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Gross Exit Prompts $27.5 Billion in Withdrawals From PIMCO Total Return

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Pacific Investment Management Co. had record redemptions from its biggest mutual fund in the first full month after the surprise departure of former manager Bill Gross, with clients pulling $27.5 billion in October.

Half of those redemptions from the PIMCO Total Return Fund occurred in the first five trading days of October and they then “slowed sharply,” according to a statement from the Newport Beach, California-based firm yesterday. The redemptions followed $23.5 billion in withdrawals from the world’s biggest fund in September and brought assets to $170.9 billion, down 42% from a peak in April 2013.

“This could easily go into the first quarter before you see the flows ebb,” said Michael Rosen, chief investment officer at Angeles Investment Advisors LLC in Santa Monica, California, who oversees $47 billion for endowments and pensions. “There’s a fair amount up for play over the next few months or so.”

PIMCO has hired back three high-profile names in recent weeks as it seeks to reassure clients rattled by Gross’s Sept. 26 departure. Investors are reviewing their allocations, moving money to competitors such as Vanguard Group Inc. and DoubleLine Capital LP or parking it in money-market funds and exchange- traded funds while they reevaluate.

The largest daily redemption in September came the day of Gross’s departure, PIMCO said Oct. 1 in a statement.

Derivatives Offset

Total Return isn’t increasing cash-like holdings in the fund to meet redemptions, Scott Mather, one of three newly appointed managers, said in October.

The fund had a 53% cash position as of Sept. 30, and a 51% offset related to derivatives including futures and swaps, according to the firm’s website. Ten percent of its holdings were invested in emerging markets, 20% in mortgage-related securities and an additional 13% in U.S. credit.

Gross had relied on derivatives to juice returns in the second quarter, replacing most of the $48 billion of U.S. Treasuries in Total Return with about $45 billion of futures, according to an August filing. The contracts require small up- front payments, freeing up money for the fund to invest in higher-yielding securities including Brazilian, Spanish and Italian debt.

High Liquidity

“The liquidity profile of the Fund remains high, and, as always, the Fund is being managed consistent with the firm’s market outlook and alpha strategies while meeting diminishing redemptions,” the firm said in the statement yesterday.

The new chiefs are trying to calm clients, saying there will be no major changes in investment strategy at Total Return.

“It’s business as usual,” Mather said in a telephone interview in September after the management changes.

The fund had more than doubled in size from $132 billion at the end of 2008, after weathering the financial crisis with returns that beat 83% of rivals. It ballooned to a peak of $293 billion in April 2013, before the Federal Reserve first hinted it would unwind stimulus measures, sparking investor redemptions and unsteady performance.

PIMCO is bringing back old members of the investment committee including Marc Seidner, who had left in the wake of former Chief Executive Officer Mohamed El-Erian’s departure. Nobel Laureate Michael Spence returned to PIMCO as a consultant and money manager Jeremie Banet rejoined as executive vice president last week. Deputies Threaten

Gross, who co-founded PIMCO in 1971 and built it into a $1.87 trillion money manager, departed after his deputies including now group Chief Investment Officer Daniel Ivascyn threatened to quit and management debated his ouster, according to people familiar with the matter. He abruptly resigned to run an unconstrained fund at money manager Janus Capital Group Inc.

Clients have been withdrawing assets from the PIMCO Total Return Fund since May 2013 as performance trailed peers and investors removed money from traditional fixed-income strategies in anticipation of rising interest rates. Returns in the past 12 months of 3.3% through Nov. 3 trailed 64% of comparable funds, according to data compiled by Bloomberg. Over five years, the fund beat 63% of peers.

Last year, Total Return lost a record $41.1 billion from client redemptions, according to estimates from Chicago-based Morningstar Inc.

Prudential Financial Inc., former PIMCO parent Pacific Life Insurance Co., Massachusetts Mutual Life Insurance Co., Alabama’s Treasury and Florida’s state pension have all moved money from PIMCO in recent weeks.

— Check out Janus’ Bill Gross: Government Needs to Spend More on ThinkAdvisor.


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