Continued Outflows a Yellow Flag at PIMCO

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser.

I'm joined today by Tim Strauts, the senior markets research analyst at Morningstar. We're going to take a closer look at the January asset flows report.

Tim, thanks for joining me.

Tim Strauts: Thanks for having me.

Glaser: Let's start with PIMCO. This was one of the big stories of 2014's asset flows--the money that left as Bill Gross exited the firm. What's been happening there? Have those flows out of Total Return continued?

Strauts: Yes, they have actually. Last month negative $12.5 billion came out of PIMCO Total Return, which makes a total of $90.5 billion that has left PIMCO Total Return since Bill Gross has left, which is an astounding number. And it's starting to get a little concerning. We expected the large outflows in the first couple of months, but now we have five months of data, and the flows are continuing to be right around $10 billion a month. The firm just can't continue at this rate for too much longer.

Glaser: Is there a sign of where that money is going? Is it following Bill Gross to Janus, or are other competitors really taking that cash?

Strauts: Well, it's going to other firms--not Janus. The top five flowing active mutual funds were all bond funds that compete directly with PIMCO Total Return: MetWest Total Return Bond, DoubleLine Total Return, BlackRock Strategic Income, Dodge & Cox Income, and JPMorgan Core Bond.

Glaser: You mentioned they weren't going to Janus. What have their flows looked like?

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Strauts: Janus has had a little bit of a halo effect from Bill Gross. For the previous three months, they have had positive inflows. Remember Janus has been in strong outflows for most of the last couple of years. But just so far in January, we saw a small negative outflow, and Bill Gross' fund, Janus Global Unconstrained Bond, only took in about $85 million in new assets, so not really much.

Glaser: One of the other big trends last year was a big preference for passive over active investments. Did that continue in January of this year?

Strauts: It did to a certain degree. Yes, we did see definitely more flows into passive, but for the first time in a long time we saw, almost across the board, positive flows into active funds. The one outlier was U.S. Equity, which had another negative $13 billion in outflows, but that category has been in outflows over the last five years.

Glaser: When you look at the money flowing into active funds, which asset managers seem to be picking up a lot of that movement?

Strauts: Interestingly, just in the last year, JPMorgan has gotten the largest amount of the assets, and interestingly, Vanguard is number 2. Vanguard, as we all know, is winning the passive battle, but they are also winning on the active side.

Glaser: How about American Funds?

Strauts: It looks like they have started to turn around. It's a firm that has generally been in outflows since 2009, but this month they had around $2 billion in inflows, and it was their best month since May 2009.

Glaser: Another big story in the month was the large outflow out of SPY, the SPDR S&P 500. What was driving this significant outflow?

Strauts: It was negative $26 billion, which is very large outflow. In general, I am actually not that concerned about it, because in four of the last five years, we have seen large inflows into SPY in December and then large outflows in January. The primary reason is that SPY is used a lot by other mutual fund managers and hedge funds. At the end of the year, a lot of managers are paring down their portfolios, selling some positions, and when they sell a position, they may not necessarily know what they want to buy right away. So, to make sure they don't trail the market, they will buy SPY for a few weeks. Then in January, once they've figured out what their new positions are going to be, they will sell SPY. So, I think most of the outflow of $26 billion is primarily just money shifting around.

Glaser: A big number, but probably nothing to be too concerned about.

Strauts: Yes.

Glaser: Tim, thanks for your thoughts on this January report.

Strauts: Thanks for having me.

Glaser: For Morningstar, I'm Jeremy Glaser. Thanks for watching.