Advisers must avert Pimco panic

The abrupt departure of legendary bond investor Bill Gross from Pimco is yet another opportunity for investment advisers to reach out to clients and provide sage advice. The first piece of advice is: Don't panic. Don't rush to sell Pimco mutual funds. Wait for the dust to settle, and see what happens over the next weeks and months. Pacific Investment Management Fund. Co. wasn't a one-man shop, though often it seemed that way. Mr. Gross, its founder, was largely the firm's public face before the arrival of Mohamed El-Erian, former chief executive and co-chief investment officer, and since his departure.

$2 TRILLION

Mr. Gross built a huge and incredibly successful bond management firm, which at its peak invested more than $2 trillion in fixed-income assets on behalf of retail and institutional investors. His insightful and often witty commentaries won him a large following among investors of all stripes. It is said that bond issuers often got Mr. Gross' reaction to the terms of a proposed deal before they proceeding with it. But Mr. Gross was backed up by a large team of top-flight investment talent — economists, analysts and portfolio managers — who had to pass his rigorous screening before being hired. That team remains largely intact. In fact, Pimco funds could have suffered greatly if Mr. Gross had not left, as important members of the portfolio management team reportedly threatened to walk if Mr. Gross did not go. The performance of the flagship Total Return Fund (PTTAX), which Mr. Gross managed and which has been lackluster in recent years, might improve with a new team managing it. The performance of other Pimco funds also might improve. There have been reports of internal tension at the firm — tension that played a role in Mr. El-Erian's exit — arising from Mr. Gross' interactions with other top investment professionals. With those tensions now relieved, the people running the funds may have a chance to concentrate on making investment decisions without the distraction of being second-guessed, and sometimes publicly excoriated, by Mr. Gross. Some clients might be concerned about reports of large withdrawals from Pimco funds by other investors. But while PTTAX lost a record $23.5 billion last month — with most of those withdrawals coinciding with Mr. Gross' leaving — that is an immaterial amount for a $2 trillion firm. Withdrawals would have to be many times that and occur quickly to cause sales of bonds to affect the performance of most Pimco funds. That seems unlikely. Large institutional investors typically put managers on watch after a key executive leaves, while their investment consultants examine the long-term effects of the exit. Their fiduciary responsibility requires that they act prudently — and knee-jerk reactions are not prudent.

WORD TO THE WISE

Advisers would be wise to adopt a similar approach when thinking about clients' holdings in Pimco. Likewise, Morningstar Inc.'s downgrading of PTTAX to bronze from gold should not affect fund performance unless it prompts a large volume of redemptions and, therefore, the forced sale of large numbers of bonds. Absent any withdrawals large enough and sudden enough to force costly sales of bonds from portfolios, shrinkage among Pimco funds might actually enhance performance. Smaller portfolios often are easier to manage than large ones. Advisers should let their clients know that they are monitoring the situation at Pimco, and that they are researching alternative funds in case a change is deemed necessary. Then, before any move is made, the adviser should identify the funds to which the assets would be reassigned. In short, advisers can use the Pimco developments to once again demonstrate their value to clients: by providing dispassionate and calming advice, and showing that they are on top of the situation.