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 Pimco hasn't said how much money has been withdrawn since fund
manager Bill Gross quit on Sept. 26 to join Janus Capital. Pimco
said its Total Return fund, which Gross had personally managed for
27 years, saw $23.5 billion in withdrawals in September.
Morningstar, which analyzes mutual funds and other investments,
estimated net outflow from Total Return at $17.9 billion in
September, part of $25.5 billion of net outflows across all of
Pimco's U.S. open-ended funds in September.
The withdrawals come as broker-dealers are holding fewer bonds,
reducing the options for fund companies seeking to sell holdings to
raise the money to meet redemption demands. That may cause the
performance of some funds - including Pimco's - to lag, as spreads
among less-liquid instruments creep higher and investors find
themselves forced to choose between moving quickly or getting a fair
price for debt they're selling.
Outflows "will tend to be elevated over the next few months" said
Jeff Tjornehoj, head of Americas research at Lipper, a Thomson
Reuters company, who said Gross's exit is "the last straw" for some
institutional investors. Those "investors are going from the
wait-and-see when Bill was there to 'let's accelerate this'"
outflow, he said.
 Morgan Stanley said that the 6 percent drop on Sept. 26 in the share
price of Pimco's parent, Munich-based insurer Allianz SE, implied
the loss of about $400 billion in assets under management in the
wake of Gross' departure. Morgan Stanley didn't say when those
withdrawals would occur, nor why investors would pull their assets.
Pimco has almost $2 trillion in assets under management.
Pimco was already on watch at a number of institutional investors
after Gross's surprise resignation, including the $46 billion
Teachers' Retirement System of the State of Illinois, the $23.4
billion Texas Municipal Retirement System and the $9.4 billion North
Dakota Retirement and Investment Office.
Those three pension systems alone have almost $5 billion invested
with Pimco, and they're only a small sample of the institutional
investors nationwide who've entrusted their money to the company -
much of it public funds.
Retail investors, too, could move out. Charles Schwab's target-date
funds, for example, booted the Pimco Total Return Fund from its
approved list last week.
This weekend, the new managers of Total Return, which Gross built
into the world's largest bond fund with a peak in April 2013 of
almost $293 billion in assets, scrambled to soothe clients and
analysts. Rivals including DoubleLine Capital and TCW were
aggressively courting Pimco clients.
Pimco declined to comment.
Total Return Fund has gained 3.3 percent this year through the end
of September, trailing the performance of 79 percent of its peers,
according to Morningstar. The fund is up about 6.6 percent since
Jan. 1, 2009, better than 58 percent of its peers, according to
Morningstar.
To be sure, investors who follow Gross out of Pimco could find
themselves losing out in the long run. Dan Ivascyn, Pimco's new CIO,
was named 2013 Fixed-Income Fund Manager of the Year by Morningstar
for his work on the Pimco Income Fund.
 SPREADS WIDER, BUT CHANGES NOT DONE YET
At many pension funds, investment committees meet every other month,
or even quarterly. Decisions to shift investments could be months
away.
In the week ended Oct. 1, for example, money market funds saw net
inflows of $18.9 billion, according to Lipper - almost twice the
$9.5 billion net inflows in the previous week as investors parked
former Pimco money in short-term assets to consider future moves.
The effect of bond sales can be seen in rising yields. Carl
Eichstaedt, a portfolio manager with Western Asset Management, said
yields on some Verizon bonds were 10 to 12 basis points wider
against U.S. Treasuries on the Friday of Gross's departure. Western
funds scooped up some of those bonds, but with an eye on the
uncertainty around Pimco, did not rush in. Bond prices fall as
yields rise.
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"It's clear that some hedge funds and long-only money managers have
been front-running in anticipation of redemptions" from Pimco after
Gross's departure, he said.
By last Monday, the average high-grade bond spread had widened about
2 basis points to 119 basis points greater than Treasury bonds – its
widest since March, according to the Bank of America Merrill Lynch
Master Index. Among high-yield debt, the average spread widened even
more, by 11 basis points.
"The volatility created by news of Gross's exit from Pimco gave us
all a small taste of how fragile this fixed-income market has become
because of illiquidity in secondary markets," said Michael Chuang,
founder and CEO of electronic trading platform iTBConnect.
BROKER-DEALERS MAY SUFFER
Broker-dealers could be forced to absorb excess inventory and search
for ways to get those securities off their books at a time when
banking regulations have driven dealers to hold as few bonds as
possible.
"Without any doubt, short-term there may be broker-dealers that are
suffering a little for this," said Xavier Urpi, director of fixed
income at Cutler Investment Group.
Many broker-dealers have reduced the inventory they keep on hand. A
paper from the U.S. Securities and Exchange Commission earlier this
year pointed the finger at fewer proprietary trading desks at
broker-dealers and changes in regulatory requirements for capital.
Nevertheless, given Pimco's size, the firm is unlikely to be turned
away from anyone who wants to keep doing business with it in the
future.
"When you have such a big player like Pimco come to your door and
say they want to sell, you have to take it," Urpi added. "They
(broker-dealers) may lose a little point here, but in the long run
they have to have that kind of relationship."
Investors who wait until year-end to move could find an added squeeze
as the holiday season dries up liquidity, said Michael Rosen, the
chief investment officer of Angeles Investment Advisors.
"If you're going to shift a portfolio, it gets tougher to do in big
size as you get closer to the end of year," he noted.
The Illinois Teachers' Retirement System has eight different
strategies with Pimco, one previously placed on watch, said
spokesman David Urbanek. Further additions to the watch list require
approval from the board, which next meets on October 29.
The Illinois system hasn't decided what to do about the almost $2.5
billion it's invested with the bond market giant.
"The situation with Pimco is fluid," Urbanek said.
(Reporting by Luciana Lopez, Jennifer Ablan, Ross Kerber, Richard
Leong, Shankar Ramakrishnan and Jessica Toonkel in New York; Editing
by David Gaffen and John Pickering)
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