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Originally published Saturday, February 8, 2014 at 8:00 PM

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Don’t overreact to fund news

The news that Mohamed El-Erian had stepped down as chief executive at PIMCO, the bond giant, is nothing to worry too much about. Pimco has weathered big-name departures before.


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Your Funds

Investors often fixate on the wrong things and miss important stuff. Two separate headlines recently help to prove the point.

The first — which most news junkies probably saw — was the news that Mohamed El-Erian had stepped down as chief executive at PIMCO, the bond giant.

The second was a notice — which even die-hard fund addicts probably missed — saying that S&P Capital IQ had lowered its opinion on Janus Capital Group (JNS) from “hold” to “sell.”

People who saw the notice about El-Erian probably worried about Pimco’s future and whether they should stick around; the few folks who saw the S&P Capital IQ announcement probably ignored it.

Both were wrong.

Sure, El-Erian is a big name in the fund world. He was co-pilot with the legendary Bill Gross on Pimco Total Return, the firm’s flagship fund, and he is highly respected as an institutional money manager.

El-Erian’s departure comes on the heels of Total Return shrinking by more than $40 billion last year, suffering through a year that it started too dependent on Treasurys at the wrong time. On the whole, Pimco’s funds suffered outflows for the first time in 20 years.

But Pimco has weathered big-name departures before, whether it was real-return ace John Brynjolfsson or Paul McCulley, who was Gross’s top Federal Reserve watcher.

The company may have gotten a pass in the media and from investors due to fortuitous timing; Brynjolfsson left shortly before the financial crisis of 2008, which made every fund company look bad, while McCulley left at a point where the market was rebounding and everything seemed to be on the upswing.

Moreover, every fund company faces issues like this, and while management turnover can be a problem, investors should be most troubled when it occurs at a small firm with a shallow bench.

If you assume that Total Return investors wanted to ride with Bill Gross, for example, they should be only so nervous at the loss of his co-captain, even one as talented as El-Erian. They’ll be far more worried — and with much better reason — when Gross decides someday to hang it up.

Management turnover always is a worry to investors who select active funds, but most firms pass the reins from master to teammate, rather than overhauling strategies and radically altering the fund.

Even if performance picks up or takes a dive, it’s typically more about the market and how the investment strategy fits in with the broad trends than by the specific tacks taken by the guy at the tiller.

That’s why the S&P Capital IQ notice about Janus should be more worrisome, as the Wall Street research firm noted that it was dumping the company “due to the relative underperformance of its funds and ongoing long-term asset outflows.”

Ouch.

That was not a statement on the quality of the firm’s funds; the sell recommendation applies only to shares in the parent company.

Todd Rosenbluth, director of ETF and mutual-fund research at S&P Capital IQ, noted that Janus has funds that rank well with his firm — pointing out Janus Hugh Yield (JHYAX) as one example — and others that rank poorly “based on their holdings, performance record, expenses, etc. Investors should not view the downgrade as a reason to sell a Janus fund. ... Investors in a fund should look at what it holds, how it has performed.”

Rosenbluth noted that if a fund family is closing some funds due to poor cash flows and asset declines, that’s a negative sign.

And while he’s right that the parent company’s stock should not weigh on the decision of whether an individual fund has the ability to meet expectations, investors should be at least as worried about a fund firm that is struggling as they are about a star manager’s departure.

Janus, for example, has consistently tried to improve its fortunes, changing top executive honchos and more, moves that haven’t delivered much in the way of results to fund shareholders. It’s fair to suggest that if the parent company is struggling, that pressure may trickle down to the guys running the funds.

That doesn’t make the funds worth avoiding, but it puts them on the proverbial “watch list,” the same way Pimco funds that might be affected by El-Erian’s departure now have something to prove.

In Janus’ case, the funds you own need to prove that they are not part of the overall problem; in Pimco’s case, the funds must show that turnover at the top does not create new issues.

In neither case does a knee-jerk reaction to a headline make sense.

A lot of what passes for news in the fund industry is business as usual, and this falls into the category of garden-variety corporate announcements. Pay attention, but don’t overreact because the only thing that’s abnormal about these items is that they got some media attention to begin with.

Chuck Jaffe is senior columnist for MarketWatch. He can be reached at cjaffe@marketwatch.com or at P.O. Box 70, Cohasset, MA 02025-0070.

Copyright 2014, MarketWatch



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