BlackRock's headquaters in New York. (Photo: AP)

At a BlackRock event last week in New York, fund manager Rick Rieder told about 100 advisers that he expects interest rates to remain low as aging Baby Boomers seek the stability of fixed-income investments. The talk was enough to persuade Larry Glazer to shift even more client money from Pimco to Rieder’s BlackRock fund.

Bill Gross’ departure in September from Pacific Investment Management Co., the firm he was synonymous with for more than 40 years, has triggered unprecedented withdrawals from the largest fund he managed, Pimco Total Return. (PTTRX) One of the beneficiaries has been Rieder’s Total Return, the top performer in its peer group. The BlackRock Inc. fund collected more than $1 billion in assets in October, the most since 2007.

“Talk about great timing,” said Glazer, a managing partner at Boston-based Mayflower Advisors LLC, who has moved some of its almost $2 billion in assets from Pimco to BlackRock. “They are performing very well in an environment where money is in motion and the scale of what’s in motion is really significant.”

Chief Executive Officer Laurence D. Fink hired Rieder in 2009 as BlackRock’s (BLK) actively managed bond unit languished while Pimco’s flourished. Rieder, a 21-year Lehman Brothers Holdings Inc. veteran, took over as chief investment officer, overseeing all active bond strategies, the following year. He said he’s boosted returns in his Total Return fund by flipping big pieces of his positions, such as this year’s shift into more mortgage-backed securities guaranteed by Fannie Mae and Freddie Mac as declining originations suppresses supply.

No. 1 Performer

Rieder, who runs the $4.1 billion fund with Bob Miller, has delivered 7 percent over the past year, according to data compiled by Bloomberg. That performance makes it No. 1 out of 41 bond funds that invest about half of their $500 million or more in assets in mortgages. The $1.9 billion Putnam Income Fund (PINCX) returned 5.7 percent, making it the second best performer. Once the largest mutual fund in the world, the $171 billion Pimco Total Return fund returned 3.6 percent over the same time period.

“There’s no home run opportunity in fixed income and nothing looks extremely cheap,” said Rieder, 53, who is based in New York. “The way we’ve been able to generate returns is by expanding the toolkit and being more nimble and tactical.”

Since Gross announced his departure on Sept. 26 from Pimco, Mayflower’s Glazer said he’s been inundated with marketing materials from mutual-fund companies, including handouts on the street and in line at the deli.

Leaving Pimco

Investors pulled $27.5 billion from the Pimco fund in October, the firm said. Half of the redemptions occurred in the first five trading days last month and they then “slowed sharply,” Newport Beach, California-based Pimco said in a statement on Nov. 4.

A unit of Prudential Financial Inc. dropped Pimco as manager of a $6.2 billion total return strategy, replacing it with Rieder and Miller and managers from Loomis Sayles & Co., according to a regulatory filing last month. TD Ameritrade Holding Corp. also decided to shift about $600 million it manages for investors from Pimco to BlackRock Total Return.

“There’s a rush for assets now that people are reconsidering their allocations to Pimco,” said Sumit Desai, a fixed-income analyst at Morningstar Inc. in Chicago. “There aren’t that many on the institutional side with fixed-income operations big enough to give those investors confidence. BlackRock is one of them.”

Fed’s Tapering

The BlackRock fund’s strong performance didn’t prevent withdrawals in almost every month this year until September, when it attracted $98 million, and last month, when it pulled in more than $1 billion, according to estimates from research firm Morningstar. DoubleLine Capital LP and Vanguard Group Inc. have also profited from Pimco’s instability, attracting their highest deposits for the year last month.

Rieder and Miller made the right calls on how the Federal Reserve’s tapering of its bond buying program would affect the mortgage market. In the summer of 2013, the fund maintained a lower allocation of agency MBS relative to its benchmark, the Barclays U.S. Aggregate Index, after the Fed’s announcement on stimulus reduction spurred volatility in the market.

This year, the duo increased their agency MBS holdings, which comprise about a third of the fund. They predicted that even as the Fed cut its mortgage bond buying, the issuance of mortgages was low enough to prevent a buildup of excess MBS supply. Agency-backed mortgage bonds returned 4.8 percent over the past 12 months, according to a Bank of America Merrill Lynch index. Recently the managers sold some government-backed MBS as they increased in price.

Gross’ Missteps

Gross took the opposite approach in his Total Return fund, reducing the proportion of mortgage debt to 19 percent in April from 36 percent in January. The fund now has about a 20 percent stake, data on Pimco’s website show. Investors should “sell what the Fed has been buying because they won’t be buying them when taper ends in October,” Gross wrote on March 7.

Gross now manages the Janus Global Unconstrained Bond Fund (JUCIX) at Denver-based Janus Capital Group Inc.

The BlackRock managers complement the safer agency mortgages with non-agency mortgage-backed securities and commercial mortgage backed securities, which make up about 11 percent of the fund.

“Our favorite source of credit risk in all of the portfolio for the last 18 months has been real estate-related securitized products,” said Miller, who began co-managing in 2011. That’s because the underlying collateral for those securities has benefited from economic growth.

Rieder’s Stumble

The managers also boosted returns by adjusting the fund’s duration, or sensitivity to interest rates, in 2014. They extended the duration to a high for the year of 5.35 years as of the end of April. A longer duration benefits a fund when interest rates fall.

Many managers expected 10-year Treasury rates to rise this year. The rates started the year at 3 percent before falling to a low of 2.1 percent in October.

“Their overall stance as being willing to take on higher duration type positions have set them apart,” Morningstar’s Desai said, referring to the BlackRock managers.

Rieder stumbled during the European debt crisis in 2011. The fund gained only 4.5 percent while its benchmark delivered 7.8 percent returns, Bloomberg data show. Rieder said they failed to keep pace with the fast moving events in Europe. Interest rates dropped quickly and the fund couldn’t change positions.

Fees Drop

The manager said he’s learned from that mistake by keeping the fund as diverse as possible for greater stability. The fund’s holdings range from U.S. municipal bonds to Italian and Brazilian securities.

BlackRock Total Return (MAHQX) fund’s fees dropped to 0.45 percent from 0.52 percent on Oct. 27, which will help to attract even more money from investors, said Todd Rosenbluth, director of mutual-fund research for S&P Capital IQ in New York.

“Like a good core bond fund, this fund offers exposure to various sectors and the low cost is another positive,” Rosenbluth said. “They’ve also had a team in place since 2010 with a consistent process. That isn’t something you can say right now for Pimco.”

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