One Friday in September: the Pimco Total Return Bond Fund
During the past seven years or so, interest rates have fallen to generational, if not all-time, lows. Here’s a chart showing the rate of the two year Treasury Note over that period courtesy of the Department of the Treasury:
Since bond values rise as interest rates fall, it has been a terrific time to own bonds funds, including the immensely popular Pimco Total Return Bond Fund. It is one of the investment options in Cummins’ RSP and many other retirement plans.
At one time, it had over $220 billion in assets but nearly $70 billion of that has been redeemed over the past year and a half, perhaps calling the fund’s management into question. Last Friday, fund manager Bill Gross resigned without notice. Since he founded Pimco in 1971, his departure leaves investors with a decision to make: stay with Pimco or follow him to his new home at the Janus Global Unconstrained Bond Fund.
Goss’ former co-Chief Investment Officer left Pimco last January, complaining that Gross’ behavior had become erratic. Gross’ impulsive departure may lend credence to that sentiment, as might the fact that he wrote an homage to his cat within a client update earlier this year.
Gross sold Pimco to German insurance giant Allianz in 1999. Some of those who believe that Gross was becoming unpredictable say that Allianz was planning to let him go. On the other hand, money management can be as ego-driven as any other endeavor and Gross, well known in the press as The Bond King, may have chafed at the team style of management which Allianz utilizes. With more than 200 portfolio managers in place around the world, Allianz prefers a group process, much different than Gross’ original solo decision making. For now, I think that team approach should provide some solace to current investors. Pimco has a lot of very experienced managers to call upon going forward.
We would not follow Gross to Janus, at least until further details about his new fund emerge. It just opened this year and caries higher expenses than those charged by Pimco Total Return. Retail investors will have to swallow a 4.75% front-end sales load and may have to deal with capital gains issues in non-retirement accounts. I’m sure retirement account investors will be allowed to purchase one of the lower cost share classes and taxes will not be an issue in those sheltered accounts. In the case of RSP and other 401(k) investors, your plan’s administrators will decide whether it remains an investment option or is replaced. In the meantime, those who are frightened by the sudden turn of events may want to switch to a low volatility option like a stable value or very short term bond fund until things become clearer.
Although we once recommended Pimco Total Return to our clients, we became concerned about its immense size - among other things. I’m sure plan administrators will take that into account as they make their decisions and I think individual investors should too. A fund with so much money to invest makes purchases and sales in huge quantities, often large enough to move markets by itself. To help manage that risk, Gross had been trading various derivative securities, a strategy which carries risks of its own.
The past several years have been very profitable for bond fund investors and Bill Gross did better than most. That said, no manager could have failed to make money during the period but with rates now so low, we believe this is a poor time to own any bond fund. We have switched most of our clients to individual bonds (which will not be a retirement plan option). We have added a small position in a low cost unconstrained fund as a hedge but it would certainly not be suitable as a replacement for a significant holding in Pimco or any total return bond fund for those who believe that owning such a fund is their best option.
SEC filings show Gross to be a multi-billionaire courtesy of the sale of PIMCO to Allianz. Having made his money, the decision to move must have been pretty easy. How the rest of us should respond to his decision is a harder question to answer, especially until more information is made public. We are watching the situation carefully on behalf of our clients and those readers who are not clients of Warren Ward Associates should check with their own advisors for personalized advice.