Pressure rises on Gross as investors pull $3.1 billion from Pimco's flagship fund

NEW YORK Tue Apr 1, 2014 7:52pm EDT

The headquarters of investment firm PIMCO is shown in this photo taken in Newport Beach, California January 26, 2012. REUTERS/Lori Shepler

The headquarters of investment firm PIMCO is shown in this photo taken in Newport Beach, California January 26, 2012.

Credit: Reuters/Lori Shepler

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NEW YORK (Reuters) - Investors pulled another $3.1 billion from Pimco's flagship fund in March, the 11th straight month of outflows from the world's largest bond fund, and its performance on the month lagged 95 percent of its peers due to a spate of wrong calls by long-time manager Bill Gross.

The latest statistics for the Pimco Total Return Fund, released Tuesday by Morningstar, increase the risk that more money could flee the fund managed by Gross, whose shop has been rattled by a management shakeup and disappointing performance. So far this year, it has generated a total return of 1.29 percent, lagging its performance benchmark by 0.55 percentage point and trailing the returns of 85 percent of its peers.

In all, investors have pulled $52.1 billion out of the fund since last May, according to Morningstar data. The latest outflows from the fund reduced the portfolio's assets to $232 billion.

Gross, co-founder of Newport Beach, California-based Pimco and dubbed as the market's "Bond King," has been dealing with a public falling-out with former heir-apparent Mohamed El-Erian, who shared the co-chief investment officer title.

Several U.S. institutional investors, including retirement systems, said they are closely monitoring the developments at Pimco and have formally put Pimco on "watch lists," a signal that they will keep a much closer eye on its performance than usual.

"In short, underperformance the past 12 months coupled with the leadership changes have led to investor concerns," said Todd Rosenbluth, director of mutual fund research at S&P Capital IQ.

The North Dakota State Investment Board, which has about $400 million invested with Pimco, put the fund on its watch list on February 28. The California Public Employees' Retirement System, the largest U.S. pension fund, said it had not placed Pimco on a formal watch list, but it was also paying close attention to developments.


Morningstar senior analyst Eric Jacobson said what hurt Pimco Total Return's performance most in March was its significant overweight position in shorter debt and its underweight position in long-dated bonds.

The Barclays U.S. Treasury 20+ year Index posted returns of 0.79 percent in March alone, while the Barclays U.S. Treasury 5-7 year Index returned -0.82 percent for the same period.

"Having such short-term exposure has hurt the fund's performance relative to its peers," Rosenbluth said. The Total Return Fund had an effective duration of 4.71 years at the end of February, according to data on the Pimco website. Duration is a measure of a bond's price sensitivity to yield changes.

The Pimco Total Return Exchange-Traded Fund, an actively managed exchange-traded fund designed to mimic the strategy of the flagship mutual fund, was up 0.084 percent in March but posted outflows of $53.4 million.

That marked the 11th straight month of withdrawals from the ETF, which has $3.4 billion in assets, according to Morningstar data.

Rosenbluth said the ETF's performance in March benefited from having less exposure to mortgage-backed securities and more exposure to investment-grade corporate bonds. The Barclays U.S. MBS Index fell 0.32 percent last month, while the Barclays U.S. Corporate Investment Grade Bond Index rose 0.07 percent.

Pimco's flagship mutual fund had a 29 percent exposure to mortgages at the end of February, while the ETF had a lower exposure to mortgages at 25 percent and a higher exposure to U.S. credit at 11 percent, according to Pimco's website.

Jacobson said the Pimco Total Return portfolio began struggling in February as the fund was "very underweight U.S. investment-grade corporate bonds. That would have been a detriment given that the overall investment-grade corporate index returned 104 basis points for February, and returns were better the farther down you went in quality."

Pimco spokesman Mark Porterfield said: "It's important to compare a fund's performance with its benchmark and not just with other mutual funds, which could hold riskier and higher-yielding assets. Total Return has outperformed its index for the past six months, two, five and 10 years."

The Pimco Total Return Fund's five-year and 10-year annualized returns of 6.87 percent and 5.89 percent have outperformed the benchmark Barclays U.S. Aggregate Bond Index by 2.07 percentage points and 1.42 percentage points, respectively, according to Morningstar data, as of March 31.

Pimco, a unit of European financial services company Allianz SE, had $1.91 trillion in assets under management as of December 31.

(Reporting by Jennifer Ablan and Sam Forgione; Editing by Chizu Nomiyama, Jeffrey Benkoe, Paul Simao and Lisa Shumaker)

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Comments (3)
LOTOGO wrote:
The Fed policy of financial repression is working by driving more dumb money deeper into long bond junk in order to maintain yields.
Neither national political party would survive trying to sell what the Fed and central banks are doing for them via stealth: Simultaneous erosion of wealth and living standards at ever increasing risk.
They’re presently making Gross look like the greater fool. Stay tuned.

Apr 01, 2014 7:32pm EDT  --  Report as abuse
xyz2055 wrote:
Bond prices where in the toilet. They have almost no place to go but up, This is the nature of the economy and investing. During tough economic times precious metals and bonds excel. Strong economies and even improving economies…the market is the place to be. Holding bonds and precious metals right now would be foolish. Gross was simply the benefactor during the financial meltdown. That time has passed….for the moment.

Apr 01, 2014 7:53pm EDT  --  Report as abuse
nose2066 wrote:
Some other websites have mentioned the strange shape of the yield curve. The middle of the curve has moved up more than the short end or the long end. The middle of the curve is where the Total Return Fund has positioned itself.

The explanation given for the strange change in the yield curve is because of market manipulation – presumably by the Federal Reserve.

Apr 02, 2014 10:43am EDT  --  Report as abuse
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