Video Reports

Embed this video

Copy Code

Link to this video

Get LinkEmbedLicenseRecommend (-)Print
Bookmark and Share

By Jason Stipp | 04-21-2011 03:07 PM

A Closer Look at PIMCO's Proposed Total Return ETF

We explore how the Total Return ETF could be different than the mutual fund, what its entrance signals for active ETFs, and what potential investors should bear in mind.

Jason Stipp: I'm Jason Stipp for Morningstar. PIMCO dropped some big news on the market on Wednesday with a filing for a PIMCO Total Return ETF. This is potentially game-changing news for the ETF industry and ETF investors. Joining me to dig into the details from our mutual fund team is Eric Jacobson, director of fixed-income research, and from our ETF team Paul Justice, director of North American research.

Thanks for joining me, guys.

Eric Jacobson: Thanks.

Stipp: So, first question about this filing that I think it's important for investors to note: This ETF isn't going to be carbon copy of the PIMCO Total Return Fund. How might it be different, Paul?

Paul Justice: Well, it's going to show the same name, so I could see there is going to be some investor confusion likely to see the two funds next to each other, but there is going to be some differences really on the fringes.

First of all, right now in the prospectus, the ETF doesn't have the allowance to get any derivative exposure, which Bill Gross has used extensively in his other fund to make some bets because of the liquidity of those contracts. So, that's going to one difference. It's going to resemble more some of the retail versions of the Total Return Fund, which Eric knows much more about than I do.

Stipp: So, Eric, this isn't the first time that we've seen a version of the Total Return Fund. There have been other versions that have also been mutual funds. Can you explain a little bit about how those are different and how they are the same?

Jacobson: Sure. In most cases the mutual funds are run almost identically to PIMCO Total Return. In other words the investment mandate isn't usually any different. What can be different often is that because of the size, there are things that are actually a little bit easier to do in the smaller funds, so for example Harbor Bond and what I believe is now called Managers PIMCO Bond--it used to be called Fremont Bond--they've been able to do things like buy specific mortgage pools rather than use mortgage forward contracts, which are derivative type that are just much easier to use in a much larger portfolio like PIMCO Total Return.

On the other hand, you may not get quite the scale on some things, but by and large it's actually a little bit easier to run a smaller portfolio.

Stipp: Have we seen a divergent performance with some of these other funds or have they pretty much performed in line with each?

Jacobson: It's a really interesting question because over the long-term they tend to track almost perfectly and almost down to the basis point, if you will, once you factor in the expenses. However, there have been examples, particularly during problematic years like 2008, where a single security perhaps that defaulted messed up the return pattern a little bit.

We've also seen cases in which cash flows in and out of portfolios have made a difference over the years because a bond, for example, that was available at one time for one fund wasn't available at the time that an inflow came to another fund.

That's something that may or may not be a factor depending on how they manage these portfolios. They're trying to get a lot closer in terms of keeping them in parity, because it doesn't just affect those funds, it affects a lot of institutional separate accounts and subaccounts and variable annuity platforms and things like that, and people are concerned about it. The good news is, as I said, that over the long term they almost always track out within a basis point or two.

Stipp: So, Paul as you're thinking about the ETF, and I know we don't know a lot of information about it, but given the ETF structure and what they might be able to do in the ETF given how much they might be managing in that particular investment vehicle, might the ETF perform possibly better or could it perform worse than PIMCO Total Return.

Justice: Both, right? I would expect it to track very closely. I think that the overarching themes that Bill is going to invest in the Total Return are going to be similar within the ETF. Most of those macro factors would probably explain most of the performance beforehand, because Bill has been very upfront about what he's seeking out in the bond market and letting us know what types of exposures he's going to layer within the fund.

So I would expect the ETF to track very closely, though not perfectly, with the mutual fund.

Stipp: So a quick follow-up for you. One of the things with ETFs is that they have a more frequent disclosure of what's in the portfolio and this is obviously something that this PIMCO ETF would also have to comply with. Do you expect that could cause problems for an active manager who might not want to disclose all the moves that he is making on any given day, so that people could front-run him. Is that potentially a problem and could be a head-wind for the ETF?

Read Full Transcript
{0}-{1} of {2} Comments
{0}-{1} of {2} Comment
  • This post has been reported.
  • Comment removed for violation of Terms of Use ({0})
    Please create a username to comment on this article