Upgrading PIMCO Total Return to Gold

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We lowered the rating for this perennial winner after legendary manager Bill Gross left PIMCO in late 2014. Investors were pulling money out of the fund at a fast clip, and we were concerned that Gross’ departure and changes to PIMCO’s business could hurt the firm’s ability to maintain talent and focus.

But PIMCO has managed the fund’s outflows well. The firm’s assets have actually grown since 2016, and there were few departures after Gross left. The team here has found balance among its leaders--Scott Mather, Mihir Worah, and Mark Kiesel (Morningstar Fixed-Income Fund Manager of 2012)--and continues to benefit from massive PIMCO resources and the leadership of CIO Dan Ivascyn (himself a 2013 winner of the award). PIMCO staffing has also been augmented, in some cases by senior-level returnees to the firm.

There have been hiccups, including a misread of the Fed response to global market shifts in late 2015 and early 2016, which made for somewhat inconsistent returns. Despite anemic returns overall in 2015, the year turned out well on a relative basis, and the fund performed well for the rest of 2016. The team managed to beat close to 90% of the competition and the Bloomberg Barclays U.S. Aggregate Bond Index in 2017. The team's U.S. interest-rate calls paid off, including timely emphasis on U.S. duration and positioning for a flatter yield curve, as did the fund's continued allocation to nonagency mortgages. Importantly, the fund's corporate underweighting didn't prove too costly, thanks to strong security selection, particularly in financials.

The fund has posted returns in the best third of its (distinct) peers in the intermediate-term bond Morningstar Category since Mather, Worah, and Kiesel took over through March 2018. This reasonably priced offering, backed by a very strong asset manager, continues to deserve plenty of investor confidence.