In a stunning turnaround, many investors have soured on Pimco, the world’s largest bond fund manager. They have raised questions about the effects of a major management shakeup at Pimco this year…succession issues…stumbles in fund performance…and the mammoth size of some of the Pimco funds. Since the beginning of 2013, investors pulled $53 billion out of the widely held Pimco Total Return Fund, which slipped to second place among the world’s biggest mutual funds. The fund is managed by Pimco founder and chief investment officer Bill Gross, who turned 70 in April.
In January, Pimco shocked investors by announcing that Gross’s heir apparent, Mohamed El-Erian, was resigning as CEO and co-chief investment officer—a move reportedly stemming from growing tension with Gross and his management style. This comes at a critical time for investors as the decades-long bull run in bonds appears to be ending. Since El-Erian’s departure, Gross has promoted six portfolio managers to deputy chief investment officer roles, but it’s not yet clear whether any of them has the talent and stature to lead one of the largest asset-management companies in the world.
But I’m sticking with the Pimco funds I use at this point and will continue to invest with them for the moment.
Gross’s management style is well-known. He is a brilliant, demanding, egocentric titan who has created a culture at Pimco that still attracts the most talented analysts and managers in the industry and has yielded superb long-term returns. For example, several Pimco funds rank in the top 5% of their categories over the past five years, including Pimco Fundamental IndexPLUS and Pimco Real Return, which invests in inflation-protected bonds.
That said, you should not just tuck away Pimco funds in your long-term portfolio and forget them. You need to monitor them because the company does face a potentially serious succession problem in the future.
Gross is near his career’s end, but he still wields almost monolithic influence at Pimco. He controls forecasts for financial markets, bond sectors and the direction of the economy and interest rates that drive Pimco fund strategies.
I’m paying particular attention to Gross’s own Total Return Fund now. Although it has excellent 10- and 15-year returns, it has done poorly of late. In 2013, it lost 2.3%, the first negative return since 1999, trailing three-quarters of the funds in its category and helping to spark an exodus of investments. In the first three months of 2014, it gained 1.2%, trailing 86% of funds in its category. If this continues, perception could become reality and performance could continue to sag as Gross is forced to sell holdings at a discount just to meet shareholder redemptions.
I still believe in this great fund because Gross has bounced back strongly from down periods in the past. But I also am worried that in order to shore up his reputation, he might take bigger-than-normal risks. If performance at Total Return continues to stumble over the next 12 to 24 months, investors should consider switching or at least diversifying their bond money into a non-Pimco fund, such as TCW Total Return, which ranks in the top 10% of its category for the past 10 years.