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PIMCO's 2013 Struggles

Has the company become too big?

John Rekenthaler, 11/26/2013

Not According to Plan
Mohamed El-Erian has them muttering. Steve Goldberg of Kiplinger writes, "El-Erian's PIMCO Fund falls flat … PIMCO Global Multi-Asset has been little short of a disaster." An email correspondent, after seeing yet another headline about PIMCO's forecasts, quips that El-Erian is "overexposed in the media and underperforming on the fund statement."

The reason: PIMCO Global Multi-Asset PGMAX is down 8% for the year to date (through Nov. 25), which is something of a feat given that developed-markets stocks have been strongly positive in 2013, and developed-markets bonds have been roughly flat (aside from long U.S. bonds, which have taken a beating). The fund bet big on a small asset class--emerging-markets bonds. As of Oct. 31, the fund had a 24% position in emerging-markets bonds, which make up less than 1% of its investment universe. Now that's investing with conviction.

PIMCO's 2013 problems are not confined to El-Erian's funds. Officially, Mohamed El-Erian is listed as a manager or comanager of only two of PIMCO's 87 mutual funds, one of which, Global Advantage Strategy Bond PSAIX, is faring pretty well. (His influence as a key PIMCO strategist is clearly much larger, but that effect is difficult to quantify.) Through yesterday, 22 of the company's funds showed in the bottom decile for their year-to-date return, by investment category. In contrast, only six PIMCO funds were in the the top 10%.

Nine of the laggards come from a single PIMCO investment unit, the group responsible for the company's target-date and retirement-income funds. Its funds are small by PIMCO standards. On the other hand, entering 2013, PIMCO's target-date series was making a name for itself and was regarded an important growth area for the company. Barring a massive relative turnaround in those funds' performances, that sales momentum will be stalled.

However, the problems have not been confined to the company's smaller funds. The company's flagship fund, Total Return PTTRX, which made PIMCO's reputation, continues to hover near the category average. That's no disaster, but Total Return didn't become temporarily the world's largest mutual fund (before being dethroned earlier this year by Vanguard Total Stock Market Index VTSMX) by matching the competition during lean years. In 2008, for example, when the rest of the category averaged a 4% loss, PIMCO Total Return scored a profit. 

The company's next two largest funds after Total Return, All Asset PAAIX and All Asset All Authority PAUIX, are both in the bottom quintile for the year. Managed by a subadvisor, Research Affiliates, the All Asset funds have suffered from a similar affliction as Global Multi-Asset Class: too few stocks, too many emerging-markets bonds. Once again, the funds' stumbles come after strong sales figures.

Aside from the two All Asset funds, and not counting Global Multi-Asset (which despite its notoriety is not one of PIMCO's bigger funds), five more of PIMCO's 20 largest funds land in the bottom quintile for the year to date.

When a hot fund company hits a rough patch, the immediate thought is that the company must have grown too rapidly and it's having difficulty assimilating the new assets and adjusting to the demands of being an industry giant. That doesn't seem to be the case with PIMCO. Yes, Morningstar analyst Kevin McDevitt argues that the All Asset funds are now encountering asset constraints, in part because of their leverage, and the enormity of Total Return has long been a concern. Elsewhere, though, this year just seems to be one of those things.

is vice president of research for Morningstar.

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