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PIMCO Total Return: Not Fussing

The story is messier than the investment results will be.

John Rekenthaler, 03/17/2014

Putting Into Perspective
The kerfuffle over PIMCO--and its signature fund, PIMCO Total Return PTTRX--continues. Following The Wall Street Journal's Feb. 24 expose of the company's personality conflicts among upper management, which led to the departure of chief investment officer Mohamed El-Erian, have been several articles, including one from today, basting the wound with salt. El-Erian and PIMCO founder Bill Gross are apparently feuding, and PIMCO's mutual fund cash flows were poor in February.

The first is unsurprising, and the second is overstated. I would scarcely expect El-Erian and Gross to be chummy at the moment (although I suspect that over time the annoyances will cool and they will ultimately become cordial ex-colleagues). As for those February cash flows, they've been weak for several months now at PIMCO and surely were little affected by a story that broke with only two trading days left in a month.

The commotion reminds me of the postshow discussions of The Bachelor, with recriminations flying over Juan Pablo's appalling behavior. Or, to move up in literary merit, the B plots of Shakespeare's tragedies. Bill Gross proclaiming to PIMCO's traders that he is Secretariat--a juicy detail of the original Journal article--is Falstaff mimicking the actions of Prince Hal. With due respect to Gross, he is neither a sports champion nor a tragic hero. He is somebody who buys and sells bonds.

And, the truth is, how well he buys and sells bonds is not particularly critical to most of his funds' investors. Yes, PIMCO's success or failure means much to institutional managers or consultants who are evaluated by the basis point, and perhaps to advisors who have clients questioning why their assets are in the bond funds of a company that currently is getting bad press and generating mediocre numbers. But the overall effect on a typical investor's portfolio is minimal.

Consider, for example, an investor who 10 years ago had $500,000 in a tax-sheltered account. She placed $250,000 into Vanguard Total Stock Market IndexVTSAX, $125,000 into a money market fund that gained 1.50% per year, and $125,000 into PIMCO Total Return's Institutional shares. Without rebalancing, that investment would be worth $907,312 today. Had our hypothetical investor held the same portfolio, but instead of PIMCO's fund purchased the unmanaged Barclays Aggregate Bond Index (for example, Vanguard Total Bond Market Index VBTLX), the portfolio would be worth $877,678. That's 3.3% less on the final investment--not exactly a life-changing amount.

That difference required 10 years of compounding, a large 25% stake in a single PIMCO bond fund, and the foresight to select a fund that would create a performance gap by beating 96% of its competitors. Over the next 10 years, PIMCO Total Return is unlikely to perform as spectacularly (in either direction), so the effect of owning it rather than either a bond index or another mainstream bond fund is likely to be even less than the 3.3% given in the above example.

Or, our investor could have made a modest change in asset allocation and placed 60% of her assets into the stock fund, with 20% each into the bond index and money market fund. That portfolio would now be worth more than the original portfolio, at $917,836. The additional 10 percentage points in stocks would have been more important than selecting the champion bond fund.

The asset-allocation competition is that close only because stocks have fallen relatively in line with bonds over the decade. Over the past five years, the very modest switch into a 54/23/23 allocation would have comfortably placed the bond-index portfolio past the 50/25/25 PIMCO Total Return portfolio.

is vice president of research for Morningstar.

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