The SEC is looking into how PIMCO values bond holdings in its $3.6-billion Total Return ETF (BOND) to find out whether it used discrepancies between the assets it bought at a discount and later re-calculated at higher values caused the company to overstate performance returns, according to reports published late Tuesday.
Regulators’ investigation of PIMCO has been underway for at least several months but appears to be gaining steam. An investment expert, though, says this is an issue that affects other fixed-income fund families, not just PIMCO.
“This is not a one-off event when it comes to price discrepancies in fixed-income funds,” said Michael Herbst, director of manager research for active strategies at Morningstar, in a interview with ThinkAdvisor.
“It may seem like it’s a one off, but it is not,” Herbst explained. “This kind of price discrepancies and potential discrepancies is great for the smaller, most nimble fund and is more common than some expect.”
The incidents of price discrepancy “will probably be greatest in funds that are most active in less-liquid holdings,” he adds. This includes non-agency residential mortgage-backed securities or other securitized products like collateralized loan obligations.
But even funds with high-yield bonds or other bonds with limited trading are likely to encounter the pricing issues, Herbst shares.
Which fund families are active in the space? BlackRock, DoubleLine, Loomis Sayles, TCW and Western Asset, he notes.
“I am not saying these firms” are likely to be investigated or to necessarily have pricing discrepancies in their holdings, Herbst explained, “but they do a lot of work in the less-liquid parts of the fixed-income marketplace”.
“The notion is more common than most [investors] realize, but it does not mean PIMCO has done anything wrong,” he added.
(See Ben Warwick’s blog for ThinkAdvisor on the liquidity issue, How Liquid Are Liquid Alts?)
Implications for Investors
Given the complexities of pricing in the fixed-income market and the currect SEC investigation of PIMCO, what should investors be keeping in mind?
The lesson, Herbst says, is to “keep an eye on actively managed ETFs that say they are using the same strategy as another fund in the space, particularly in the fixed-income space.”
“Many ETFs try to mimic an index as best they can,” Herbst explained. “ETFs that try to do this would not probably run into this issue as often.”