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Fund Spy

Where Have PIMCO Total Return's Assets Gone?

These intermediate-term bond funds have grown the most as PIMCO's flagship has shrunk.

PIMCO's recent announcement that Manny Roman will become its new CEO comes after the firm has seen its assets under management decline by hundreds of billions since 2013. The appointment of Roman, who has been lauded for successfully stabilizing, diversifying, and growing Man Group's business as CEO, suggests that the firm is hoping he can pull off something similar here.

While some of PIMCO's strategies have been stable or even growing during this time, the firm's flagship PIMCO Total Return (PTTRX) has seen a staggering level of redemptions. The pace of outflows from the fund has slowed more recently, as the initial investor exodus following the departure of the fund's legendary manager Bill Gross subsided, but have nonetheless continued. At $86 billion in assets as of June 30, 2016, PIMCO Total Return is still hefty--the third largest in the intermediate-term bond category--but now less than a third of its size at its April 2013 peak of $293 billion.

Where has all that money gone? We don't actually know where each of the dollars that left PIMCO Total Return have ended up. Some investors may have replaced their PIMCO Total Return allocation with another intermediate-term bond fund, but others may have left the category altogether or turned to another PIMCO strategy, such as the growing PIMCO Income (PIMIX). U.S. mutual fund flows also don't tell the whole story about which managers have gained or lost the most market share. They don't account for flows in funds domiciled outside of the United States, nor allocation decisions made by pension plans, endowments and foundations, sovereign wealth funds, and other institutional investors.

Nonetheless, several intermediate-term bond funds have experienced extraordinary growth as PIMCO Total Return's assets have declined. Although the fund's outflow trend extends back to 2013, the so-called “taper tantrum” produced sharp losses for many funds, leading to widespread redemptions across the category that year. By early 2014, though, the category began to attract investors again, even as PIMCO Total Return's outflow trend remained steady and was about to accelerate. Since the beginning in 2014, when the asset flow trends of the intermediate-term bond category and PIMCO Total Return began to diverge, through June 2016, the following 20 intermediate-term bond funds (mutual funds and exchange-traded funds) have attracted the most assets.

- source: Morningstar Analysts

A few observations jump out from this table. One is the growth of Metropolitan West Total Return Bond (MWTIX), the fund that saw the largest amount of net inflows in the immediate aftermath of Bill Gross' departure, gaining $19 billion in four short months from September through December 2014. Now at $79 billion in assets, more than twice its size at the beginning of 2014, that fund is close to catching up with PIMCO Total Return. Vanguard Total Bond Market Index (VBTLX) received the second-largest net inflow during this brief period at nearly $15 billion, followed by Dodge & Cox Income (DODIX) with close to $10 billion and DoubleLine Total Return Bond (DBLTX) with roughly $5 billion, according to our estimates.

While those funds were already significant players in the intermediate-term bond category, a number of the group's smaller players have grown into heavyweights in recent years. Two funds run by the Milwaukee-based Baird Advisors, Baird Core Plus Bond (BCOIX) and Baird Aggregate Bond (BAGIX), have nearly tripled and quadrupled in size, respectively. Led by CIO Mary Ellen Stanek, the Baird team's process--a no-frills approach focused on bottom-up security selection and straightforward portfolio construction--stands in stark contrast to PIMCO's penchant for complexity, including extensive use of derivatives and techniques such as active duration management, bets on non-U.S. rate markets, and currency plays. The Baird team doesn't have PIMCO's army of traders and analysts, but its disciplined approach has delivered over time, and we think newer investors are in steady hands.

On the bolder side, corporate-credit-heavy Prudential Total Return Bond (PDBAX) and Loomis Sayles Core Plus Bond (NEFRX) have also seen their assets multiply. Prudential had already managed hundreds of billions in insurance and institutional money, but PIMCO Total Return's outflows have likely given its mutual fund business a boost. Loomis Sayles Core Plus Bond has long labored in the shadows of its Dan Fuss-steered sibling Loomis Sayles Bond (LSBRX), but its lengthy track record of making well-timed calls with an expansive tool kit that includes currency plays and emerging-markets credit (a trying 2015 notwithstanding) has gotten it well-deserved attention.

While gains in market share among different active bond managers are worth noting, the most striking trend in the table demonstrates the ongoing shift from actively managed to index-tracking funds. The magnitude of the movement into index mutual funds and ETFs in this list stands out, totaling roughly $111 billion across funds run by Vanguard, iShares, and Fidelity, which happens to be just about two thirds the size of the asset flows out of PIMCO Total Return during this time. In April 2015, Vanguard Total Bond Market Index Fund surpassed PIMCO Total Return as the world's largest bond fund, and since the end of 2013, passive funds have grown from around a fourth of the assets in the intermediate-term bond category to more than a third as of June 2016.

In the years following the financial crisis, many market observers wrote off strategies that track the Barclays U.S. Aggregate Bond Index because of the bogy's generous allocation to low-yielding U.S. government bonds, a sentiment that stoked the popularity of unconstrained and other non-traditional-bond funds a few years ago. As it turns out, the Aggregate Bond Index has been tough to beat in recent years. That won't always be the case, but the relatively low price tags offered by these index funds give them a built-in edge over more-expensive intermediate-term bond peers, which is particularly useful when yields are lean. In the context of turmoil in the executive and investment-staff ranks at PIMCO, an index fund run by a reputable firm has one more advantage over its actively managed brethren: stability and consistency.

Miriam Sjoblom has a position in the following securities mentioned above: PTTRX, LSBRX. Find out about Morningstar’s editorial policies.