Some target-date investors may own more PIMCO Total Return than they realize.
Many target-date funds have turned to PIMCO to cure what has ailed them in recent years, but it's no panacea.
Target-date funds have been under a good deal of scrutiny from regulators, investors, and the media over the past couple of years, much of it stemming from the poor performance of the so-called 2010 funds--those intended for investors planning to retire around the year 2010--during the 2008-09 bear market. The category as a whole averaged around a negative 22% loss return in 2008, with the worst funds approaching losses of 40%. High equity weightings caused some of these results, but underperforming core-bond funds that owned nonagency mortgages and other lower-quality bonds inflicted additional pain. This drew the ire of investors and the attention of Washington, D.C. (Morningstar recently submitted a letter responding to the Security and Exchange Commission's proposals on target-date-fund disclosure.)
A number of the afflicted target-date series have turned to a savior of sorts--Bill Gross and his PIMCO Total Return
And yet the turn toward this estimable core-bond fund raises some concerns. For one thing, there is an element of window dressing to adding PIMCO Total Return to a portfolio after weak results. Certainly, it's hard to fault anyone for holding these funds, but their presence may paper over other weaknesses in a target-date fund's fixed-income lineup. If existing funds have exhibited poor risk-management practices or have routinely underperformed, adding PIMCO Total Return won't do much to cure those ills.
Moreover, investors may unknowingly be placing more assets in Gross' hands than they realize. As PIMCO Total Return is the largest mutual fund, it's likely that many target-date investors may already be exposed to Gross' strategy elsewhere in their portfolios. Even as astute a manager as Gross is not infallible; should one of his macro calls miss, or should the size of his assets under management eventually lead to underperformance, investors who are overexposed to PIMCO could pay a price.
Who's Been Raising Their Stakes?
ING Solution 2015
A similar but even more dramatic shift took place at Principal Lifetime 2010
The Schwab Target series only began allowing third-party funds in 2009. Given the problems the firm has experienced with its Total Bond Market fund
Finally, it's worth pointing out several firms whose close affiliations with PIMCO have led to hefty investments in the Total Return strategy. These include PIMCO RealRetirement 2010
We certainly don't see impending doom here, but it's worth tallying up the overall exposure of your clients' portfolios to PIMCO. Gross has made many bold calls over the years, and most have paid off, but you wouldn't want a couple of wrong steps to seriously damage clients' portfolios. So, make sure they have some fixed-income holdings outside the PIMCO realm. Fidelity and Vanguard are among the better bond managers working outside Newport, Calif.
Josh Charlson is a senior fund analyst with Morningstar.