Bill Gross, portfolio manager of Pimco Total Return, the world's biggest mutual fund, quit last Friday. Gross, who also was founder and chief investment officer of Pacific Investment Management Co., left before he was fired.
But Gross's evidently erratic, difficult behavior likely wasn't the main reason, contrary to much of the media commentary about the soap opera that has ensued. Poor investment performance was the probable primary cause.
For several years, Pimco Total Return was one of the biggest client holdings in my investment management company. But I sold the entire position in early June 2013.
I sold out for two reasons. First, I was concerned about the risk of higher interest rates and falling bond prices in the wake of the Federal Reserve's first discussion of when it would start to reduce its purchases of U.S. government bonds and mortgage securities. You may recall the bond market's "taper tantrum" at the time.
As it has turned out, bond yields subsequently declined again instead of continuing to decline as generally expected. Even so, yields have risen considerably from their all-time low in July 2012. Back then, the 10-year U.S. Treasury yield bottomed at 1.4%, and it's at 2.5% now.
Second was the performance of Pimco Total Return itself. For many years, the fund was a standout. But its results, relative to both its peers and its benchmarks, were weakening. The performance decline has continued: For all of 2013 and so far in 2014, the fund's returns have lagged 75% of its peer group.
True, Gross and Pimco Total Return stumbled badly in 2011, when he incorrectly bet that interest rates would rise. But the fund rebounded strongly in 2012, delivering a remarkable 10% return, compared with 7% for its investment category and 4.2% for the benchmark Barclays Aggregate bond index.
Total Return, which reached its asset peak of $293 billion in April 2013, was partly a victim of its own success. When a fund gets too big, it becomes impossible to continue beating the market and the competition, as Gross did for so long. And soaring assets also reflect the popularity of the fund's investment category. In the equity world, the best example is the decline and fall of Fidelity Magellan from its level as the world's biggest mutual fund in 1999.
September was the 17th consecutive month of net withdrawals for Total Return. Investors took out $23.5 billion during the month, much of it last Friday after the announcement of Gross's exit. Assets now are below $200 billion.
Many of Gross's co-workers rebelled against his increasingly mercurial, tyrannical ways, according to accounts. Running a big investment company with some $2 trillion of assets requires skills and tact that Gross evidently lacks. So Pimco's management shakeup was inevitable and overdue. But it took so long precisely because of superior long-term performance that faltered only recently.
Among the dubious claims I've seen is that the departure earlier this year of Mohamed El-Erian, Pimco's co-leader with Gross and his supposed successor, was more significant than Gross's exit. Reason: El-Erian was a "brilliant and affable market analyst."
Perhaps. But while El-Erian could talk the talk, he was a mediocre portfolio manager. It was Gross who was the "bond king."
What should you do now if you're an investor in Pimco Total Return?
The new management team of three Pimco veterans is experienced and competent. Of course, time will tell in performance, particularly with the potential challenge of further significant client withdrawals. But if I held the fund now (which I don't), I'd be willing to give the new team a chance, particularly if your options are limited in a 401(k) or 403(b) plan, say.
Here are four other worthy intermediate-term bond funds to consider to at least diversify your fixed-income exposure:
---Dodge & Cox Income (DODIX)
---DoubleLine Total Return Bond (DLTNX)
---Fidelity Total Bond (FTBFX)
---Metropolitan West Total Return Bond (MWTIX)
Gross himself has joined another fund company, Janus Capital Group. He's to manage a much smaller fund, Janus Global Unconstrained Bond (JUCTX), which recently had just $13 million in assets.
Billions of dollars likely will follow Gross from Pimco toJanus. He's still arguably one of the best bond investors and highly competitive. I think he's intent on going out as a winner. But let's see how he does there before we invest.
This article originally appeared in the Mind Over Markets column. Never miss an issue. Sign up to receive Mind Over Markets by email.
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