Gross Going From $293 Billion to $79 Million Sets a Trend The era of one dominant bond fund may be ending with Bill Gross’s sudden exit from Pacific Investment Management Co. It’s unlikely that any other actively managed bond fund will soon get as big as Pimco’s $200 billion Total Return (PTTRX) Fund - - which has lost billions of dollars to competitors since Gross’s departure. DoubleLine Capital LP, one beneficiary of the exodus, has said it will stop new money from coming into its total-return bond fund well before it reaches $100 billion because that kind of size can hamstring performance. Other asset managers, such as Vanguard Group Inc., have previously closed bonds funds to new cash for similar reasons. The performance of the Pimco fund, whose size peaked at $293 billion last year, has lagged behind most of its peers since the end of 2012. A shift toward less concentration is alright by Morningstar Inc. (MORN)’s Russ Kinnel, who said bond investors will benefit from more competition among investment firms for assets. “It’s never healthy for one company in one asset class to be the default” investment choice, said Kinnel, director of mutual-fund research at Chicago-based Morningstar. “The idea that there won’t be another $200 billion bond fund doesn’t sound so bad to me.” Fed Stimulus Pimco’s flagship bond fund ballooned as the Federal Reserve embarked on unprecedented stimulus programs to rescue the world’s largest economy from the 2008 financial crisis. Investors flocked to the fund managed by billionaire Gross -- known as the Bond King -- to get a piece of the debt rally that ensued. The broad U.S. bond market posted annualized gains of 6.3 percent in the four years through 2012, according to a Bank of America Merrill Lynch index. Now, as the Fed prepares to start raising interest rates as soon as next year, investors are gravitating toward managers who can find opportunities in specific securities and slices of the debt markets rather than a general basket of bonds. “Investors are going to be less likely to all pile into one firm or one fund the way they did during this run that Bill Gross had from the 1980s through a week ago,” said Jim Flick, director of global client service and marketing of Western Asset Management Co. Gross “was early, at the right place at the right time.” Pimco’s Total Return fund outperformed 82 percent of its peers in 2008, when credit markets seized as housing values spiraled downward. It underperformed 65 percent of its peers in the past year, though, and its assets were already shrinking before Gross left, according to data compiled by Bloomberg. Mark Porterfield, a Pimco spokesman, declined to comment. Tool Kits “The bigger and bigger those mega funds get, the tool kit that’s available to them to find alpha and generate alpha is limited,” David Leduc, chief investment officer at Standish Mellon Asset Management Co. said, referring to the ability to outperform. “We’re very conscious of how certain size can impact our ability to do things and the way we do it,” said Leduc, who co-manages the $550 million Dreyfus Opportunistic Fixed Income Fund. (DSTRX) Gross may be more nimble after departing Newport Beach, California-based Pimco on Sept. 26 for Janus Capital Group Inc. (JNS), where he’s overseeing a fund with an estimated $79.1 million of assets. The smaller Janus fund “makes for a much more effective ability to put together a portfolio and change it as circumstances change,” Gross said yesterday in a webcast. “It’s important to remain compact to remain effective.” Shrinking Assets Since he left, Pimco has lost more than $20 billion, with money flowing to competitors including TCW Group Inc., DoubleLine, BlackRock Inc. (BLK) and Western Asset Management. Some of the money pulled hasn’t been reinvested in debt funds, which makes sense given bonds don’t hold the same promise they did five years ago when the Fed’s stimulus was just getting rolling. Larger funds do have advantages. They tend to get better allocations to new bond sales, which often gain value in the few days after their issuance. More assets can also mean a bigger budget for a staff of analysts to identify opportunities. The Total Return fund still has more assets than the next two biggest funds combined, Vanguard Total Bond Market funds that together have $184.7 billion, Morningstar data through Aug. 31 show. The Templeton Global Bond (TEMGINI) Fund ranks fourth with $73.1 billion of assets and the $50.5 billion Vanguard Short-Term Investment Grade fund is the fifth-biggest. Closing Funds “We closely monitor cash inflow to ensure that it is long-term in nature,” David Hoffman, a Vanguard spokesman, wrote in an e-mail. The asset manager has closed several bond funds to new investors in the past few years “to reduce cash flow, with the aim of preserving the fund advisors’ ability to implement their investment strategies and produce competitive long-term returns,” he wrote. The ability to be nimble is becoming more important as the Fed pulls back its stimulus, potentially spelling worse returns for bonds. Yields (USGG10YR) on the benchmark 10-year Treasury note will climb to 3.4 percent at the end of next year from 2.31 percent yesterday, according to a Bloomberg survey of analysts. “We’ve had this tremendous long-term bond rally,” Morningstar’s Kinnel said. “Even in a bullish scenario, there’s no one saying we’re going to have another of those.” For years, bigger seemed better. Now, it’s not so clear.
Posted on: Fri, 10 Oct 2014 11:22:18 +0000
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