A Smaller Fund
According to Morningstar, Inc. (MORN), the fund’s assets currently stand at about $101 billion. By most standards this is still a huge fund. This total represents a substantial drop from its peak of just under $293 billion in 2013. Redemptions started well before Gross’ departure in September of 2014 due to performance issues, management turmoil and frankly some questionable investment calls made by Gross. Redemptions accelerated in the months after his departure with many large institutional investors terminating their relationship with the fund and with PIMCO. Many financial advisors ceased to use the fund as well. (For more, see: The Greatest Investors: Bill Gross.)
In fact in 2011 the fund underperformed 87% of the funds in its peer group, 60% in 2013 and 71% in 2014. Its solid 12th percentile ranking in 2012 was the fund’s only solid relative performance during this four-year stretch. By contrast from 2005 through 2010 the fund placed in the top half of its peer group each year including the top percentile in 2007 and the fifth percentile in 2005. The fund’s trailing 10 and 15 year performance through the end of July 2015 has it outperforming 96% of its peers in each time frame.
No Longer the Largest
The redemptions have cost the fund its title as the world’s largest bond fund, which is now held by the Vanguard Total Bond Market Index (VBTIX) with about $145 billion in assets. This came about certainly due to the outflows from Total Return, but is also a reflection of an overall trend by investors toward low cost passive index investments. The expense ratio for the admiral share class of the Vanguard fund is 0.07%, while the institutional share class of Total Return has an expense ratio of 0.46%. (For more, see: The 5 Biggest Financial Advisory Firms in the U.S.)
Through the end of July, 2015 the fund’s performance placed it in the top 4% of all funds in its peer group. For the trailing 12 months the fund ranked in the top 9% (with the final two months of Gross’ tenure overlapping). Clearly the new managers have done well. Perhaps their ability to focus on managing the fund without all of the distractions that Gross had (or created) has helped. Perhaps the smaller size of the fund has as well. (For more, see: Time to Look at PIMCO's Total Return Fund Again?)
Lower Bottom Line
Even though PIMCO's parent company Allianz Se (AZSEY) says good things about PIMCO and has posted strong corporate earnings, there is no way the drop in Total Return’s assets has not hit PIMCO’s bottom line. Investment managers like PIMCO are compensated via a percentage of the assets in the fund and a drop of almost two-thirds hurts. I have no idea how significant PIMCO is as a piece of Allianz or if PIMCO has made up for at least part of this decline in other areas of the firm. (For related reading, see: Understanding the Bond Behemoth that is PIMCO.)
Will the Assets Return?
Through all of this the new management team at Total Return has done a good job as witnessed by the fund’s relative performance. After Gross’s departure it seemed like almost every day we would hear about some large institutional investor eliminating the fund or a major 401(k) plan replacing the fund in its lineup. While many large financial advisors indicated they would take a wait and see approach, just as many others reduced or eliminated their allocations to Total Return.
I agree with both approaches. One trigger, especially for plan fiduciaries, is a management change in a fund. This one was certainly very visible. Couple this with lagging performance and a change was justified. Yes the fund came back and regained its top ranking but it just as easily could have turned out differently. Will the advisors and institutions that moved away from Total Return come back as investors? Only time will tell. Is Total Return a better fund without Gross? My opinion is yes and not because of any lack of respect for him. (For more, see: Pimco Total Return Fund's New Structure.)
The Bottom Line
Almost a year after Gross' departure from PIMCO, the flagship Total Return fund finds itself almost two-thirds smaller than at its peak in 2013 and has lost its title as the world’s largest bond fund. Outflows have slowed down but do continue. On the other hand, the fund has regained its place atop the performance rankings among its peers under new management. It will be interesting to see what the future holds for this fund. (For more, see: What Bill Gross, Steve Jobs and Steve Wynn Have in Common.)