(Recasts; adds outflow figures from January and February;
background on corporate culture)
By Jennifer Ablan
March 28 Bill Gross has yet to regain his
dominance of the bond market as his Pimco Total Return Fund
lagged most of its peers in the first quarter, raising
the risk that more money could flee the firm's flagship fund.
In the latest setback for Gross, who has faced intense
scrutiny since January when longtime colleague Mohamed El-Erian
announced he was resigning as Pimco's chief executive officer,
the Total Return Fund is trailing 87 percent of its peer funds
this year, data from Morningstar showed on Friday.
The $236.5 billion bond fund, the world's largest, has
delivered a total return of just 1.28 percent through March 27,
75 basis points behind the 2.03 percent return so far for the
sector's benchmark, the Barclays U.S. Aggregate index.
The lackluster performance follows a dismal 2013, when misguided
calls on how Federal Reserve policy would play out in the bond
market led to a loss of 1.92 percent for the fund, its poorest
showing in nearly two decades.
Underperformance is just one of many headaches for Gross,
who co-founded the Newport Beach, California, firm in the early
1970s and until recently was revered as one of the greatest bond
market investors ever, dubbed the "Bond King."
First, investors have fled his fund in the past year. In the
first two months of 2014, $5.1 billion was pulled by investors.
That followed $41 billion of outflows in 2013.
Then, the departure of El-Erian, who had also served as
co-chief investment officer alongside Gross and was seen as his
heir apparent, drew more unwelcome scrutiny.
The shakeup raised questions about both the corporate
culture at Pimco, which oversees $1.9 trillion of client assets
and is now a unit of European financial services company Allianz
SE, and about Gross's leadership style.
On Feb. 24, the Wall Street Journal published a report
describing how El-Erian's previously close relationship with
Gross had soured as the firm's investment performance
deteriorated last year. Then Gross told Reuters that his
one-time lieutenant was trying to "undermine" him, and that he
had "evidence" El-Erian "wrote" the Journal article.
Last week, Morningstar analysts downgraded Pimco's overall
stewardship grade by one notch to a C, reflecting a higher
degree of uncertainty after the departure of El-Erian and other
key personnel. Morningstar analysts also cited reports that
Pimco's atmosphere has long been characterized as a "pressure
cooker" and that Gross has demonstrated "at-times severe and
reputed retaliatory temperament."
February and March were brutal months for the Pimco Total
Return Fund's investment strategy.
Morningstar senior analyst Eric Jacobson said the most
important issue that hurt Pimco Total Return's performance in
March "may have been that it was a blockbuster month for long
maturity bonds and a lousy one for shorter maturities."
The Pimco Total Return Fund has been significantly
overweight in shorter debt and correspondingly very underweight
in long bonds, "so much so in fact that the fund has even been
using swaps to achieve a modest short position on the longest
maturity debt," Jacobson said in a phone interview in a phone
The Barclays U.S. Treasury 20+ year Index is posting returns
of 1.70 percent in March alone, while the Barclays U.S. Treasury
5-7 year Index is -0.61 percent for the same period.
The Pimco Total Return Fund also has long had a significant
underweight to investment-grade corporate credit - 9 percent in
the fund and 22.7 percent in the Barclays Aggregate - which
Morningstar's Jacobson said "didn't help either given that the
sector outperformed the broader market overall."
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 on quality."
The fund also cut its effective duration to 4.71 years in
February from 5.05 years. Jacobson said the fund's shortening of
duration and meaningful underweight to bonds maturing in more
than five years and all the way out the yield curve "would
probably have been a very meaningful detriment to returns
because the 20-plus sector of the Treasury index returned
85-plus basis points for February."
All told, Morningstar's Jacobson reaffirmed its Gold Rating
on Pimco Total Return last week as "Gross is still one of the
best around; modest showings in 2011 and 2013 were
disappointing, but expectations of perfection weren't realistic
Pimco did not return phone calls or e-mails seeking comment.
(Reporting by Jennifer Ablan; Editing by James Dalgleish, Dan
Burns and Jonathan Oatis)