It’s been about eight months since fixed-income guru Bill Gross abruptly left the fund firm he co-founded to join Janus Investments. Since Sept. 26, outflows from PIMCO “have been staggering,” Morningstar analysts conclude in their latest report.
The firm’s total assets under management dropped 15% from $1.88 trillion in September to $1.59 trillion as of March.
Furthermore, the flagship PIMCO Total Return Fund (PTTRX) shed about $180 billion in net assets from mid-2013 to May 2015, the research group says, with the bulk of redemptions stating in September 2014.
Redemptions from Total Return, along with the PIMCO Unconstrained Bond (PFIUX), PIMCO Low Duration (PTLDX) and PIMCO High Yield (PHIYX) funds, top $250 billion in estimated outflows from mid ’13 to April 2015.
“Outflows peaked in October 2014 and continued at a heavy, if slowing, pace through the first part of 2015,” explained Michael Herbst, director of fixed-income strategies for Morningstar, in a group report issued Thursday. “While PIMCO management notes redemptions from individual investors came quickly, it has seen a much longer tail of outflows from institutional accounts, including defined-contribution plans.”
Still, the fund experts say they remain “cautiously optimistic” about PIMCO’s future.
“We’re encouraged at the progress the firm’s leaders have made in stabilizing the investment team, fortifying the firm’s culture, and continuing to invest in its research effort,” Herbst and his colleagues said. “Yet, the situation is fluid amid continued outflows and an investment team still in the formative stages of jelling and reforging its identity. Team stability continues to weigh heavily in our assessment of whether PIMCO can succeed in the future.”
Outflows from the Total Return Fund finally started to “slow meaningfully” in April and May, according to Morningstar, dropping to $7.6 billion and about $2.7 billion, respectively.
As for outflows from DC plans, PIMCO management team told Morningstar they were on the decline.
In addition, “Allianz also suggested in May that it expected PIMCO flows to turn positive by the end of 2015. That’s consistent with what we’ve heard from other large fixed-income money managers who say the bulk of manager searches for defined-contribution plans are now complete,” the Morningstar experts stated.
For its part, PIMCO said in early May that net flows for the Total Return Fund “continued to decline in April and were estimated at -$5.6 billion.”
The fund had $110.4 billion of assets as of April 30. In the first four months of 2015, the fund had after-fee returns of 1.62%, outperforming its benchmark and Morningstar category by 38 and 30 basis points, respectively, according to PIMCO.
In November, the research group estimated that PIMCO could “take a roughly $300 billion to $350 billion hit to its $1.88 trillion assets under management over a three-year period before suffering an impact on its profit margins sufficient enough to affect its ability to invest in its business.”
Given that the firm’s assets declined some $290 billion between September and March 2015, the firm is “getting close to that point — and more quickly than we had expected or modeled,” Morningstar experts say. “The decline in assets over the course of 2014 and the corresponding fall in revenue have already led to a marked decline in PIMCO’s profitability in 2014,” they added. “From 2013 to 2014, PIMCO’s operating margins fell from an estimated 37% to 33%, worse than we expected but still within the range we think the company could withstand without having to make drastic changes to its cost structure. However, even assuming that the firm’s assets under management have stabilized now, we expect PIMCO’s overall profitability would continue to decline in 2015.”
Before Gross departed, the Newport Beach, California-based fund group was “among the world’s most profitable money managers,” Morningstar says. With a high fixed-cost business model, “a near-term stabilization of flows is critical to the firm maintaining its current structure.”
The research group adds that is it “comforted by PIMCO’s longstanding and supportive relationship with its corporate parent Allianz and PIMCO’s importance to Allianz.”
Recently, PIMCO has picked up several high-profile advisors and consultants — such as former Federal Reserve Board Chairman Ben Bernanke, former White House advisor Gene Sperling, Nobel laureate Michael Spence, and Joachim Fels, who joined the firm as global economic advisor from Morgan Stanley, Morningstar points out.
Nonetheless, PIMCO said in May that it planned to close several equity funds and that equity CIO Virginie Maisonneuve was set to leave the firm.
“After a tumultuous year and a half, the relative stability of PIMCO’s senior fixed-income team and the steps taken under CIO Dan Ivascyn to shore up communication and collaboration around the firm are reassuring signs of the continued strength of PIMCO’s investment culture,” Morningstar analysts concluded in their report. “They’re also a key reason for our cautious optimism regarding the firm’s future.”
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