was
chosen only because it is its own fund," Rosenbluth said.
(Reporting By Jessica Toonkel; Additional reporting by Jennifer
Ablan; Editing by Tim McLaughlin and John Pickering)
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