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Morningstar's Current View on PIMCO

Still formidable, with areas for improvement and a few open questions.

Eric Jacobson and Michael Herbst, 03/18/2014

On Jan. 21, 2014, PIMCO announced that former CEO and co-CIO Mohamed El-Erian would be departing the firm by mid-March 2014. Those announcements took most PIMCO observers by surprise. The firm announced a number of additional changes to its leadership ranks on Jan. 29, 2014.

Since those announcements, a number of media articles have focused on the fractious interactions between CIO Bill Gross and El-Erian; short-term performance challenges and outflows at a few of the firm's funds; and Gross' at-times tempestuous behavior. Those articles generally did not directly address the question of whether El-Erian's departure, Gross' behavior, or the recent leadership changes have actually impaired or benefited PIMCO's investment process and investment culture.

We've been delving into that question in a series of extensive conversations with PIMCO's leadership. Since the changes were announced, Morningstar analysts have been in frequent contact with PIMCO's senior leadership, including Gross, Mihir Worah, and other portfolio managers directly or indirectly affected by the changes. We've also had extensive conversations with other members of PIMCO's leadership, including CEO Doug Hodge. These conversations culminated in an on-site visit to PIMCO on March 10, 2014.

Given our current view, we have lowered PIMCO's overall Stewardship Grade to C from B, with an A grade being the highest possible and F the lowest. We have also lowered PIMCO's Parent Pillar score--one of the five pillars of the Morningstar Analyst Rating for Funds--to Neutral from Positive. Those changes reflect a higher degree of uncertainty around the firm's recent personnel changes and lower manager investment alongside fund shareholders.

The changes to PIMCO's Stewardship Grade and Parent Pillar score do not automatically affect PIMCO funds' overall Morningstar Analyst Ratings for Funds, yet it is logical to assume that Morningstar analysts would move quickly from here to reassess those ratings on a fund-by-fund basis. We are preparing a follow-up piece for early April 2014 that will summarize our current opinions on individual PIMCO funds. In that piece we'll also answer a number of PIMCO-related questions that we have been receiving most frequently from investors.

What follows below is essentially the Corporate Culture section of our updated Stewardship Grade on PIMCO. We've also attached a PDF containing a brief synopsis of what happened at PIMCO, Morningstar's response thus far, and the full scoring and text of our updated Stewardship Grade on PIMCO.

Slowly Heating Water
In many ways, PIMCO has long had a standout corporate culture. Bill Gross is the founder around whom PIMCO was built, and his essential nature as an investor, above all else, has been a critical foundation for the firm.

The firm's public reputation was shaken in January 2014 following the announcement of Mohamed El-Erian's March departure. Much of what was publicized after that announcement can arguably be viewed as tabloid fodder, but his resignation, combined with other departures in recent years, has helped drive material changes in PIMCO's corporate culture.

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

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