http://www.nytimes.com/2014/10/12/business/mutfund/assessing-pimco-after-bill-gross.html 2014-10-10 21:56:28 Assessing Pimco, After Bill Gross While experts see plenty of reasons for caution in the wake of a manager’s departure, some see upsides to the new structure of the Pimco Total Return bond fund. === EVENTS at Pimco this year have resembled a soap opera, but at this point, the spectacle is creating a real-life headache for The And there has been a solid reason for that: The returns, until recently, have been excellent. The fund is offered in nearly half of the more than 55,000 plans that BrightScope tracks, and 401(k) savers had $88 billion riding on the fund at the end of 2012, the latest data available for 401(k) plans. Now that Mr. Gross has exited, should the fund get the boot from your retirement portfolio? “What’s happened isn’t a confidence builder,” says Marilyn Cohen, chief executive of Envision Capital Management, an investment advisory firm specializing in bond portfolios. “You don’t want drama from your bond portfolio of all places.” There’s been plenty of that of late. Here is a quick recap: After a standout decades-long record that earned Mr. Gross the sobriquet “the bond king,” performance at Pimco Total Return wobbled in the last few years. A misplaced big bet in 2011 against United States Treasuries produced a return that ranked in the bottom 13 percent of intermediate bond funds that year, according to Morningstar. This year’s performance through September ranked in the bottom 30 percent of similar funds. And Pimco was in serious damage-control mode even before the recent upheaval. In January, Mohamed A. El-Erian, co-chief investment officer with Mr. Gross and his heir apparent, abruptly resigned. Friction with Mr. Gross emerged as one contributing factor to his exit. In the wake of the split, Mr. Gross’s management style at the firm he built received plenty of media attention. A flamboyant presentation at an investment conference in June — wearing sunglasses, Mr. Gross, 70, compared himself to Justin Bieber — wasn’t a confidence booster. Investors were already getting anxious before Mr. Gross’s exit; nearly $69 billion was withdrawn from the fund in the 16 months through August. In September, which included three trading days after Mr. Gross resigned and said he was joining the Janus Capital Group, nearly $18 billion more, net, was withdrawn from the Total Return fund. Its $202 billion in assets at the end of September was down from a peak of nearly $293 billion in April 2013, according to Morningstar. Rusty Vanneman, chief investment officer at “Where you used to have one person in charge, now there are three with input,” Mr. Vanneman says. “Having more voices typically moderates a portfolio’s investment bets.” Mr. Vanneman’s firm manages more than $2 billion in assets, including nearly $130 million invested in Pimco bond Current investors should also be calmed by the fact that the new team comes from a deep internal bench that had been working with Mr. Gross for years. Daniel J. Ivascyn, Morningstar’s fixed-income fund manager of the year in 2013, oversees the fund’s three-manager setup, which includes Mark R. Kiesel, Morningstar’s fixed-income manager of the year in 2012. “It’s not as if they went outside to fill the position,” says Jon Hale, director of manager research at Morningstar. “The new team has been part of the process and the culture.” Still, it can take time for new teams to jell, and there’s no guarantee that they will. Morningstar downgraded Pimco Total Return from its gold designation (best of breed, based on Morningstar’s assessment of five key metrics) to bronze (still positive, but less so). It said it wanted to watch Pimco closely for a while to see how the new management team coalesced. It will also check on outflows in the coming months. That close monitoring of Pimco is similar to the approach being taken at OVER the near term, redemptions are another concern. Mr. Hale says the September outflows, while significantly higher than the approximately $4.3 billion monthly average over the previous 16 months, were not overly troubling, and he expects outflows to moderate in the coming months. Pimco Total Return has sizable assets in Treasuries and other highly liquid assets that can be sold to meet redemptions. That said, Laura Thurow, director of private wealth management research at If all of that is a whole lot more gray area than you’d like to live with — especially in what is supposed to be the boring part of your portfolio — you may want to consider a move to the sidelines. (You can generally buy and sell funds held inside a tax-deferred account without incurring any tax consequences. If they are held in a taxable account, you may need to be more careful.) “You can sell today, see how it plays out and then come back later if you want,” Ms. Thurow says. But Mr. Hale of Morningstar cautions against upending your This interlude could also offer a timely opportunity to focus on investment expenses. With bond yields near historical lows, there is limited room for big gains in the years ahead. That’s because bond returns are the sum of yield plus changes in the underlying price. As bond yields rise — a high probability in the coming years, given the low levels from which we’re starting — prices fall, thus cutting into returns. That makes low-cost investing more important than ever. The Pimco Total Return bond fund has never been best in class on fees. Investors in Pimco Total Return pay anywhere from 0.46 percent to 1.6 percent in annual charges, depending on the share class, and sometimes an additional sales commission must be paid as well. The average asset-weighted expense ratio for similar intermediate-term bond funds is 0.48 percent, according to the Investment Company Institute. The E.T.F. version of the Total Return portfolio charges an expense ratio of 0.55 percent. The BrightScope says that about 1,700 of the 401(k) plans it tracks that include the Pimco fund as an investment option also include the less-expensive Vanguard bond index option. Vanguard’s E.T.F. version of this portfolio charges 0.08 percent, as does the And other options exist. On Thursday, Fidelity started an E.T.F. version of its actively managed $16 billion SHOULD investors follow Mr. Gross to Janus? Despite his recent stumbles, his long-term record is excellent: A $10,000 investment in Pimco Total Return at its inception in 1987 was worth more than $79,000 when he resigned, according to Morningstar. The same $10,000 in the average intermediate bond fund would have grown to about $51,000 during that stretch, and a theoretical bet on the Barclays U.S. Aggregate Bond index, without any expenses, would have turned into nearly $61,000. Expenses, of course, are a consideration. And the cheapest share class for the new fund that Mr. Gross now runs, “At Pimco he drew on one of the biggest and best credit research teams operating across the globe,” says Wayne Schmidt, chief investment officer at