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Worries About PIMCO Total Return Overblown

Christine Benz
Timothy Strauts

Christine Benz: Hi, I'm Christine Benz for PIMCO's flagship Total Return fund has recently encountered a little bit of performance turbulence. Joining me to discuss that issue are two of Morningstar’s senior fund analysts, Tim Strauts and Eric Jacobson. Eric is on the phone with us, and Tim is here in the studio.

Gentlemen, thank you so much for being here.

Tim Strauts: Thanks for having me.

Eric Jacobson: Thanks, Christine.

Benz: Let’s discuss what has been behind the recent performance weakness. Tim, can you add any color to that question?

Strauts: So, in the last three-month period, the mutual fund and the exchange-traded fund have both underperformed their broader categories and the broader Barclays Aggregate Bond Index benchmark. It looks like one of the main factors was an allocation to emerging-markets debt, which PIMCO has been very bullish on during the last few years and has been positive performance longer term. But just in the last few months that market has sold off pretty strongly.

Benz: Eric, any other color to add on the recent performance weakness?

Jacobson: The only other thing I would add is that the PIMCO Total Return mutual fund has a longstanding exposure to Treasury Inflation-Protected Securities--TIPS also exist, I should say, in the ETF--and TIPS have sold off quite a bit as a result of rising interest rates. The funds have a little bit more Treasuries than usual as manager Bill Gross has been ramping up there.  He has been focusing on bonds with five- to 10-year maturities, and those actually weren’t as big a problem as the TIPS were.

Benz: When you think back to the last period of significant performance weakness at least in relative terms, you think back to a couple of years ago, right, Eric, where the fund and a lot of other intermediate-term bond funds underperformed because it didn’t own as much in Treasuries as the Barclays Aggregate Bond Index. What would you say about the underperformance recently? Do you think it’s just a natural byproduct of a truly active manager?

Jacobson: I mean, broadly speaking I think that’s fair. I think you can also say that it’s another misstep. They don’t happen too frequently with Bill Gross, but occasionally they do. It hasn’t been a major, major misstep yet. But it was a pretty bad month in May certainly, and it’s the kind of error you expect to get. I will say, though, that it’s been a lot harder for all funds to match the benchmark up and down at the same time, just because they have been investing a little bit away from it in the last few years.

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Benz: Tim, one thing we’ve seen recently when we look at fund flows is a rare couple of months or at least a month worth of outflows from PIMCO Total Return, both the exchange-traded fund and the mutual fund. Is that cause for an alarm and could that cause the fund to have to sell positions that it would otherwise want to own? What do you think the issues are there?

Strauts: I think this is just a one month blip on the radar. It could turn into something more, but as of yet, we're talking about a very small outflow relative to the size of these two funds. In general, I don't think the outflow is necessarily directly related to the recent performance of PIMCO Total Return, it's more just that 10-year Treasuries have risen dramatically. I mean, in May the 10-year were sitting around 1.6% and today it's around 2.3%.

So, rates have been rising, and people are getting a little bit worried about their bond exposure. A lot of investors have a lot of money invested in PIMCO, so we see that through some of the outflows.

Benz: Eric, a question for you is whether investors should be concerned about the recent performance weakness?

Jacobson: Yeah. I think that it's a little early for that. There is no question Bill Gross is human, and the firm is made up of real people. So, it's tough to really expect perfection herein. He has had periods in the past where he has been a little early or his timing has been off, and the firm has suffered a little bit. But it's been pretty rare for those periods to last very long. And if you still go back and look, the fund and Gross have a terrific record, and I really wouldn't count him out yet.

Benz: Tim, what's your take on that question?

Strauts: Yeah, I think that it's a very short time period that we're talking about here. Over a longer period, just going back a year or even two years, the performance is quite strong for PIMCO Total Return, so I really wouldn't be concerned.

Benz: So, it's probably causing some angst in Newport Beach, Calif., where PIMCO is located, but probably not too big a cause for concern for investors just yet?

Strauts: Yes, I’d agree with that.

Benz: Well, thank you both so much for being here to share your insights on this issue.

Strauts: Thanks for having us.

Jacobson: Glad to be with you, Christine.

Benz: Thanks for watching. I’m Christine Benz for