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Morningstar: PIMCO’s Post-Gross Total Return Fund Is Fine—for Now

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Despite the fact that Morningstar recently downgraded its rating on PIMCO’s Total Return Fund from gold to bronze after the departure of Bill Gross, Morningstar “still likes” the huge fund despite its continued spate of outflows.

“The underlying material that has driven the [Total Return] fund is still there,” said Eric Jacobson, senior analyst of active strategies, on a Wednesday conference call held by Morningstar’s fixed-income team titled, “Views on a Post-Gross PIMCO.”

Indeed, John Hale, director of manager research, North America, added that while the Total Return Fund has seen “significant outflows,” PIMCO has “sufficient liquidity” to handle those outflows—at least in the short-term.

Hale noted that the PIMCO Total Return Fund’s (PTTRX) assets peaked in April 2013 at $292 billion, but that the fund has “been in net redemption since then.” Outflows from the fund, he said, continued this year at a rate of about $3.5 billion per month, “and prior to Gross’ departure” those outflows had lowered the fund’s total net assets to $220 billion. “So the fund had already lost a quarter of its AUM prior to Gross leaving,” Hale said.

Michael Herbst, director of manager research in active strategies, added that while Morningstar believes the Total Return Fund can handle outflows in the “near-term, sustained outflows over the next one to five years could be a bit more challenging.”

Indeed, Jacobson added that while there’s “no need to panic right now,” the fixed-income team will watch the Total Return Fund over the “next six to 24 months to see if [the outflow] numbers have an impact on the organization.”

Morningstar has estimated that investors pulled about $20 billion from Total Return from Sept. 26 to Sept. 30, Hale said, adding that the PIMCO Income Fund has seen inflows.

But, Hale said, Total Return “will remain in net redemptions for some time.”

On the news that Gross was leaving, Hale said, Morningstar “immediately” put all of PIMCO’s funds “on review.” Morningstar has published some ratings on those funds since then, he said, and plans to publish “new ratings in the next week or two.”

Jacobson noted that the team of “very accomplished” managers running the Total Return Fund contributes to its strength, adding that Scott Mather, PIMCO’s chief investment officer, core strategies, will now replace Gross as the “final decision maker” on the fund.  

Sumit Desai, analyst, active strategies, manager research, said that investors should proceed with caution, however, if they plan on fleeing the Total Return to join Gross’ new Janus Unconstrained Fund (JUCIX).

The new Janus fund “is very different from Total Return,” Desai said, in that Gross “will have a more wide ranging” investment mandate in the fund, and “no limit on the high-yield bond exposure that the fund can hold.”

Cara Esser, senior analyst, active strategies, manager research, added that investors can get an idea of what Gross “may do” with the new Janus fund by looking at the strategies he used in managing five closed-end funds for PIMCO. Gross“did take a fairly wide latitude in managing these [closed-end] funds because they weren’t managed to a benchmark and they were small compared to Total Return,” she said. “He had a lot more latitude in making smaller, illiquid bets in those [closed-end] funds.”

As to the outlook for PIMCO, Herbst noted the fact that “the firm is still strong in expertise and resources post Gross,” adding that Gross’ departure makes it more likely that PIMCO will move into more alternative, multi-equity and equity strategies.

As to what the new PIMCO head, Daniel Ivascyn, has in mind, Herbst said that he’s not planning any “radical departures” from the firm’s macro-economic positioning.  

Also, PIMCO still has a “highly driven” team in place, he said. “Gross is not leaving with a team,” and the firm is “still stocked with highly driven personnel … who contributed to Gross’ success while he was there.”

The Morningstar team also predicted that former Co-CIO Mohamed El-Erian will not return to PIMCO. “I suspect that the people there now feel pretty good about how they are set up,” Jacobson said. “They have a lot of strong, confident people there.”

Added Hale: Asking El-Erian to return “would convey that they needed him to come back and ‘right the ship;’ I’d say it’s unlikely.”

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