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By Jeremy Glaser | 11-10-2014 10:00 AM

How PIMCO Fund Ratings Are Shaking Out

An update on our Fund Analyst Rating changes and what we're continuing to monitor as the firm works to stabilize itself after Bill Gross' departure.

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. It's been a little bit over a month since Bill Gross unexpectedly left PIMCO. I'm joined today by Russ Kinnel, he is the head of our analyst rating committee, and also Michael Herbst, he is our director of manager research for active strategies in North America, to get an update on our view of PIMCO and how we've changed the ratings on several funds.

Gentlemen, thanks for joining me.

Russ Kinnel: Good to be here.

Glaser: So, could we talk a little bit about what manager research has been doing over the last month in terms of assessing changes at different PIMCO funds and how your thinking has evolved there?

Kinnel: So, we're looking at all the personnel changes because Bill Gross' departure set off a whole round of changes at a number of funds. We're looking at flows. We're looking at any tweaks to strategy and trying to understand, within each team, how well equipped they are to handle the changes and, in some cases, added responsibility. So, we've been [sifting] through, debating all this, rating funds, and by now we have rerated all of PIMCO's funds.

Glaser: Let's look at the market reaction, then, before we get to the changes to our ratings. In terms of flows, I know we've got some preliminary data; but taking a look at it, how much money has left PIMCO and have you seen it accelerating or do you think the worst is behind them?

Michael Herbst: I think the easiest data point that most people are looking toward as an indicator of firmwide activity at this point are flows out of PIMCO Total Return (PTTRX), the firm's flagship strategy. In October, we saw about $32.3 billion in outflows from that fund. If you combine that with outflows in September, the fund has lost about $50.1 billion in assets over the past two months. That sounds staggering, but the data would suggest that those outflows really haven't had any marked impact on the fund's performance.

That is not altogether surprising in our conversations with Bill Gross over the past year and more extensive conversations with a number of people including the fund's three new managers over the past month or past six weeks. The portfolio had ample liquidity coming into this and by any number of angles, including if you look at daily performance in October or the fund's performance overall during the period of October, its performance for that trailing month lands right at the intermediate-term bond category's midpoint. It actually outpaced its average peer. It lagged the [Barclays U.S. Aggregate Bond Index] by a slight margin as did three quarters of its peers. The main thing that we can determine at this point is that the fund's slightly shorter duration was probably the biggest contributor to that performance over that trailing month.

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