How Is Pimco Total Return Handling a Manager Change?

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One of three managers has left, but Pimco Total Return still offers a manager juggernaut and a battle-tested process. All shares carry Morningstar Analyst Ratings of Gold or Silver.

Mihir Worah retired at the end of March 2020, remaining an advisor to the firm through the year. Pimco veteran Mohit Mittal joined Scott Mather and Mark Kiesel as a comanager in December 2019 in anticipation of Worah's departure. Senior leaders have dubbed Mittal a rising star, and in addition to managing a range of portfolios--he’s been a comanager on Pimco Investment Grade Credit PIGIX since 2016--Mittal oversees a large contingent of traders. And although group CIO Dan Ivascyn isn't named as a manager, he and other key investors contribute to this fund's success via work in their specialties and the firm's investment committee.

Despite the resources brought to bear, investors began pulling money here more than a year before Bill Gross left the firm in 2014, and while the bleeding eventually slowed, it has mostly continued since. By the end of 2019, the once gargantuan fund held $67 billion.

Pimco has managed those outflows well. Despite some hiccups--shorts against Japanese and U.K. bond markets kept it from better gains in 2019, for example--the effort has been a success. Paring back risk over the past couple of years as valuations ground tighter meant it was ready to withstand the storm when the coronavirus shook markets. It carried roughly a half year of duration beyond its benchmark's as of January 2020, yet also a significant underweight to corporate spread risk, and while still holding 11.7% in nonagency mortgages, a lighter exposure to other out-of-benchmark securitized sectors--such as collateralized loan obligations and commercial mortgage-backed securities--than many competitors. By April 14, 2020, the fund's institutional shares had come out the other side of the first-quarter sell-off and subsequent rebound with a year-to-date gain of 3.3%, placing in the best quartile of its (unique) intermediate core-plus Morningstar Category peer group. It was similarly situated since Gross' 2014 departure through March 2020.

Process | High A meticulous and comprehensive approach.

The strategy's managers haven't made any big changes to its process since taking over in late 2014, and all sit on Pimco's investment committee, including Mohit Mittal, who is currently a rotating member.

The team starts with the firm's macro forecasting (determined by the investment committee) and bottom-up analysis to determine interest-rate, yield-curve, currency, country, sector, and security-level decisions. The group has gone through iterations over the years, having been dominated by sector specialists early on, then more by those focusing on macro research. The group gained more balance some years ago, as Pimco added back managers with fundamental and sector-level expertise. It also draws on the resources of thought leaders on global macro and policy issues, including members of its own staff and outside consultants, several of whom have central bank experience and sit on the firm’s Global Advisory Board. The firm uses a system of secular and cyclical forums to help inform and debate its views on the economy.

Group CIO Dan Ivascyn has worked to incorporate outside opinions and foster critical analysis in channeling the expertise of Pimco's experts, and the combined effort earns a High Process Pillar rating.

As of March 2020, the strategy’s overall duration measured 6.6 years, reflecting modest shorts on rates in Japan and the United Kingdom but an otherwise large exposure to U.S. rates across maturities out to 25 years (plus a short on the 25- to 30-year tenors) pushed that metric well beyond the Bloomberg Barclays U.S. Aggregate's 5.7-year duration. That reflected a notable shift back to a long stance after Pimco reined the figure in as rates rallied in late February.

Although credit sectors sold off severely in late March, the strategy was still notably light in corporate exposure at month's end and--despite its long interest-rate duration--more heavily allocated to short maturities, including among mortgages, than it had been for years. Overall, comanager Scott Mather argued that while Pimco's outlook was comparatively sanguine on efforts to fight the COVID-19 pandemic, as well as monetary and fiscal policy efforts to soften its economic blows, the team still wanted to structure the portfolio without assigning overly optimistic probabilities. Markets moved very quickly in late March and early April 2020, though, and it wouldn't be out of character for Pimco to take swift tactical action to either jump on risk-taking opportunities or to peel risk back in a hurry.

People | High A talented and seasoned group.

The three managers who replaced Gross all came to the job with impressive and complementary resumes, and that still held after Mohit Mittal joined the fund in December 2019 as Mihir Worah stepped off anticipating retirement. Prior to taking over here, Scott Mather, who has final decision-making responsibility on the portfolio, had served in a number of roles across Pimco, including a stint co-heading the firm's mortgage- and asset-backed securities group and, most recently, running its global portfolio management team. Mark Kiesel, Morningstar Fixed-Income Fund Manager of 2012, heads up the firm's global credit effort. Mittal, meanwhile, has often been dubbed a rising star by senior leaders of the firm. In addition to managing a wide range of portfolios--he's been a comanager on Pimco Investment Grade Credit PIGIX since 2016--Mittal oversees the firm’s U.S. investment-grade, emerging-markets corporates, and U.S. high-yield traders.

Although not a named portfolio manager here, group CIO Dan Ivascyn has an impressive record in his own right, which includes recognition as Morningstar Fixed-Income Fund Manager of 2013. All four are permanent members of the firm's investment committee.

Overall, Pimco's staff has tremendous depth, boasting world-class practitioners and intellects across the board, supporting the fund's High People Pillar rating.

Parent | Above Average Pimco's investment culture is robust.

The state of Pimco is strong, and the firm earns an Above Average Parent rating.

Morningstar has taken Pimco to task for expensive retail share classes and big price tags outside the United States. The firm also gets lots of attention for its intense working culture, invariably sparking speculation of whether it leads to dysfunction that might drive away the firm's best investors. In defiance of that narrative, Pimco has consistently hired highly skilled people who thrive in its pressure cooker--and stick around for a long time. People do leave, and some of its best and brightest have occasionally departed or retired earlier than one would have hoped. Even so, the firm's record of filling in the gaps has been remarkable and Pimco has managed to promote and broaden leadership responsibility across its talent pool.

The persistence of Pimco's investment culture has been critical. Despite the acrimony of Bill Gross' 2014 departure, an experienced and critical-thinking investor--rather than a prototypical corporate manager--took over as the firm's cultural force in the form of Dan Ivascyn. Now effectively the firm's CIO, Ivascyn had material influence in the later hiring of industry-veteran Manny Roman as CEO. Whether or not the pair's bonhomie is as genuine as it appears, Ivascyn and Roman have kept the firm in excellent stead as both a strong steward of investor capital and a thriving business.

Performance A still notable record despite a few bumps.

There have been performance hiccups here, including a few in 2019 when bearish views on non-U.S. interest rates in a few developed markets, including a notably large short against Japanese debt, hurt returns. And while Pimco’s management team made hay on U.S. rates and corporates when higher-risk markets sold off in 2018’s fourth quarter, betting against other developed rate markets offset that success.

But while various global interest-rate strategies have had mixed success, sector plays, led by allocations to nonagency mortgage and other securitized assets, have made strong contributions. Meanwhile, a decision to pare back risk over the past couple of years as valuations ground tighter meant the strategy was ready to withstand the storm when COVID-19 shook markets. The strategy carried roughly a half year of duration beyond its benchmark's as of January 2020, a significant underweight to corporate credit risk, and lighter exposure to out-of-benchmark securitized sectors--such as CLOs and CMBS--than many competitors. By April 14, 2020, the fund's institutional shares had come out on the other side of the first-quarter coronavirus sell-off and subsequent rebound with a year-to-date gain of 3.3%, placing in the best quartile of its (unique) intermediate core-plus Morningstar Category peer group. It was similarly situated over the stretch since Gross' 2014 departure through March 2020.

Price It's critical to evaluate expenses, as they come directly out of returns. The share class on this report levies a fee that ranks in its Morningstar category's cheapest quintile. Based on our assessment of the fund's People, Process and Parent pillars in the context of these fees, we think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Morningstar Analyst Rating of Gold.