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By Christine Benz | 06-10-2015 12:00 PM

PIMCO Battered but Far From Broken

Significant outflows have stymied the fund company, but the firm's depth of resources and shift to a more collaborative culture are reasons to be optimistic.

Christine Benz: Hi, I'm Christine Benz for Morningstar's analysts have been re-evaluating PIMCO in the wake of Bill Gross' departure in late 2014. Joining me to discuss PIMCO's corporate culture in a post-Bill Gross world are two of Morningstar's lead analysts on PIMCO, Sarah Bush and Michael Herbst.

Sarah and Michael, thank you so much for being here.

Sarah Bush: Thanks for having us, Christine.

Benz: The team has really been digging into PIMCO from a lot of different angles since Bill Gross departed. I'd like to, as an overview, talk about that due diligence process and talk about the number of meetings that you and the team have had with PIMCO, as well as some on-site visits. What goes into creating an update such as this one and how does your ongoing due diligence process work?

Bush: In our due diligence that we do across all funds, we are regularly talking to managers and talking to leadership in the fund firms. We do on-site visits for a lot of the funds that we cover. We were out at PIMCO earlier this spring and had the opportunity to meet with senior folks both on the investment side and then also on the business side of the firm.

Benz: A follow-up to that would be that the managers and the other people running the firm really know some of Morningstar's hot-button issues. They know what we want to hear. How do you make sure that you're appropriately skeptical and you're not just being fed the information that you want to hear?

Bush: That's a very good question. It really is true that people know what you want to hear and you have to go into these conversations with a fairly skeptical approach. That said, I really find a couple of pieces very valuable when we have these conversations. In a case like PIMCO where there has been so much change in the senior leadership of the firm--not that they are brand new, but the overall structure has changed with Bill Gross' departure--having the opportunity to talk to them about their vision and how they are thinking about the investment process is really very valuable.

The other piece at PIMCO is that, obviously, a big part of our investment thesis at PIMCO is the sheer depth of the resources on the investment staff that they have there. They have something like 250 portfolio managers, all with a ton of experience. One of the things we have had the opportunity to do through our due diligence is get to know a lot of those folks farther down--the more junior- or intermediate-level investment staff. That really has increased our confidence and given us a higher level of confidence. We really can see the strength and the depth of this team. Talking to people, for instance, who are focused on financial securities in Europe and seeing the depth of the process they go through there really helps us feel comfortable with how that's all rolling up to broader-based strategies.

Benz: Michael, for people who haven't been following along as closely as you two and the rest of the analyst team have been, let's talk about some of the headline manager changes that have happened since Bill Gross departed--some of the changes on PIMCO Total Return (PTTRX), as well as some of the other funds that Gross was associated with.

Michael Herbst: We haven't actually seen the widespread changes or disruption that a lot of people might've expected. There have only been a small handful of senior-level departures since Bill Gross left. Saumil Parikh and Paul McCulley both left; but outside of that, you haven't really seen any of the major decision-makers leave.

Another thing that strikes us is Dan Ivascyn is really taking conscious steps to foster a more collaborative culture and a more open forum for communication--both within investment teams and across investment teams, too. That may seem like a subtle shift, but it's a powerful one. In our view, that's one of the most significant cultural changes from the Bill Gross-led PIMCO to the Dan Ivascyn-and-crew-led PIMCO as well. Some of that can be reflected in the comanager structure that they've implemented on PIMCO Total Return. We have Scott Mather making the ultimate day-to-day decisions but working closely with Mark Kiesel and Mihir Worah to run the fund. You have actually seen a number of other folks named as comanagers on other funds, too. So, that's far from just a cosmetic shift. That actually is a very serious, very conscious, very concerted effort, not just on behalf of Dan Ivascyn, but from all of the CIOs that we've been in touch with. This is something that they're fostering day in and day out, and we've seen it in the decision-making process driving the funds that they run.

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