Coverage: Pimco’s flagship loses record amount

It looks like Bill Gross is a huge draw, and investors are voting with their dollars. Pimco’s main fund saw record withdrawals

The Wall Street Journal story by Kirsten Grind pointed out that the month’s withdrawals were larger than what was seen at competitors:

Investors yanked an industry record $27.5 billion from Pacific Investment Management Co.’s flagship fund last month as the surprise exit of co-founder Bill Gross took its toll on the firm he co-founded.

The net withdrawals from the Pimco Total Return fund marked the first full month of investor-flow data since Mr. Gross, Pimco’s former chief investment officer and the fund’s star manager, resigned on Sept. 26. Mr. Gross now runs a small mutual fund at rival Janus Capital Group Inc.

The October outflows in the Total Return fund represent the 18th consecutive month of outflows, an unprecedented exodus from a fund that for years has been a staple of the pension and 401(k) accounts of ordinary investors. The amount beats the previous mutual-fund-industry record for a monthly withdrawal—set in September when the Total Return fund suffered a net $23.5 billion in withdrawals.

The size of the outflow is larger than many mutual-fund companies.

Jennifer Ablan wrote for Reuters that investors believe there’s been a shift in strategy:

Pimco – which had assets under management of $1.876 trillion as of Sept. 30, representing a 5 percent drop in the third quarter – has been aggressively reassuring clients through meetings, conference calls and advertisements that the firm remains committed to the same investment strategies following Gross’ exit.

“With Bill’s recent decision to resign, the perception has been that there has been a dramatic shift at Pimco,” Pimco CEO Doug Hodge said in a letter to clients last month. “However, the reality is that while Pimco has evolved into a globally diversified investment company, our DNA is fundamentally unchanged.”

Gross’ exit, eight months after his top deputy, Mohamed El-Erian, quit amid acrimony, has quickened speculation in the bond market about leadership stability and further outflows into the new year.

Pimco said outflows from the Pimco Total Return fund slowed considerably during the month of October, with nearly half of the $27.5 billion of outflows occurring in the first five trading days.

“Unfortunately, new management will need to convince shareholders that the process has not changed but performance has improved,” said Todd Rosenbluth, S&P Capital IQ’s director of mutual fund and ETF research. “But many investors viewed the Gross departure as reason to reconsider investing in Pimco Total Return. For many, the review process takes time, so outflows could persist as investors identify other funds with stronger records under current management.”

Bloomberg’s Mary Childs reported that the departure of Gross wasn’t the only reason that investors were pulling money from the fund:

Gross, who co-founded Pimco in 1971 and built it into a $1.87 trillion money manager, departed after his deputies threatened to quit and management debated his ouster, according to people familiar with the matter. He abruptly resigned to run an unconstrained fund at money manager Janus Capital Group Inc. (JNS)

Investors have been withdrawing assets from the Pimco Total Return Bond Fund in anticipation of rising interest rates and as performance lagged behind competitors. Returns in the past 12 months of 3.3 percent trailed 64 percent of comparable funds, according to data compiled by Bloomberg. Over five years, the fund beat 63 percent of peers.

Last year, Total Return lost a record $41.1 billion from client redemptions, according to Chicago-based Morningstar.

Randy Diamond wrote for Pensions & Investments that Pimco’s competitors are the biggest winners as investors move money:

Meanwhile, Vanguard Group reported on Tuesday it had attracted $164.3 billion in subscriptions in its mutual funds and exchange-traded funds through October, more than it has gained in any full calendar year in its 39-year history, John Woerth, a spokesman for Vanguard, said Tuesday in an e-mail. The firm received $141 billion in 2012, its previous high.

PIMCO did not release figures for any outflows from separate accounts. Data from eVestment show that as of Sept. 30, PIMCO had more than $50 billion in total return separate accounts.

After years of superior performance, the Total Return Fund started to experience redemptions in May 2013 when performance turned sour and started lagging its peers.

Pimco has been struggling to reassure investors that it isn’t shifting strategy after Gross’s departure, while it also works to distance itself from his antics. The past several months have been disappointing for the fund. But as returns fall and investors remain skittish, it’s hard to see how Pimco will regain trust and confidence. Some institutional investors have pulled money, but The Wall Street Journal reported that many are sticking around.