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PIMCO Swipes Muni Veteran Deane From Rival

PIMCO hooks a big fish from its Southern California coastal neighbor Western Asset in a bid to build out its municipal-bond team.

Miriam Sjoblom, associate director of fund analysis, 07/08/2011

On July 18, Joe Deane, who was Western Asset's muni-bond co-chief, will take over as PIMCO's head of municipal-bond portfolio management. Deane will take the spot from John Cummings, who stepped into that role at the end of 2008, following disappointingly poor performance for a number of PIMCO's open-end muni funds during the financial crisis.

Cummings has had some success whipping the firm's open-end muni-fund lineup into shape. But despite improved performance and several new fund launches, including two active muni exchange-traded funds, PIMCO hasn't attracted many assets. The firm has less than $1.5 billion spread across its eight open-end muni funds and another $119 million in its ETFs, much less than Western Asset's roughly $13 billion. Bringing Deane onboard could signal that the firm is making a bid to grab market share.

Deane's decades of experience and distinctive style make him as close to an institution as you'll find in muni portfolio management. He and his team have been under the Western Asset umbrella since the firm purchased Citigroup Asset Management in 2005, but Deane's tenure with predecessor firms stretches back to 1972. He has run Western's flagship muni fund, Legg Mason Western Asset Managed Municipals SHMMX, since 1988. That fund has beaten more than 80% of its long-term muni-fund competitors over the past decade.

Although PIMCO hasn't announced specific portfolio-management duties for Deane, or for Western Asset colleague Julie Callahan who joins him in the move, it's tough to imagine that his influence won't make a mark on PIMCO's portfolios. For starters, Deane has avoided owning more than a smattering of general-obligation bonds in his portfolios in recent years--even though GOs comprise more than a third of the municipal-bond market and are a staple in many peers' portfolios--arguing that their comparatively lean yields offer scant compensation for their political risk. By contrast, PIMCO Municipal Bond's PFMIX state and local government GO stake approached 19% of assets as of May 31. PIMCO even offers a GO-only fund, which hasn't grown beyond $30 million since its 2009 launch.

Since 2009, meanwhile, Cummings had eliminated the use of leveraged tender-option bonds, or TOBs, and downplayed the so-called "municipals-over-bonds spread," or MOB trade--by which managers bet on a change in the relationship between muni and taxable yields using Treasury futures or interest-rate swaps--in PIMCO's funds. Like Cummings, Deane has avoided using TOBs, but he employs the MOB trade liberally, which at times has led to dramatic portfolio duration shifts--a trait that sets him apart in a peer group that generally takes a more restrained approach to duration management.

Such moves have caused Deane's funds to shoot to the top or land near the bottom of the pack in any given year. While 2010 was a banner year for PIMCO Municipal Bond, for instance, Legg Mason Western Asset Managed Municipals eked out a 7-basis-point gain and trailed all but three other long-term national muni funds.

Still, Deane has played the long game successfully, and his presence adds serious weight to PIMCO's lean muni operation, which relocated to Manhattan last year. As for Western Asset's muni efforts, David Fare, a comanager on the funds who has worked alongside Deane since 1989, will take over as the group's leader. Comanager and muni-sector team leader Rob Amodeo also remains, providing the funds with continuity. But as the most experienced member of the team, Deane's departure is still a loss for Western Asset. Provided Fare and Amodeo continue to apply the same strategy as planned, it will be interesting to see which team will have the most success brandishing the style that has been Deane's trademark.

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