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Originally published Saturday, April 5, 2014 at 8:00 PM

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Pimco’s changes don’t alter what matters | Chuck Jaffe

Concern over management does add a proverbial straw to the load, but it’s not going to be the one that breaks the camel’s back. An investor who owns a fund going through this kind of transition most likely will ride it out; a potential investor may want to wait.


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Your Funds

There’s a fine line between paying enough attention to your fund portfolio and paying too much attention.

Pimco investors were walking that line recently, thanks to news that Morningstar had changed its “stewardship” rating on the bond-fund giant in the wake of ugly news reports about the rift between the legendary Bill Gross — Pimco’s primary face and the company’s main attraction to many investors — and Mohammed El-Erian.

El-Erian — who served as Pimco’s chief executive and was co-chief investment officer with Gross — announced in January that he would be leaving the firm by mid-March. Pimco announced other leadership changes a week later.

The news had investors wondering if there was trouble brewing, and those concerns only grew after the media unveiled details of the testy relationship between Gross and El-Erian.

In the fund world, institutional investors hire consultants to try to figure this stuff out.

Ordinary investors can basically guess at what’s happening or can turn to such firms as Morningstar, which makes corporate governance one of the five “pillars” on which it bases its analyst ratings for funds.

After having talked to Pimco management — Morningstar lowered Pimco’s stewardship grade from a B to a C (think academic scale with A being highest and F representing abject failure).

It also lowered the “parent pillar score” — the portion of its analyst rating representing the stewardship of a fund’s sponsor — to “neutral” from “positive.”

Morningstar’s Eric Jacobson, a senior analyst at the firm, said the downgrade reflected a “heightened level of uncertainty in this new era, after Mohamed El-Erian has left,” as well as questions about whether the other leadership changes “will ultimately be beneficial to investors.”

And then, a day later, Morningstar reaffirmed that Gross’ flagship fund, Pimco Total Return (PTTRX) was keeping its “gold” analyst rating.

Beyond a fund’s parent, Morningstar’s other pillars look at people, process, performance and price.

“We still have tremendous conviction over the process,” Jacobson explained. “We still think performance is quite good over the long term. And all of that really outweighs, for now anyway, the kind of concerns that pushed the Patent Pillar score down a little bit.”

The analysis is sound and proper but also a bit unnecessary, because for all of the importance put on all of those factors, the one that most heavily influences everything is performance.

Concern over management does add a proverbial straw to the load, but it’s not going to be the one that breaks the camel’s back.

An investor who owns a fund going through this kind of transition most likely will ride it out; someone on the outside looking in might put the fund on alert and wait to see where things go from here.

But change the ratings on the fund — let alone get to where a sell-off is recommended — over changes at the parent company?

That’s not happening so long as a big-name manager like Gross remains in place and people think he’s still a genius.

If people wanted to sell out of Pimco Total Return, they didn’t need the Gross/El-Erian drama as an excuse.

The fund was a below-average performer in 2013 and has been near the bottom of its category — intermediate-term bonds — for the last 12 months.

This year it has returns that are about two-thirds the industry average, and a recent monthly return — right as concerns over the management peaked — the fund was down at or near the very bottom of the peer group.

Despite those struggles, the fund is in the top 5 percent of its peer group for the 10- and 15-year time horizons, and remains comfortably above-average over the last three and five years.

“If you wanted an excuse to get rid of Pimco Total Return, you’ve had it for a year now,” said industry consultant Geoff Bobroff. “But people aren’t looking for an excuse; they want to hold the fund because they still believe in Bill Gross, the same way they have for years.

“Meanwhile, the risk-assessment experts and the consultants hired by institutional investors are looking for an excuse to justify what they do, and to prove the value of their services,” Bobroff added, “so they did analysis and came to the same conclusion most people would have come to anyway, on their own.”

It doesn’t mean the analysis is wrong or overblown.

It’s a red flag for any outsider trying to choose between Pimco and competitors that analysts say have a similar process and performance without the drama, but it shouldn’t sway investors who were already in the fund.

Selling the fund over reports of turmoil in the board room would be crossing that fine line between being aware of a potential trouble spot and overreacting to headlines.

Said Bobroff: “No one is sticking with a fund that has horrible performance just because it has good stewardship, and nobody is selling their best funds just because something happened in the board room that has the industry talking ... and that’s how it really should be.”

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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