The exit of Bill Gross as manager of the PIMCO Total Return Fund has led to investor outflows, Morningstar downgrades, platform exclusions and more. For Total Return investors, there’s also the possibility of a mammoth 2014 tax bill.
PIMCO shareholders yanked a net $23.5 billion from the Total Return fund last month, including $446.5 million on Sept. 26, the day Gross announced his abrupt departure. And the massive outflows are likely to have negative tax implications for remaining investors who own the fund in taxable investment accounts.
To deal with redemptions, PIMCO has been selling fund assets. And the evidence shows, as these outflows are already affected big positions held by the fund.
The Total Return’s largest holding as of Sept. 25 – $201.3 million of bonds issued by Ontario, Canada – have been sold, according to the fund shop’s website.
The Total Return’s annual report (published in March, when Gross was still at the helm) indicated that its annual turnover was a very elevated 227%.
Portfolio turnover above 100% indicates heavy trading activity (buying and selling), rather than a buy-and-hold approach. If 227% turnover was the fund’s turnover when Gross was in charge, what could it be today?
According to a report from Paris-based brokerage group Kepler Cheuvreux, the Total Return Fund might suffer withdrawals of up to $150 billion or two-thirds of assets. In that scenario, the Total Return’s post-Gross portfolio turnover could approach 500%.
Yikes! The cause of such ugly turnover would be selling by the Total Return’s new fund manager to meet shareholder redemptions.
Another measure of the Total Return fund’s tax efficiency (or lack of it) is the tax-cost ratio.