Thu, 5 Dec 2013
Bill Gross will assume management duties of this widely held, Bronze-rated PIMCO fund when current manager Chris Dialynas takes a leave of absence in 2014.
Christine Benz: Hi, I'm Christine Benz for Morningstar.com. PIMCO Unconstrained Bond, which has gained tremendous asset inflows since its launch five years ago recently announced a manager change. Joining me to discuss the news is Eric Jacobson. He's a senior fund analyst with Morningstar. Eric, thank you so much for being here.
Eric Jacobson: Well, it's great to see you Christine. Thanks.
Benz: Eric, we got this news just today about the fund having a manager change, the longtime manager departing, and Bill Gross actually taking over. Let's talk about PIMCO's reason for making this change?
Jacobson: Well, the public release says that the manager Chris Dialynas is going on sabbatical beginning in the second quarter of 2014. But they made the decision to make the change immediately, ostensibly to allow for time for transition and so forth. There is no information about when he's coming back, though they seem to think that he will, but that's all we're really able to go on at this point.
Benz: So the fund has been tremendously popular in terms of garnering asset inflows. But performance, at least year-to-date, has been just so-so, something like 73rd percentile within our nontraditional bond category. Do you think that performance was behind the change, or I guess you have no reason to second guess what PIMCO is saying?
Jacobson: That's right. I guess one reason to think that it wouldn't be [performance] necessarily is that part of the reason for underperformance was a bit more interest-rate sensitivity coming into the summer rate-spike period, and that was really a firmwide decision that affected most PIMCO funds, and so I don't think that you can necessarily blame Chris for that. The general tenor of the interest-rate sensitivity for all their funds was tilted in one way based on sort of group decisions, and the investment committee and Bill Gross, certainly.
Benz: So let's discuss the general premise of this fund Eric. What is it set up to do?
Jacobson: It's the ultimate goal I think is both to allow for this unconstrained strategy which gives it sort of a go-anywhere flavor, and that really allows it to have a tremendous amount of flexibility in terms of its interest-rate sensitivity. The fund's duration, which is as you know a measure of rate sensitivity, can go from negative 3 to positive 8, and the fund also has a lot of flexibility in terms of building up assets in non-U.S. emerging-markets and high-yield bonds, which are very, very high numbers, in the double-digits, and less than 50% in most cases depending on which group you're talking about.
But that, as I said, it gives a lot of flexibility the idea really is to have a best-ideas fund for PIMCO to express all their views on the bond side certainly, whether it has to do with interest-rate sensitivity, yield curve, where they see valuations in those sectors, and even includes a currency component most of the time.
I think part of their narrative really, though, is that it has an absolute-return flavor. So, the hope is that generally speaking you're going to see positive returns, maybe not the highest positive returns, but better than a modest LIBOR-plus benchmark as they often say, short-term money market plus a spread over that.
And again, I think the biggest story here though is that as with lot of these funds, it's really being marketed for its lower interest-rate sensitivity relative to others even though it has that huge range that it can work in. It's generally stayed on the low side.
Benz: A natural question, even though I think investors might be somewhat heartened to see a big name like Bill Gross taking over their fund, is about Bill Gross' capacity. He has seen some asset outflows on the big Total Return fund, but it's still enormous, and now he is taking on this other pool of asset something like $28 billion in this Unconstrained Bond fund. Are there limits to how much one individual can run in the bond market?
Jacobson: Well, the way that they run money at PIMCO really does a pretty good job I think of minimizing that strain on an individual based on the way that they allocate money to different accounts. Each of these funds has multiple managers associated with them, even though the named manager is an individual like in this case Bill Gross. There are other people, some very senior people, on the Unconstrained Bond management team, who also go into the decision-making process here.
From a more general perspective, you always have to look at PIMCO and say it's really, really big and what limitations does that put on the management of the fund? And there absolutely are. There's no question that the kinds of individual, security level, and even subsector bets that other funds can benefit from are not going to be very useful in the context of these funds, PIMCO Total Return or PIMCO Unconstrained. But really what you're buying here is the expertise and the bigger-picture calls of Bill Gross and that huge analysts staff and their investment committee.
Benz: I want to talk a little bit about the investment committee because you mentioned to me before this interview that that's actually one concern for you that Chris Dialynas is leaving that investment committee. So it's down a person, down a very senior person.
Jacobson: That's right. I would say just for the record as far as PIMCO is concerned, as I said, he's going on sabbatical and ostensibly coming back after that, although they have not said how long he'll be gone. But as we discussed, just the fact that he will not be available for the investment committee raises the question again of what is the importance of that?
Especially given the fact that within the last few years they lost Paul McCulley, who retired. These are very senior people who ostensibly had the ability to really push back on other members of the committee and act as really strong devil's advocates and be perhaps a balance not only to each other, but to Bill Gross himself.
And well, I certainly take it at face value that that Gross really values that kind of pushback, it's an open question as to whether he's going to still get the same amount. Mohammed El-Erian is still there, so that's certainly a plus that the two of them are both at the top of the organization and running that investment committee. There are several very, very bright people with different kinds of experiences also on the committee, but a lot of them around are newer to PIMCO, newer to Bill Gross and a bit younger and less experienced.
It raises questions. It's very hard to tell what the dynamic is can be going forward, but you can't simply write off the fact that you are losing a big presence there.
Benz: Your bottom-line takeaway for people who own this fund or maybe are looking at it, is this a plus or a minus for the fund?
Jacobson: Well, I think it's pretty neutral at this point because of the way the team is staying. We have the fund rated a Bronze; we're keeping it that. That's our recommended rating. We're not going to probably change that as a result of Bill Gross taking over.
And again, the fact that the same team that manages Unconstrained portfolios is still backing it up and helping run the fund and the fact that Bill Gross has been managing other Unconstrained portfolios already for some time gives us a lot of confidence that things are still going to be pretty much as it is.
We're not saying that this is a knock-the-lights-out kind of fund. We haven't seen evidence of that yet, and it's not really designed for that. But so far, we certainly like the resources behind it. And we think that over a fuller market cycle, it has a potential to be a pretty good fund in terms of what it promises.
Benz: Eric. Thank you so much for being here to discuss this news.
Jacobson: I'm happy to do it Christine. Thanks.
Benz: Thanks for watching. I'm Christine Benz for Morningstar.com.