Updated Ratings on 18 PIMCO Funds

Although nearly all the attention on the Bill Gross story has been on  PIMCO Total Return (PTTRX), his departure rippled throughout PIMCO. He was the lead manager on 10 PIMCO funds, but scores of other PIMCO funds saw changes as PIMCO shifted responsibilities throughout the organization.

We put all PIMCO funds under review the day of Gross' departure, and since then we’ve sifted through most of the PIMCO funds we cover to issue new ratings. By now, we have published nearly all of our new Morningstar Analyst Ratings. You already know our conclusion to lower the rating on PIMCO Total Return to Bronze from Gold in light of a higher level of uncertainty, so here I’ll work my way through all the rest.

Our Analyst Ratings are driven by people, process, parent, price, and performance. In this case, nearly all of the changes were focused on the people and parent sides, though we are watching closely for changes in strategy where new managers have taken the helm. And of course we took into account any new developments on the performance and fee fronts.

PIMCO promoted Dan Ivascyn to group chief investment officer and turned PIMCO Total Return over to Scott Mather, Mihir Worah, and Mark Kiesel. In some cases these four managers kept their funds, and in other cases they handed them over to others. That gave us a lot to dig into. Where the elevated four stayed, we wanted to know how deep the resources were behind them now that they had much more responsibility. Where there were changes, we reassessed the team left behind and what their records were in running similar funds in the past.

We have had daily meetings to review the funds under their new guise. Here are our conclusions. Please click through to the analysis pages for the whole story.

Real Return Team
Morningstar Analyst Michael Herbst
Headed by Worah, the real return team manages PIMCO's inflation strategies including Treasury Inflation-Protected Securities funds, commodities funds, and multiasset inflation-fighting strategies. Now that Worah is also comanager on PIMCO Total Return and heading up the firm's global multiasset strategies, he’ll need to lean more on the remaining real return team.

However, given the range of Worah's new duties and two departures from the real return team earlier in the year, we fear Worah is stretched a bit thin for the time being. It’s still a good team, but we have lowered ratings on some of the funds one notch to reflect the new reality. We took  PIMCO Real Return (PRRIX) and  PIMCO Commodity Real Return Strategy (PCRIX) (and their near clones run for Harbor) down to Silver from Gold. PIMCO Real Return is an appealing inflation-protected bond portfolio, and PIMCO Commodity Real Return Strategy uses that portfolio to add value to commodity futures positions.

We’ve maintained a Silver rating on  PIMCO CommoditiesPLUS Strategy (PCLIX), however, because it remains largely the same fund it was before. Nic Johnson remains the lead manager at the fund, and the key driver here is his commodity bets versus the index. In addition, the underlying bond sleeve comes from the PIMCO StocksPlus side rather than the PIMCO Real Return side.

 PIMCO Income (PIMIX)
Morningstar Analyst: Eric Jacobson
Ivascyn and Alfred Murata's fund has been absolutely brilliant, and we think that can continue. Although Ivascyn was elevated to the group chief investment officer position, he retains this multisector fund. We named Ivascyn and Murata Morningstar Fixed-Income Fund Manager of the Year for 2013 because they've done a deft job of shifting among bond sectors over the years. Yes, Ivascyn has more on his plate, but this fund’s $39 billion asset base is downright puny compared with the portfolio managed by the previous chief investment officer. We have maintained a Silver rating on this fund.

Foreign-Bond Fund Team
Morningstar Analyst: Karin Anderson
While Worah remained on his funds, Mather turned over his global bond mandates to Andrew Balls. Thus, we lowered our ratings on four PIMCO funds to Bronze from Silver. Specifically, we downgraded  PIMCO Global Bond (Unhedged) ,  PIMCO Global Bond (USD-Hedged) (PGBIX),  PIMCO Foreign Bond (Unhedged) (PFUIX), and  PIMCO Foreign Bond (USD-Hedged) (PFORX) to Bronze from Silver.

Mather had a long, appealing track record on these global bond mutual funds, whereas Balls' public track record in the space has been pretty brief. He comanaged  PIMCO Global Advantage Strategy Bond (PSAIX) since 2011 and became lead manager in 2013. However, his record over both time periods was middling compared with the world-bond category average. Balls has been successful on a handful of European fixed-income strategies since 2008. Prior to joining PIMCO in 2006, Balls was a journalist at the Financial Times.

Balls intends to use the same strategy employed by Mather, though we may see some nuanced differences over time. Sachin Gupta and Lorenzo Pagani were named comanagers on the funds in the wake of Mather’s promotion.

On the plus side, PIMCO does have a strong group of analysts and traders in global debt. It’s enough that we can still recommend the funds albeit at a lower rating level.

Asset Allocation
Morningstar Analysts: Kevin McDevitt and Michael Herbst
Rob Arnott and the rest of the team at Research Affiliates remain in place, so the issue here is about the underlying funds that they use in building portfolios. The funds’ current top holding is PIMCO Income, which we didn’t downgrade, as noted earlier. While we lowered  PIMCO Emerging Local Bond (PELBX), it’s still a Silver. Arnott and team still have some excellent PIMCO funds at their disposal, so we’ve maintained our ratings of Silver for  PIMCO All Asset All Authority (PAUIX) and Gold for  PIMCO All Asset (PAAIX).

Worah assumed leadership of PIMCO's global multiasset strategies upon Mohamed El-Erian's early 2014 departure, including  PIMCO Global Multi-Asset (PGAIX). Since then, he's rebooted the struggling fund's strategy and taken steps to build out his team with internal and external hires. As a result, we had already reset this fund's pillar scores and overall rating to Neutral prior to Gross' departure. Additional hires are forthcoming, which could over time lessen the overall burden on Worah.

Emerging Markets
Morningstar Analyst: Karin Anderson
Michael Gomez remains at the helm of the firm’s emerging-markets strategies, but comanager Ramin Toloui left earlier this year to take a job in the Treasury Department. That departure and mediocre performance of late nudged the emerging-markets fund ratings to Silver from Gold. Gomez and team are still among the best in emerging-markets bonds. In addition,  PIMCO Emerging Local Bond’s (PELBX) slump is partly due to its mandate for investing in local-currency bonds. A dollar rally has hurt performance, but that part can’t be held against it.  PIMCO Emerging Markets Bond (PAEMX) has enjoyed better performance because of the difference in currency exposure.

Credit
Morningstar Analyst: Sumit Desai
Lead manager Kiesel has a lot on his plate as chief investment officer of global credit and lead manager responsibility on  PIMCO Investment Grade Corporate Bond (PIGIX) and comanager responsibility on PIMCO Total Return as well as a couple of smaller funds. We’re keeping our Silver rating on the fund because Kiesel and team have done an excellent job over the years. As Sumit points out in the analysis, PIMCO has built a 50-analyst-strong team devoted to credit, so Kiesel has plenty of support.

Kiesel’s issue selection, sector selection, and use of credit default swaps have led the fund to outstanding performance since he took over in 2002.

Municipal Bonds
Morningstar Analyst: Cara Esser
Check it out: An upgrade! Yes, we actually raised the rating on  PIMCO Municipal Bond  to Bronze from Neutral. PIMCO's muni team hasn't really been affected by the upheaval. What mattered to us is that manager Joe Deane has continued to build his team so that it now looks like a cohesive group. It has been a little more than three years since Deane came to PIMCO from Western Asset. The fund's three-year returns are excellent, but Deane's long track record prior to PIMCO is also important.

Short-Term
Morningstar Analyst: Sarah Bush
 PIMCO Short-Term (PTSHX) manager Jerome Schneider remains at the helm nearly four years into his tenure. Short-term debt is a big deal at PIMCO as it runs huge sums in the strategy including portions of other big PIMCO funds. (Schneider was also named comanager at the $20 billion  PIMCO Low Duration (PTLDX).)

On the downside, fees have remained stubbornly high even as yields have come down and competitors have lowered their fees. The average ultrashort-term bond fund expense ratio has fallen to 0.59% today from 0.64% in 2001. However, the fund charges 0.70% on its individual investor shares (A and D) and 0.45% on institutional shares. All three are above average for their share classes, and that makes the fund a Silver rather than a Gold.

Unconstrained
Morningstar Analyst: Eric Jacobson
 PIMCO Unconstrained Bond (PFIUX) was already down to a Neutral when Gross left, and we're keeping it there. Like other non-traditional-bond funds, this one hasn’t made much of its additional flexibility, as last week's bond rally illustrated. Now the fund is in the hands of Ivascyn, Mohsen Fahmi, and Saumil Parikh. Parikh will be lead manager. That’s the third manager change for the fund in one year.

Parikh is a veteran at PIMCO, but he doesn't have much in the way of a public record. As Eric points out in the analysis, a new group of managers and a reshaped investment committee guiding it leave a lot of questions about just how this fund will use its wide latitude.

The Unconstrained strategy is plugged into quite a few other PIMCO funds, so PIMCO really needs to get it right.

EqS
Morningstar Analyst: Jason Kephart
PIMCO’s equity group is the least affected by Gross’ departure. Although it said it got some macro guidance from PIMCO’s investment committee, it doesn’t appear to have had much impact. EqS hasn’t been a smashing success so far, as PIMCO has made some rookie mistakes in its entry into stocks.  PIMCO EqS Long/Short  was already rated Neutral, and it retains that Neutral rating.

It’s one of the funds that plugs in the unconstrained portfolio. However, the key to the fund is manager Geoffrey Johnson’s focused long-short portfolio. You don’t often see focused and long-short together because you can end up with some extreme performance that way. You know a lot is riding on each stock pick when a fund has just 29 longs and 15 shorts. This fund converted from hedge fund to open-end fund in 2012, and the jury is still out.

 

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