If ever there was an example of the power and influence of a single asset manager, it was illustrated in full force with the Sept. 26 announcement that Bill Gross would be moving from Pimco to Janus Capital Group.
What happened next -- and continues to unfold -- is a kind of tectonic shift in the world of fixed income that has seen billions of dollars' worth of investor assets set in motion, much of it leaving funds linked to Mr. Gross at Pacific Investment Management Company Inc.
A lot of the initial punishment was inflicted on the $200 billion flagship Pimco Total Return Fund (PTTAX), which suffered a record $23.5 billion in net outflows in September, an estimated $20 billion of which occurred during the three trading days following the Sept. 26 announcement.
“There's never been a bond fund that lost $20 billion in one month; there's nothing to even compare that to,” said Morningstar Inc. senior analyst Tim Strauts.
While the knee-jerk reaction by bond fund investors was both dramatic and historic, it is important to keep in mind that September marked the seventeenth consecutive month of net outflows for the fund. In essence, even though there is little indication anyone outside Mr. Gross' inner circle had much advance notice about his plans to join Janus, the challenges facing Pimco in general and the Total Return Fund in particular were not news to bond-fund investors.
“All the money that has been set in motion since Bill Gross' departure tells you that a lot of people were already seriously considering leaving Pimco prior to the news of the move, and you can see that by all the money that had been leaving over the prior 16 months,” said Lipper Inc. analyst Jeff Tjornehoj.
With that in mind, it's not surprising to hear bond fund industry competitors fessing up to efforts to place products and strategies directly in the path of fixed-income assets that are now looking for a new home. Suddenly, everybody has a bond fund that looks, feels, and acts like something you might find at Pimco.
“Even before Sept. 26, there was some switching going on because of all the other earlier publicized management disagreements and issues,” said Charles Melchriet, director of investment grade portfolio management, overseeing half of the $40 billion in fixed income assets at Pioneer Funds.
Among the well-publicized issues at Pimco that Mr. Melchriet referenced is the March departure of Pimco chief executive, and Mr. Gross' heir apparent, Mohamed El-Erian.
Representatives from Pimco did not respond to multiple requests for comment for this story.
“The asset flows for us have been noticeable for a while, but our daily inflows have doubled since September,” Mr. Melchriet said. “We've been having a huge number of conference calls, and we're learning that a lot of the flows are coming in from advisers that already had Pimco on their watch lists.”
As the world's largest bond fund manager, with nearly $2 trillion under management, Pimco is not likely to be knocked from its perch anytime soon. But losing its co-founder, a man who for decades was affectionately known as the Bond King, to a firm managing $33 billion in fixed-income assets is jarring enough to cause a good amount of speculation about where the shifting dollars will eventually land.
Looking for a pure replacement for the Pimco Total Return Fund will produce a predictable short list of highly-regarded intermediate-term bond funds. Among the strongest and most likely beneficiaries, according to Morningstar Inc., are Dodge & Cox Income (DODIX), Fidelity Total Bond (FTBFX), Loomis Sayles Investment Grade Bond (LSIIX), and Metropolitan West Total Return Bond (MWTRX).
No doubt, DoubleLine Total Return Bond (DBLTX) would also be on that list if it weren't for the fact a rift between Morningstar and DoubleLine Capital has led to be the fund being deemed “not rateable.”
But, there is also an expanded perspective that goes beyond just proxies for the openly-vulnerable fund that Mr. Gross built from the ground up.
A glimpse of that can be seen by the asset flows into the fledgling Janus Global Unconstrained Bond (JUCAX), which Mr. Gross is now managing with a skeleton crew from his new Newport Beach, Calif. office.
The five-month-old fund, which had just $13 million the day before Mr. Gross joined Janus, has since swelled to more than $80 million. That's still chump change by Bill Gross standards, but the asset growth surge says a lot about both the market's confidence in the 70-year-old portfolio manager's abilities, and where the bond fund space sees the next wave of opportunities.
“It has been fun to watch,” said Gibson Smith, the chief investment officer overseeing Janus' $33 billion fixed-income business.
“We've had so many conversations over the past several weeks with people who didn't know we had this kind of a fixed-income business,” he added.
Say what you will about the messy infighting, personality clashes and high-profile departures at Pimco, but all the while the company seemed to keep its focus on diversifying out of its bread-and-butter core bond strategies toward the kinds of products that investors will need in a rising- or extended low-interest-rate cycle.
According to Pimco data, core bond strategy holdings represented 65% of all assets in 2001. But, driven largely by an effort over the past half-dozen years, a deliberate and orchestrated focus on diversifying into more flexible bond alternatives, such as unconstrained, emerging markets, inflation protection, distressed opportunities, credit, and liability-driven-investing strategies have trimmed Pirmco's total core bond exposure down to 25%.
And this was all happening at a time when assets were pouring into fixed income managers, thanks to a combination of the global financial crisis and a major re-engagement of foreign capital in U.S. markets. It took Pimco 39 years to get to $1 trillion under management, but only three years to reach the $2 trillion mark.
The first major body blow to core bond strategies hit in May 2013 when investors over-reacted to the Fed's first real move toward slowing the pace of its bond-buying quantitative easing program.
Intermediate term bond funds, as a whole, went from $1.1 billion in net inflows in April 2013 to $10.5 billion in net outflows in May. The next month the net outflows more than doubled, leading to a 10-month string of net outflows before the category finished March of this year with $4.2 billion in net inflows.
If the investor reactions to what has been dubbed the “taper tantrum” in May 2013 wasn't enough to get bond fund shops to diversify out of core bond strategies symbolized by Pimco Total Return, Mr. Gross' move to Janus was at least a trigger to promote non-Gross attributes.
Fidelity Investments, like a lot of fund companies, has jumped on the single-manager-risk argument, suggesting that Mr. Gross' profile at Pimco proved to be a liability when the Bond King abruptly walked out the door.
“This has focused both retail and institutional investors on that risk associated with single managers, and we know that investors are now looking at firms that take a team-oriented approach to investing,” said Bob Brown, president of Fidelity's $850 billion bond division.
“We don't talk specific numbers here, but in terms of inflows we're seeing a strong correlation to the Bill Gross move to Janus,” he added. “This will be our strongest year in terms of net inflows into our institutional business in 10 years, and on the retail side, we've seen our net flows into retail taxable bond funds jump almost 100% since the announcement.”
Fidelity's institutional pipeline, including inquiries and requests for proposals from foundations, endowments and pension funds, has increased by “approximately 40% since the end of September,” Mr. Brown said.
The institutional market, which tends to be more deliberate and often moves based on preset rebalancing schedules, is seen by some as the next shoe to drop in terms of fixed-income assets in motion following what has become known as “the announcement.”
Prudential Financial Inc. announced late last month that Pimco would be replaced as subadviser of the $6.16 billion AST Pimco Total Return Bond Portfolio by BlackRock Inc. and Loomis Sayles & Co.
Pimco was also dropped as manager of the U.S. fixed-income portion of the $8.75 billon AST Advanced Strategies Portfolio.
Other institutional portfolios that have moved away from Pimco since the announcement include Ford Motor Co., Massachusetts Mutual Life Insurance Co., Alabama's state treasury, and Florida's state pension.
“Some organization will react very quickly and some will take a more measured approach, and there might be formal investment policy statements drafted for situations like this,” said Scott David, head of U.S. investment services at T. Rowe Price & Associates, which manages $165 billion in fixed-income assets.
“We are definitely seeing an increase in activity and requests for proposals from institutional investors,” he added.
Part of the reason some analysts and market watchers are anticipating a second wave of fixed-income assets in motion is that in the immediate aftermath of Mr. Gross' announcement a lot of money was tracked going into a couple of broad-benchmark exchange-traded funds.
In the first three weeks following Mr. Gross' move to Janus, the iShares Core US Aggregate Bond ETF (AGG) added $2.4 billion, while the Vanguard Total Bond Market ETF (BND) had $2.7 billion worth of inflows.
Both ETFs are designed to closely track the Barclays US Aggregate Bond Index, which might represent broad market exposure, but it isn't really the kind of thing most investors or financial advisers would normally be migrating toward in an environment poised for a rising-interest-rate cycle.
Thus, it is assumed that a lot of those assets that found a home in some low-cost ETFs are likely there just as a place holder.
“If you lost faith in Pimco, the easiest thing to do was to move into an ETF, where you could stay exposed to bond market until you make a decision on what to do next,” said Todd Rosenbluth, senior fund analyst at S&P CapitalIQ.
For its part, Vanguard Group Inc. acknowledges to recent burst of inflows into its $24 billion ETF, but is intent on spinning it away from the Bill Gross announcement.
“We're attributing that to the long-term secular trend toward indexing,” said Josh Barrickman, Vanguard's head of bond indexing, Americas.
It is different story, however, when it comes to Vanguard mutual funds. Mr. Barrickman said efforts are being made to head off the kinds of assets that might be looking for a temporary place holder, which seems to suggest an acknowledgement that the freed up bond money is not looking for a long-term relationship with an index fund.
“On the mutual fund side we've actually been taking steps to make sure we're screening inflows to make sure we're not taking in money that might not be long term focused,” he said. “We have a team that will reach out to investors and get a sense of their intentions, and we've lowered the thresholds for making those calls.”
If nothing else, “the announcement” has given advisers and investors some freedom from the kind of bond-investing inertia that might not make as much sense going forward as it did over the past several decades.
“If I'm a financial adviser recommending bond funds, you couldn't go wrong recommending Pimco Total Return, but that changes now,” said Morningstar's Mr. Strauts.
“If there's some pressure to get out of that fund, it's very easy now for an adviser to go to clients and say 'let's get out and go to a different fund or strategy,” he added.
With interest rates still hovering near historic lows, and signs pointing toward a new Fed-tightening cycle likely starting next year, the movement of money that was sparked by Mr. Gross' departure from Pimco might just be the start of a major transitional period for bond funds.
“It wouldn't surprise me to see some of that money stay in index funds or ETFs that are charging 12 basis points,” said Tim Clift, chief investment strategist at Investnet Inc.
“Maybe some people will be giving up on active management for a while,” he added. “Bond funds are definitely challenged right now.”
