Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. After this morning's surprise announcement that Bill Gross was leaving for Janus, PIMCO said this evening that Dan Ivascyn will be taking over as group CIO. I'm here today with Michael Herbst--he's our director of manager research for active strategies here in North America--for his take on this news.
Michael, thanks for joining me.
Michael Herbst: My pleasure.
Glaser: With Ivascyn's promotion to group CIO and other deputy CIO's also being promoted, is this news basically in line with what you expected?
Herbst: In combination, these moves definitely make sense. We won't rehash all of the moves here, but each of the CIOs that were named today were, in fact, deputy CIOs or named deputy CIOs in the wake of Mohamed El-Erian's departure. At that point, we knew that these were going to be some of the key folks involved--or potentially involved--in a succession plan for Bill Gross.
The group CIO announcement of Dan Ivascyn--that was one that we didn't know, for sure, how that was going to unfold. But he is very well regarded by us and is very well regarded by his colleagues, too; so that's a comforting announcement as well.
Glaser: Does this give you some more confidence that there will be at least some short-term stability at PIMCO?
Herbst: Yes. I'd say the emphasis is on the short-term stability. An important part of the message right now that a lot of investors in PIMCO funds are thinking about is "What does this mean today? Should I sell my fund or should I continue to hold my fund?" What these changes, in sum, suggest to us is that the strategies that the portfolio managers ply at their individual funds--in their new roles, too--and the way that PIMCO as a firm executes its fixed-income strategies, we aren't likely to see any immediate or radical changes that would have us concerned. That is what I mean by "for now."
The other part of the situation here at the portfolio-manager level, getting a better sense of how the new managers are stepping into their new roles and working with colleagues in a new way perhaps, is something that will take a little bit of time to assess. At the firm level, too, there is some of that going on in terms of what these changes in total, with Bill Gross' departure, mean for the future direction and leadership of PIMCO as a firm.
Glaser: Let's look at the flagship fund, then, with Total Return (PTTRX) getting three new managers named. So, you're saying that you don't expect any big change of direction there?
Herbst: Well, we are familiar with these three managers. They are new in these roles, but they are not new to us or to investors. Mark Kiesel heads up a lot of PIMCO's credit work. He was Morningstar's Manager of the Year in 2012. So, we're very familiar with him. Mihir Worah has done an excellent job heading up the firm's real-asset strategies and has recently started taking on some broader multi-asset strategies as well. So, we have a good deal of confidence in him as well.
And Scott Mather is no stranger at all, either. He is one of PIMCO's global-bond experts on a number of PIMCO's non-U.S. or global-bond funds. So, we're very familiar and very comfortable with these three managers based on not just their past work but also the way that they work with their teams and interact with each other so far.
All of that said, we are digging into how they are going to work together on this fund. PIMCO Total Return obviously has been the firm's flagship for a long time. It's Bill Gross' creation. His imprint is deep on the fund. How the three new comanagers choose to divide and conquer, or divvy up responsibilities amongst themselves, is really the key task at hand for us that we're digging into to get a better sense of what investors can realistically expect from the fund's strategy and performance going forward.
Glaser: You mentioned that Bill Gross' imprint is very much on Total Return and a lot of investors bought that fund because of Bill Gross. Now that he's gone, there is potential for more outflows. What's the liquidity situation of Total Return? Are you worried that the outflows could create a problem for investors who would wish to remain?
Herbst: There is certainly some potential for outflows, and that is one of the main things that we're watching here. Some of our working assumptions include the fact that many big institutional users of the fund may move fairly cautiously in terms of reassessing the management team in place rather than making any rash decisions.
In terms of the portfolio itself, it's very important for investors to realize that, even though this is a big fund that has experienced significant outflows in recent years, the portfolio has been and remains very liquid. Does that mean that there would be no impact from additional investors leaving the fund? That's not the case at all; there will be an impact.
But we do not have the same level of concern as we would if this fund trafficked more heavily in some of the less liquid parts of the fixed-income markets. So again, for now, today, sitting here where we are, we do not believe that these changes or Bill Gross' departure cause an imminent risk in terms of significant outflows from the fund.
That's an area that we're going to be watching very closely because that's something that could change. And if outflows do pick up and they are sustained for a long period of time, ultimately the portfolio's composition and liquidity might be affected. And by ripple effect, that in turn could affect broader fixed-income markets as well.
Glaser: So, with this announcement today, what's your advice for PIMCO's shareholders? Earlier, it was "Take some time to assess." Is that still the case?
Herbst: Yes, it is. Nothing in these announcements was shocking to us--nothing was absolutely surprising. And we have a very good sense of what our to-do list going forward from here is. We are already at work re-assessing our views on the ratings that we pulled down earlier today, and we're going to move as quickly as we can to re-assign ratings to all of the funds, beginning with the ones that were most affected--starting with PIMCO Total Return.
Glaser: Michael, thanks for your take on this developing story. I'm sure we'll be hearing more about it in the days and weeks to come.
Herbst: My pleasure. Thank you.
Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.