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PIMCO Outflows Painful but Not Deadly: Morningstar

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PIMCO has probably seen most — but not all — of the heavy outflows tied to the departure of co-founder Bill Gross in late September, Morningstar analysts said Tuesday.

“Firmwide, outflows of about $300 billion from its $1.87 trillion in assets are the top outflows it could handle over the next few years,” said Sumit Desai, active-strategies analyst and research manager, during a webinar. “And that shouldn’t greatly affect its [financial] performance.”

The Morningstar expert, though, says the impact of outflows has been “very sizeable and very painful.”

“Keeping in mind, PIMCO has gone for $600 billion in retirement funds to $400 billion in a short period of time, that will likely effect profitability,” Desai explained.

“But [parent company] Allianz’s stability can benefit it,” he said. “That’s why we estimate PIMCO could withstand additional outflows of approximately $300 billion to $350 billion over next the two years before the portfolio management operation is impaired.”

Total Return Issues

During the last week of October, the PIMCO Total Return Fund was losing about $500 million a day in assets, according to John Hale, director of manager research for North America.  Thus, the monthly outflows figure — if such a level of daily redemptions were to continue — could be $10 billion or even as much as $15 billion, Hale says.

Before Gross left the bond shop, outflows were averaging about $3.1 billion a month.  At the very least, according to Morningstar, the redemptions could average or top $3.4 billion a month going forward.

In the five days after Gross resigned (Sept. 26) and joined Janus Capital, outflows topped $170 billion. The Total Return Fund’s asset level is 40% below its mid-2013 peak, according to Morningstar.

(PIMCO is set to release assets held in its flagship fund on Wednesday.)

The Total Return ETF, though, “is holding pretty steady,” Hale says, with some $2.5 billion in assets. “We were not seeing significant outflows from the ETF in the past month. For background, the ETF was at $5 billion in May 2013 and at $3.5 billion before Gross left.”

The Morningstar expert points out that the Total Return portfolio improved 0.8% in October. When the research firm compared it with a portfolio of passive fixed-income indexes, the PIMCO fund came within 1 basis point of the customized benchmark,” Hale explained.

‘Manageable’ Outflows

Across PIMCO, outflows were $48 billion, a level that Morningstar analysts call “significant but manageable.”

They explain that PIMCO’s yearly revenues are at over 8.6 billion euros ($10.7 billion), while operating profits stand at 3.17 billion euros. (PIMCO reports in the same currency as Allianz, which is based in Germany.) This gives the firm a profit margin of 36.8%.

That margin beats that of Janus (29.8%) but lags the results of BlackRock (BLRK), 43.2%, and T. Rowe Price (TROW), 47.6%, the research group says.  

Some products, like the PIMCO Income Fund, have seen inflows.

“Clearly outflows may continue to be elevated,” said Russel Kinnel, director of mutual fund research. “But it’s unlikely there will be more sudden spikes in redemptions.”

Large outflows could come from retirement-plan groups and institutional investors, who take longer than retail investors to adjust holdings due to the nature of their due-diligence processes, according to Morningstar.

“Added uncertainties beyond the outflows include manager changes and workloads,” Kinnel explained. “That is a negative in the short term, but could be a positive in the long term — as we get more certainty of who is going to be in charge of what.”

After Gross left, Morningstar adjusted its rating of the Total Return Fund downward to bronze. “We want to see how the new team in place works before we go beyond the bronze rating,” the expert said.

“We will watch for tweaks in strategy. Things remain in flux,” he added.

Management Muscle

Morningstar’s experts believe the switch from two co-chief investment officers — formerly Gross and Mohamed El-Erian — to a group of several deputy CIOs is proving advantageous.

“By no means is this a group of new faces,” said Michael Herbst, director of manager research-active strategies. “It’s comprised of people who cut their teeth at PIMCO, and Morningstar has gotten to know them over the past 15 years, especially during the last six weeks.”

“Under Group CEO Dan Ivascyn, there have been more open lines of communication on the trading floor and within the investment committee,” he explained.

Support from Allianz (ALV) has been strong, and a $279 million retention program is being rolled out, according to Morningstar.

“There’s a good mix of individuals on the investment committee … and we feel confident in how they are setting the tone,” said Herbst.

The “high-performance” culture at PIMCO remains in place, and “the rough edges are being smoothed out,” he added. “This is a huge positive.”


Editor’s note: Morningstar’s estimate of October outflows differs from PIMCO’s figure of $27.5 billion in outflows. PIMCO reported and counted $5.6 billion in redemption requests on Sept. 30; however, since the fund follows a “T+1 settlement” procedure, Morningstar considers those redemptions’ impact on fund net assets as effective Oct. 1.

Combining September and October, both Morningstar and PIMCO agree that the Total Return Fund had redemptions of over $50 billion.

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