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More Questions About PIMCO in the Post El-Erian Era

The tumult surrounding El-Erian's departure is unsettling, but PIMCO has a lot of firepower to aim at the problem.

Eric Jacobson, 02/06/2014

Questions surrounding Mohamed El-Erian's recently announced departure and the flurry of other personnel changes that followed at PIMCO continue to proliferate, and, if anything, that trend has intensified over the past week. Morningstar has been fielding those questions left and right, from audiences as diverse as individual investors, advisors, institutions, and the press. A number of themes have come up consistently in these conversations, and we thought it worthwhile to address a few of them here along with Morningstar's preliminary thoughts on the current situation at PIMCO.

How much of an effect did the market calls made by PIMCO over the past year have on Mohamed El-Erian's departure?
The official version from PIMCO is that El-Erian's departure was purely a personal decision and that it had nothing to do with last year's performance. That said, it makes sense to consider what’s gone on not only over the past year, but what’s occurred over the past few years, given that there was some difficulty, particularly in the third quarter of 2011, with some of the calls that the firm made.

First, it seems unlikely that performance during that 2011 period would necessarily be hung around El-Erian's neck, because Bill Gross took a lot of responsibility for it.

The volatility that many of the firm’s funds suffered in the summer of 2013 was certainly disturbing for some investors as well, especially when looking at some of the funds' category standings and relative performance, and the fact that people have come to expect so much from PIMCO and Bill Gross.

There are a couple of relevant issues to examine there, however. One is that the summer volatility didn't do as much damage to PIMCO Total Return PTTRX, in particular, as some press reports have implied. There has been a big focus on the fact that 2013 was the fund's worst calendar-year loss since 1994. What has been nearly absent from that conversation, however, is that it was also the Barclays U.S. Aggregate bond benchmark's worst loss since 1994, as well, yet Total Return still edged past the index by 0.10% last year.

Perhaps more important is that none of that difficulty appears anywhere near sufficient to justify deliberately making the waves that El-Erian's departure did. Eliminating someone so senior, so identified as a face of the firm, and so crucial to its reputation simply doesn't seem to be anywhere near worth the cost that PIMCO is now paying in terms of investor trepidation about its future.

What are the most notable implications of El-Erian's departure for the management of PIMCO's funds?
That's really two questions in one: How will his departure affect the few mutual funds that he has been managing directly, and how will it affect PIMCO's all-important investment committee.

As for the funds on which El-Erian is a named manager, there's not much reason for concern. There are actually just a couple of them, and while this is certainly an issue for shareholders of those funds, the amount of assets in those portfolios is relatively small compared with the rest of the firm and PIMCO Total Return, and the new managers have outstanding credentials.

Eric Jacobson is Morningstar's director of fixed-income research and an editorial director for mutual fund content.

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