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Which Firms Are Capturing PIMCO's Outflows?

Jeremy Glaser
Timothy Strauts

Jeremy Glaser: For Morningstar, I'm Jeremy Glaser. We recently released our September fund flows report. I'm here with Tim Strauts--he's a senior markets research analyst--to take a look at some of the underlying data. Tim, thanks for joining me.

Tim Strauts: Glad to be here.

Glaser: So, the big story this month has to be PIMCO--what happened after Bill Gross' surprise departure and what those flows look like. Can you talk to us a little bit about how the numbers have looked for PIMCO Total Return (PTTRX) in particular?

Strauts: We estimate that $17.9 billion came out of PIMCO Total Return in September, which differs slightly from the number that PIMCO announced. That's because PIMCO included an outflow of $5.6 billion approximately on Sept. 30, which is the last day of the month, and our flows don't account for the last day. But effectively, we had $17.9 billion in September and then on the first day of October, another $5 billion.

Glaser: How have they managed this big outflow, then? Have you see any dislocations at PIMCO with all this money flowing out?

Strauts: Well, obviously, this is a very large outflow--one of the largest outflows we've ever seen. So far, they have managed it quite well. If you look at the performance of Total Return versus the Barclays Aggregate Bond Index, it has actually tracked very well over the last week and half here. So, they have managed it well. They have a pretty significant amount of highly liquid positions that they have been able to sell off to meet redemptions.

Glaser: Do you see the redemptions slowing down at all? What kinds of trends are you seeing in the short term? [Has the thinking been that] this money is going to leave and then we're going to enter a stabilization period? Or is there going to be more bleeding?

Strauts: It's hard to say, obviously. It's hard to predict what investors are going to do. But we would not expect another $18 billion or $20 billion outflow next month. What's going to be interesting, though, is that--for some of the institutional accounts--whether they are going to start having more outflows in the coming months, because institutional investors don't typically make investment decision in a hair trigger, in a day or two. They have an investment committee that they talk to, and so we'll see what institutional investors do over the next few months.

Glaser: Has this been mostly a Total Return impact? Or have other PIMCO funds, maybe even ones not managed by Bill Gross, have they also been under pressure in September?

Strauts: PIMCO has been under pressure for the last year in general. All of PIMCO's major funds except PIMCO Income--which is run by Dan Ivascyn, the new CIO--have actually been in net redemptions over the last year. So, obviously, Total Return was the largest outflow and then two other funds, PIMCO Unconstrained Bond (PUBAX) and PIMCO Low Duration (PTLAX)-- which were also managed by Bill Gross--were the second and third largest outflows. So, yes, PIMCO is under stress right now.

Glaser: Where is this money going? Do you have a sense of which other fixed-income managers might be picking up the slack here? Or is too early to say?

Strauts: It's still pretty early. We've seen some initial indications. DoubleLine Total Return (DLTNX) got a large inflow, Metropolitan West Total Return (MWTRX), Dodge & Cox Income (DODIX). All of these other large intermediate-term bond funds are due to potentially get some new assets. But we don’t think that it's going to be a one-for-one shift. We don't think everyone who sells PIMCO Total Return is going to immediately go buy another intermediate-term bond fund. They may use this opportunity as a way to reallocate their portfolio, start fresh, and maybe think about other positions in their portfolio.

Glaser: Let's shift gears a little bit into the equity world. In September, we had another month with pretty decent outflows from actively managed equity funds but decent inflows into passively managed equity funds. Could you talk a bit about the dynamic and how maybe it's changed--or hasn't--over, say, the last couple of years?

Strauts: This has been a trend that's been happening since around 2005, where investors on an annual basis have been selling their active U.S. equity funds and buying passive U.S. equity. And just last month, again, active was negative $13.3 billion and passive was a positive $12 billion, which is the trend we have been seeing over the last 10 years, where it's almost a one-for-one ratio, where the money that goes out of active somehow gets right back into passive U.S. equity. So, it seems investors are selling their active mutual funds and buying an index fund or an ETF on the U.S. equity side.

Glaser: What active equity funds, or what fund families, have been under the most pressure and where does that passive money seem to be ending up?

Strauts: American Funds is the biggest one. They had a very large U.S. active equity business. Vanguard is the one that is getting most of the new flows with either the Vanguard ETFs or the Vanguard Index Funds. And then iShares and State Street on the ETF side, also.

Glaser: Tim, thanks for your thoughts on the flows in September and, certainly, on that PIMCO story--something we'll be keeping an eye on.

Strauts: Thanks for having me.

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