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.