By Mike Cherney And Kirsten Grind
The shadow of Bill Gross continues to hover over Pacific
Investment Management Co.
The giant bond manager on Friday disclosed a sharp rise in
outflows from the flagship fund run by Mr. Gross, who left abruptly
in late September. In December clients pulled $19.4 billion from
Pimco's Total Return Fund, more than double the $9.5 billion that
were yanked in November.
But the new outflows were lower than the $23.5 billion and $27.5
billion lost in September and October, respectively, as investors
reacted to Mr. Gross's acrimonious departure to Janus Capital Group
Inc., a rival investment firm. Total assets in the Total Return
fund, which Mr. Gross managed for 27 years, dropped to $143.4
billion from $162.8 billion in November.
The December pullback suggests the Newport Beach, Calif., firm
isn't yet clear of the investor flight triggered by months of
internal strife and the departure of its co-founder at the end of
September. Pimco, a unit of German insurer Allianz SE, also lost
its Chief Executive Mohamed El-Erian last year after clashes with
Mr. Gross.
Outflows from the Total Return Fund are expected to vary from
month to month, but in December one of three new Total Return
managers, Scott Mather, said the firm had moved past the "knee-jerk
reaction in terms of flows that you would expect to happen." On
Friday, a Pimco spokesman said the pace of withdrawals during
December was "significantly below" the peak in September and early
October. Mr. Gross left Pimco on Sept. 26.
"I think they've weathered the worst of the storm," said Jeff
Tjornehoj, head of Americas research at fund manager Lipper. "But
now it's just a matter of convincing more people to get into the
fund than leave."
The jump in December withdrawals came as Total Return's
performance slipped. The fund, which invests in government and
corporate bonds, was down 0.48% for the month, worse than the
benchmark Barclays U.S. Aggregate index and the average return of
other funds in its category, according to Morningstar. The return
figure includes changes in the prices of the bonds held by the fund
and interest payments on those securities.
For the full year, the Total Return Fund gained 4.69% compared
with 5.97% for the Barclays U.S. Aggregate index.
Traders and portfolio managers say Pimco is a calmer place to
work now that Mr. Gross is gone, according to people familiar with
the situation. Pimco also has made a series of aggressive moves
internally to handle the outflows, including taking positions
against rival managers to boost returns, The Wall Street Journal
has reported.
But rivals are still trying to position themselves to attract
some of the Pimco pullback, and many pension funds and large 401(k)
plans haven't yet made decisions about whether to move their
money.
To be sure, Pimco had $1.87 trillion under management as of
Sept. 30 and can absorb big, billion-dollar losses. Research firm
Morningstar Inc. has concluded outflows would have to reach $350
billion in the next two years before Pimco's "ability to function
at a high level would be impeded," according to a recent
report.
Pimco had a secret succession plan in place for Mr. Gross's
departure, The Wall Street Journal has reported, and the firm moved
quickly to appoint Daniel Ivascyn as group chief investment officer
of the firm, as well as three new portfolio managers for the Total
Return Fund.
Yet Total Return's performance lagged behind for the year, said
Morningstar official Russ Kinnel, because it invested heavily in
emerging-market and high-yield bonds that fared poorly in 2014. It
also invested too little in long-dated bonds that did well, said
Mr. Kinnel, who is director of manager research. Some of these bets
were put in place before Mr. Gross left. Morningstar still gives
Total Return a "bronze" rating, the third-highest out of five.
Some funds that compete with Total Return attracted more money
than they lost during December, according to estimates from
Morningstar. The $51 billion Metropolitan West Total Return Bond
fund, which is owned by parent TCW Group Inc., saw inflows of about
$7.2 billion, while the $40 billion DoubleLine Total Return Bond
fund saw inflows of $1.3 billion.
Pimco wasn't alone in its bad bets last year. Many portfolio
managers expected the Federal Reserve to raise interest rates as
the economy improved, which would have sent bond yields up and
prices down. But geopolitical uncertainty and slowing economies
overseas led to an unexpected rally in government bonds.
But for Marc Henn, a financial adviser in Cincinnati, the Total
Return Fund's performance during 2014 contributed to a decision to
sell holdings worth millions in recent months. The president of
Harvest Financial Advisors said he was also concerned about the
personnel changes, and an investigation by federal regulators into
how a Pimco exchange-traded fund similar to Total Return valued its
bondholdings.
"Their investment decisions haven't been the best over the past
year and a half," said Mr. Henn, whose firm oversees about $400
million. "That started prompting us to take look."
Brad Cougill, chief investment officer at Deerfield Financial
Advisors in Indianapolis, has also been advising clients who have
exposure to the Pimco Total Return Fund through retirement plans to
switch to a different investment.
"If there's another option that doesn't have that uncertainty
surrounding it, we just thought that was a more appropriate choice
for our clients," said Mr. Cougill, whose firm helps manage about
$500 million.
Write to Mike Cherney at mike.cherney@wsj.com and Kirsten Grind
at kirsten.grind@wsj.com
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