PIMCO Total Return Weathers First Round of Outflows

Based on its performance since the departure of Bill Gross on Friday, Sept. 26, 2014,   PIMCO Total Return (PTTRX) appears to have weathered the initial flurry of outflows without hurting performance. This suggests that the fund had more than enough liquidity in its holdings to manage the outflows. The fund's I shares gained 0.4% last week, lagging the Barclays U.S. Aggregate Bond Index by 1 basis point and finishing just outside the top quartile (26th percentile) of the intermediate-term bond Morningstar Category. These numbers cover the five market days following Gross' announcement.

Based on our internal flow data and PIMCO's public comments, we estimate that PIMCO Total Return suffered outflows of about $20 billion beginning with market close on Friday, Sept. 26 through Tuesday, Sept. 30, with the Monday and Tuesday outflows hovering around $5 billion per day. PIMCO doesn't release daily outflows, so we don't have numbers for the rest of the week ending Oct. 3, although it appears certain that outflows continued at elevated levels. Prior to Gross' departure, the fund had been averaging about $140 million per day in outflows this year.

We do have daily flows for  PIMCO Total Return ETF (BOND), which experienced especially large outflows immediately on the news of Gross' departure, as might be expected for an exchange-traded fund. The rate of outflows has declined precipitously since then. While we don't think the flow rates are necessarily the same for the mutual fund as for the ETF, the decline in outflows from the latter suggests to us that mutual fund outflows may also be moderating.

While PIMCO Total Return's weekly performance versus the category and index was positive, it is certainly possible that the fund could have performed even better last week had it not been managing record outflows. To test this, we used a tool developed by our quantitative research team to create a custom index for PIMCO Total Return that aims to achieve as close a correlation as possible to the fund using long-only investments in passive indexes. The performances of the fund and this custom index track closely over time. Any significant deviation between PIMCO Total Return and the custom index during the past week can be interpreted as idiosyncratic behavior perhaps caused by difficulties dealing with outflows.

During the past week (Sept. 29 through Oct. 3), PIMCO Total Return actually outperformed its custom benchmark by an estimated 19 basis points. To put this in context, we compared the performance of the fund with the custom index during the third quarter up to the day of Gross' departure. During that period, the fund trailed the benchmark by an estimated 53 basis points. In the four weeks immediately prior to Gross' departure, the fund trailed the custom index in each of the four weeks. Last week's shift from negative to positive performance relative to the custom index could have something to do with how PIMCO handled shareholder redemptions, but the results indicate that last week's outflows do not appear to have harmed performance in any meaningful way.