Cast your minds back to late September 2014 when the news broke that Bill Gross and Pimco would be parting ways.
The announcement was met by colossal outflows from the Pimco Total Return fund: $11 billion would leave the strategy globally in the few short days that remained in September and a further $20 billion would go in October. All told, $120 billion left the strategy worldwide in just 11 months. There were stories at the time that not only could this break the Newport Beach-based giant, but that the scale of the redemptions would cause systemic shock waves that would affect the liquidity in the underlying bond market.
With the benefit of hindsight it is easy to see that these fears were unjustified, but at the time we had never experienced a manager move having such a huge impact before, because no one had ever been charged with managing more assets than Gross.
But what a difference three years makes. In August, the Total Return fund stopped experiencing outflows and began taking in money. Despite the doomsayers, life carried on at Pimco. A new star even emerged in the shape of Daniel Ivascyn on the Pimco Income fund, which may well have passed the $100 billion mark by the time you read this.
At the time of his departure, I felt that Gross’s real legacy at Pimco was the strength of the bench he had helped to build. His success attracted many of the best and brightest investors to the group and when he left, the firm had a host of long-term top-decile managers running huge sums of assets, of which Ivascyn was just one.
The task of managing the Total Return fund fell to seasoned pros Scott Mather, Mark Kiesel and Mihir Worah. Their three-year anniversary has just passed, and it’s fair to say they have done a solid job, returning 10% against the Barclays US Aggregate Bond index’s 8% gain. While the company line on managing the outflows was that it was business as usual, it can’t have been easy.
Performance on the fund over the past three years really has been a tale of two halves. The first 18 months started out well, but by the end of the first year they were tracking below the benchmark. That continued until the midway point. Since then, the decision to tilt the portfolio toward the US consumer and investment grade corporate markets and a selection of emerging markets has proved to be the right one. The fund has flourished and now sits above the index over the full three years. It is also worth noting that performance had dipped prior to Gross's departure and money had left, although not to the same extent.
The portfolio today is quite an interesting beast too, with some fairly significant short positions. The first is a 12.2% short to international developed fixed income and the other is a 26.4% short in short-duration instruments. This brings the trio’s gross allocation up to 177% of the fund.
While many of those short positions look larger than they really are – thanks to mortgage bundles going through the settlement process – the international short is being used to hedge out interest rate duration in the US. The managers have also loaded up on the middle of the curve, with 78.7% of the assets in maturities of between three and 10 years. This has been financed by being negative the short end of the curve to the tune of 12.8% of the fund’s assets.
While returns look modest compared with the Income fund’s stellar run, the portfolios are very different propositions. The Total Return fund lacks the weighting to the short duration high yield investments, which have been such a boon for performance over much of the past three years.
Where the Total Return portfolio will be in another three years is anyone’s guess, but it is unlikely to be hanging over Pimco as a strategy they would rather forget. If anything, the landslide of assets that resulted from Gross’s departure has been good for the industry and, more importantly, the end investor. Spreading the wealth across a few super funds at DoubleLine, TCW, Western Asset and Pimco – instead of seeing them concentrated in one mega fund – means that investors are likely to be more diversified than they were before. That can only be a good thing.
This article will also appear in issue 27 of Citywire Professional Buyer. To subscribe, click here.