Bill Gross, the “bond king” of Wall Street, quit Pimco last Friday because of “fundamental differences” with the board of the $2 trillion firm he founded 40 years ago. He will join Janus Capital to become the portfolio manager of a newly-launched Unconstrained Bond Fund. Although Gross has been on the new headlines for months after the resignation of the former CEO Mohamed El-Erian, his abrupt departure from the world’s biggest bond fund stunned investors.
Shares of Janus Capital jumped by 43%, while Allianz, Pimco’s parent company, tumbled 6.14%. There may be worse to come for Pimco. Morningstar analyst Vincent Lui said in a report: “It is likely that tens of billions, if not hundreds of billions in AUM (assets under management), will follow Gross to Janus from Allianz.” Sanford Bernstein, an research firm, said that Pimco could see withdrawals of 10 percent to 30 percent.
With possible acceleration of Pimco’s outflows. DoubleLine Capital, TCW and BlackRock, among others could be the largest beneficiaries, who have seen money reallocated to their portfolios from pension funds, foundations and endowments, as Pimco’s flagship fund failed to stem the net outflows since El-Erian’s resignation in January (see Performance in Table 1).
Table 1: Performance Comparison
|
|
2014 YTD (8/29) |
2013 |
|
PIMCO Total Return (PTRRX) |
2.3% |
-2.0% |
|
TCW Total Return (TGLMX) |
4.6% |
1.7% |
|
Doubleline Total Return (DBTLX) |
4.8% |
0.7% |
|
Blackrock Total Return (MAHOX) |
6.7% |
-0.2% |
|
9.8% |
6.3% |
|
|
Barclays US Aggregate Bond Index |
4.8% |
-2.0% |
If you are an investor in the PIMCO funds, you may be scratching you head and trying to figure out what to do. There are four things you may want to consider:
(1) Proven quality vs. unproven team. PIMCO named a team of portfolio managers to replace Bill Gross last Friday. Although all of them are capable investors on their own rights, they don’t have the long-term experiences and track record of making big macro calls during several market cycles as Bill Gross has. Additionally, Bill Gross managed half of the Pimco’s $2 trillion assets; none of the new managers had manged that big size before.
(2) Size matters. PIMCO Total Return Fund had almost become the victim of its own success. With AUM at $222 billion, it is certainly not an easy task to outperform the market when the fund becomes too big. The much-smaller Janus Unconstrained Bond Fund now managed by Bill Gross may present an interesting alternative to investors who still believe in his investment talent.
(3) PIMCO management in disarray. PIMCO ended up on the watch list for many investment consultants after El-Erian left. Given Gross’s reputation and track record, many were willing to give the firm time to regroup. However, Gross’s resignation changed all that. Many institutional investors as well as individual investors may follow Gross to Janus. It is a huge mistake for Pimco to let Gross go and join a competitor.
(4)Multi asset income strategy as an alternative for traditional fixed income. With higher interest rates in the horizon, bond investors are likely to suffer again. Pimco’s outflows had a lot to do with the bearish sentiment in the bond markets as well as its own performance and management issues. Choosing the right strategy or style will be as important as picking the right manager. Multi asset income strategy offers the flexibility of investing in all the income generating asset classes such as REITs, MLPs, preferred shares, high-dividend stocks and other high yielding bonds like bank loans, converts and EMDs. Normally these asset classes outperform the traditional bonds like Treasuries or investment grade bonds when interest rates are rising. Multi asset income strategies provides an attractive alternative if the downside risks are managed appropriately.
Julex Capital is managing a multi asset income strategy in a dynamic fashion. The Julex Dynamic Income Strategy returned 6.3% in 2013, and 9.8% YTD as of August 29. It ranked as the No. 1 performer in Q2 2014 and No.2 performer in the year ended June 30, 2014 in the PSN database across US Fixed Income Core, Intermediate Maturity and ETF Bond categories. For more information, please see the Julex Dynamic Income Fact Sheet.