The over-publicized departure of Bill Gross from the fixed income goliath he founded roughly 30 years ago has brought about some interesting crosscurrents in recent fund-flow statistics.
Although the vast majority of the assets that departed the firm were domiciled in the flagship Pimco Total Return Fund (PTTRX), the smaller, actively managed ETF version Pimco ETF Trust (BOND) also experienced an exodus when the news finally broke.
Yet, the real question remains: How did investors select worthy alternatives so quickly given the majority of the assets were liquidated at a break neck pace following Bill Gross’ resignation?
Naturally we are all familiar with the long term success that Bill imparted to investors in his total return strategy, and that his star-power as a portfolio manager puts the fund’s future performance and ability to generate meaningful alpha in question. Yet, the problem remains that for investors that still want the daily liquidity and low cost structure associated with an actively managed core fixed income ETF, BOND is still one of the only games in town.
Judging from my own observations over the years, Pimco has done a fantastic job assembling competent teams of portfolio managers, analysts, and support staff to effectively implement and manage their strategies over time. Besides, one man shows don’t exist in the asset management business when assets under management swells into the trillions of dollars.
With that in mind, jumping ship on BOND for a passively managed core fund such as the iShares Barclays Aggregate Bond Fund ETF (AGG) or the Vanguard Total Bond Market ETF (BND) doesn’t make much sense. I have to imagine investors in BOND found the value proposition of active sector, credit and duration positioning attractive. Otherwise, why would they pay the premium expense ratio of 0.55% over 0.08-0.09% offered by BND and AGG. Furthermore, in the current interest rate and credit environment, divergences are cropping up and spreads are widening; lending further proof that indexing isn’t a problem solver.
As a result, I have confidence in the team Pimco assembled to steward BOND, which includes a trio of senior CIOs of the firm including: Scott Mather, Mark Kiesel and Mihir Worah. Each with their own successful individual track records in fixed income portfolio management at the firm.
Alternatives to BOND
Scanning the universe of actively managed fixed income ETF alternatives, many strategies do exist, however they predominantly focus on more credit-heavy, high-income or strategic-income strategies. If investors decided to head that route, their weighting toward investment grade securities would shrink, likely resulting in greater volatility in response to changes in the strength of the economy. Instead, most core fixed income investors rely on the quality side of their funds to act as a shock absorber when equity markets correct. Without additional changes to entire strategy, investors could inadvertently be assuming more risk than they might be comfortable with.
The one option that could ultimately give BOND a run for its money is the newly launched Fidelity Total Bond ETF (FBND), one of Fidelity’s first actively managed fixed income offerings. On paper both funds line up well, with FBND offering a slightly lower expense ratio at 0.45%, and an investment grade credit objective. In addition, FBND will rely on Fidelity’s massive research team for sector selection, credit posturing and yield-curve positioning. The one caveat is that the fund has only been trading for about a week, which doesn’t offer up much for performance comparison to make an educated selection.
Time will tell if a true rival emerges to challenge BOND in the actively managed core fixed income space, but in the meantime don’t make the foolish choice of shooting first then asking questions later. Let performance be the ultimate arbiter for your investment dollars.
As of this writing, Michael Fabian did not hold a position in any of the aforementioned securities in either personal or FMD client accounts.