Vanguard Total Bond Market Index (VBMFX) has dethroned Pimco Total Return (PTTRX) as the biggest bond mutual fund in the world.
After two years of client withdrawals from Pacific Investment Management Co.’s flagship fund, punctuated by the departure of Pimco co-founder and lead fund manager Bill Gross, VBMFX now stands as king of bond funds.
Therefore the Pimco Total Return assets clearly didn’t follow Gross to his new gig at Janus Capital Group (JNS) as manager of the Janus Global Unconstrained Bond Fund (JUCAX) and lead spokesperson.
But is the mass exodus of the Total Return fund justified? How has it performed since Gross left Pimco for Janus? And why is Vanguard’s Total Bond Market fund the biggest in the land?
We’ll dig beneath the financial media headlines and see if VBMFX and PTTRX deserve their respective No. 1 and No. 2 spots on the list of top bond funds in the world.
A Tale of Two Fixed Income Styles
On the surface, the styles of VBMFX and PTTRX can’t get much further apart:
- VBMFX is a passively-managed index fund; PTTRX is an actively-managed fund.
- VBMFX built its assets on a diverse base of long-term shareholders seeking a low-cost core bond holding; PTTRX built its assets on the name, notoriety and the performance record of a star fund manager.
- VBMFX consists of more than 16,000 bond holdings, all long positions; PTTRX has around half the holdings and includes short positions.
- VBMFX performance closely mirrors that of the Barclay’s Aggregate Bond Index; PTTRX has beaten the bond index in six of the past 10 years.
The style comparison is a story of apples and oranges. While they are both broadly categorized as intermediate-term bond funds, investors shouldn’t expect similar styles or performance.
VBMFX and PTTRX Performance
Past performance is no guarantee of future results, which may be the starkest of lessons for long-term investors of Pimco Total Return.
A lesson for all other investors is that there is always “manager risk” when investing in an actively-managed fund with a star manager like Gross was in the past. When the manager retires or moves to another firm, performance can suffer, either because of lesser management talent remaining on board or a panicky exodus of assets that makes management more difficult (or both).
Investors in Vanguard Total Bond can continue to expect reliable, index-hugging performance; whereas Pimco Total Return investors may or may not get returns that match that of the fund’s brighter days with Gross.
As of this writing, the 10-year annualized return of 6% for PTTRX beats 95% of all other intermediate-term bond funds. However, its year-to-date performance of 0.5% gives it a 54th percentile rank.
Vanguard Total Bond has a 10-year return of 4.6%, placing it around median with a 55th percentile rank. And year-to-date it only earns 78th percentile rank with a 0.7% gain.
Bottom Line
The big question is still this: What does the future hold for Pimco Total Return? Can it hold on to its still respectable position as second-largest bond fund in the world? Or will investors continue to jump ship to other funds?
Personally, I don’t invest in actively-managed funds and I rarely recommend them to clients, especially when it’s a bond fund like PTTRX that is still bleeding assets. But if you’re looking for a bond fund with a similar style, Vanguard Total Bond Market Index may not be the best choice either.
With that said, the era of star fund managers may be giving way to a growing attraction to passive management styles.
As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities, although he recommends and holds VBMFX for some of his advisory clients. His No. 1 holding is his privately held investment advisory firm. Under no circumstances does this information represent a recommendation to buy or sell securities.
