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Portfolio > Mutual Funds > Bond Funds

PIMCO’s Ivascyn to Challenge Gross With Unconstrained Fund

By Charles Stein, Bloomberg

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Daniel Ivascyn, Pacific Investment Management Co.’s new group chief investment officer, is about to go head to head with Bill Gross in the fastest-growing segment of fixed income: unconstrained funds.

Ivascyn, who was named PIMCO’s investment chief on Sept. 26 after his old boss abruptly quit, was also appointed as one of the three portfolio managers on the $21.6 billion PIMCO Unconstrained Bond Fund. Gross will run a startup unconstrained fund for his new employer, Denver-based Janus Capital Group Inc.

The Unconstrained fund, which has the flexibility to invest in all types of bond securities globally and often invest in credit rather than interest-rate sensitive assets, is an important product for Newport Beach, California-based PIMCO. Its investors have been withdrawing assets from the company’s traditional offerings, such as PIMCO Total Return, the world’s largest bond fund, in anticipation of rising interest rates.

The company is counting on Ivascyn to revive the Unconstrained fund, which Gross took over in December after the fund trailed peers over the past five years. The firm, which manages $2 trillion, has lost ground to competitors such as BlackRock Inc. and Goldman Sachs Group Inc., which have attracted new money into such strategies amid a surge of demand from investors.

‘New Perspective’

“What I hope to do is maybe bring a new perspective that we’ve utilized in the income strategy and even some of the hedge-fund strategies over to the unconstrained bond strategy,” Ivascyn, who also manages the $38 billion PIMCO Income Fund, said in a Sept. 27 telephone interview.

Gross didn’t respond to phone calls seeking comment.

Unconstrained or non-traditional bond funds collected almost $40 billion in the year ended Aug. 31, data from Chicago- based Morningstar Inc. show, compared with redemptions of $10 billion from conventional intermediate-term bond funds. Over the past three years, they have returned 3.7%, outperforming conventional intermediate bond funds, which rose at an annual pace of 3.4%.

Many of the funds have wagered on higher-yielding corporate and emerging-market bonds. For the most part, they have avoided interest rate bets on the assumption that rates would rise.

“In essence these funds take credit risk rather than interest rate risk,” Steven Roge, a portfolio manager at Bohemia, New York-based R.W. Roge & Co. said in a telephone interview.

Losing Assets

PIMCO’s Unconstrained Bond has been losing assets to its main competitors because its returns have lagged behind peers. Its assets have declined by more than $5 billion in 2014, according to data compiled by Bloomberg.

The $25.2 billion Goldman Sachs Strategic Income Fund grew by more than $10 billion this year through Aug. 31. The $20.3 billion BlackRock Strategic Income Opportunities added about $9 billion through Sept. 26. The $26.8 billion JPMorgan Strategic Opportunities Fund gained $2.5 billion through Sept. 26.

PIMCO Unconstrained Bond returned less than its chief competitors over the past three years, according to data compiled by Bloomberg. Much of that underperformance happened on the watch of Chris Dialynas, who ran the fund from June 2008 to December, when he left on a sabbatical. Dialynas will return to PIMCO this quarter, the Newport, California-based firm, said Sept. 26.

Under Gross, PIMCO Unconstrained returned 2.6% this year, beating 65% of comparable funds, according to data compiled by Morningstar.

Housing Bets

Gross will run the Janus Unconstrained Bond Fund, created in May, from a new Janus office in Newport Beach, the Denver- based company said Friday. Gross and Janus Chief Executive Officer Richard Weil worked together from 1996 to 2010, when Weil was at PIMCO. Janus gained a record 43% Friday following news of Gross’s hiring.

Ivascyn, who burnished his reputation following the 2008 financial crisis with prescient bets tied to the U.S. housing recovery, will co-manage the fund with Saumil Parikh and Mohsen Fahmi. Roge, who oversees $245 million and is an investor in Ivascyn’s PIMCO Income, said he would not be surprised to see Ivascyn increase the allocation to non-agency mortgages in the unconstrained fund.

The PIMCO Income fund has bet heavily on mortgages without the backing of Fannie Mae, Freddie Mac and Ginnie Mae. The non- agency mortgages, which were crushed during the recession, have rebounded along with the U.S. housing market.

In an interview with Morningstar in January, Ivascyn and his co-manager on PIMCO Income, Alfred Murata, said they divide their fund into two buckets: one with securities such as non- agency mortgages, that will do well in a strong economy; the other holding assets such as government bonds that can protect the fund if the economy slumps.

Ivascyn and Murata were named fixed income managers of the year for 2013 by Morningstar.

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