The “Authority on Bonds.” Pacific Investment Management Company. Pimco.
Whatever you want to call it, Bill Gross — the so-called “bond king” — has just announced that he’s jumping ship and swimming to Janus Capital.
Now, the once-mighty fund provider is leaving investors wondering what the heck is going on in Newport Beach.
The Ship Is Sinking
Pimco currently has nearly $2 trillion in assets under management. You can largely thank Bill Gross for that, thanks to his flagship Pimco Total Return Fund (PTTRX) becoming a staple in many retirement plans. At $222 billion in assets, it’s one of the largest mutual funds on the planet.
But given the magnitude of recent events, you probably don’t want your investment dollars to be a part of that AUM.
Before today, the most recent scandal was that the Securities and Exchange Commission was poking its nose around Pimco Total Return ETF (BOND). According to leaked documents, the regulator is investigating whether Pimco inflated BOND’s returns. The issue has to do with how Pimco bought various odd-lot and illiquid securities on the cheap, then marked the values upward to reflect a gain.
The problem is that unlike stocks, bonds (except for Treasuries) aren’t quoted every second. In fact, some of these illiquid things are hardly quoted at all. Many fund companies — Pimco included — will use price quotes furnished by third-party pricing services. Companies like Interactive Data, Thomson Reuters, Bloomberg and Markit maintain quoting services for bonds … but sometimes these quotes are based on old data, information from various market-makers or even estimates derived from other similar bonds.
The SEC appears concerned that Pimco used its huge size to muscle issuers into selling at discount various bonds that the company knows are being valued at a higher price. Because it’s so large, Pimco could, say, go out and buy a small town’s municipal bonds or a basket of mortgages on the cheap, then use inefficiencies in pricing data to make an instant gain.The big problem in the SEC’s eyes would be that investors might have been provided false information on the value of these securities. That would run afoul of the law.However, the SEC investigation is just the latest of several potholes showing up at Pimco.
It all began back in 2013, when investor yanked a record $41 billion out of the Total Return Fund as Gross took some big missteps in the bond market and underperformed by a wide margin. Then this January, Gross’s main-squeeze and apparent successor Mohamed A. El-Erian — chief executive and co-chief investment officer — abruptly left Pimco. His departure set off a fire of reports of the tensions that have been building inside the investment manager.
Things got even weirder when PImco’s inflation-protected bonds specialist fund manager Jeremie Banet quit to run not an independent hedge fund, but a food truck.
Perhaps all this pressure was too much for Bill Gross.
Hours ago, reports hit the wire saying that Gross will leave Pimco — the firm he founded — to run an unconstrained bond fund at Janus Capital. The money quote from Gross:
“But now, after having spent considerable time serving in senior management, it is a time for me to reduce executive and people management responsibilities at a larger firm and focus on the pure aspects of portfolio management at a smaller one. Janus is the right fit at the right time in my career — and my life.”
The ship is going down.
Bill Gross isn’t sticking around to watch it sink.
Leave Pimco Alone
A fresh start might be great news for Gross, but it’s not for your portfolio.
The problem for anyone invested in Pimco funds is simple: With all the craziness going on at the investment shop, can they really be focusing much on my returns?
Personally, I’m not so sure.
All these distractions — and an SEC investigation is very distracting — clearly were weighing on Gross, who was already a pretty busy guy. In addition to Total Return, Gross has his ladle in many of Pimco’s soups as a co-manager. He also heads several closed-end funds and manages third-party mutual funds such as Harbor Bond (HABDX).
One can only imagine this is distracting other managers at the firm, too. After all, their captain is leaving, so they must deal with life without both El-Erian and Gross, but with an SEC investigation.
Meanwhile, managers like Jeffrey Gundlach and his competing DoubleLine Total Return Bond Fund (DLTNX) have been getting it right and don’t come with the “extra baggage.” Heck, even Vanguard and its boring index funds have taking much of Pimco’s thunder away.
I seriously didn’t think the SEC investigation would kill Pimco. But Bill Gross’ departure might. Live or die, though, something clearly isn’t right in Newport Beach, and chaos can really weigh down the bottom line.
If you invest in Pimco funds, you should at least start looking at steadier waters.
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As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.