Is There Life at PIMCO After Bill Gross?

Charitable Planning Blog - JLFranklin Wealth Planning

Fall 2014

In late September 2014, superstar bond manager Bill Gross left PIMCO, the firm he founded in 1971. We have reviewed the repercussions of Gross’s departure and have decided to continue holding PIMCO Total Return fund as we complete further research on the fund and the available alternatives.

PIMCO is a large organization with talented bond managers. To replace Gross, Daniel Ivascyn is now the Group Chief Investment Officer. Mark Kiesel, Scott Mather, and Mihir Worah are now co-managing PIMCO Total Return, which is the country’s largest bond fund, available in more than half of 401(k) plans. Although the fund had $222 billion in assets at the end of August, investors withdrew a net $23.5 billion in September, with the majority of those withdrawals taking place on the day Gross resigned. Morningstar gives the post-Gross PIMCO Total Return fund a Bronze rating (downgraded from Gold). Only 9.5 percent of mutual funds get any medal rating from Morningstar.

So, is there life at PIMCO after Bill Gross? The answer is maybe. We look at Gross’s departure as an opportunity to thoughtfully reevaluate our clients’ entire bond asset allocation. Our last deep asset allocation review was in 2010, on the heels of the Great Recession.

When analyzing fixed income, we look at several factors, including:

  • Duration—Duration is the number of years it takes for the price of a bond to be repaid by its internal cash flows. Generally, a bond with a higher duration is riskier than a bond with a lower duration. Read more about bond duration.
  • Credit Quality—The higher the credit quality, the lower the risk of default. Bonds rated AAA have a higher credit quality than bonds rated B. Read more about credit risk.
  • Expenses—All mutual funds have expenses, often referred to as expense ratios. It’s best to choose a fund with lower expenses, all else being equal. Actively managed funds generally have higher expenses than index funds. Read more about expense ratios.
  • Returns—Comparing returns of different funds should be done with an eye on duration and credit quality. Riskier bonds may have returned impressive numbers in the past, but they may not be so lucky going forward. Read more about fund performance.

While PIMCO Total Return remains under review, we sold PIMCO Unconstrained Bond Fund in all client accounts just after Gross’s departure. Over the next several months, we will review the team at PIMCO Total Return, analyze our bond asset allocation, and make a thoughtful decision about whether or not to make changes. We will then trade in client accounts as appropriate.

If you have any concerns about your portfolio, please let us know.