In the days following Bill Gross's departure from Pimco, advisor Joe Franklin says his firm took action to shift client investments.
"We immediately got out of the Pimco Total Return fund being run by Gross," says Franklin, who runs an eponymous wealth management firm in Hixson, Tenn. "We already were almost out anyways, because the fund was so huge, it would be hard for anyone to manage a fund that size."
Franklin's firm still has investments in some Pimco bond funds, he says, but has primarily moved its fixed-income investments to other fund families. Janus Capital Group, which is Gross's new employer, is not among them, he adds.
"It's hard to know what infrastructure was put in place and the processes put in place at Janus," Franklin says. "I'm doubtful that Gross has been able to move all of his talent there."
Franklin is hardly alone. After Gross exited the firm on Sept. 26, investors yanked a record $27.5 billion from Pimco's Total Return Fund over the course of October. And it's still too early to see whether Gross will be able to lure money over to Janus, says Barry Fennell, senior research analyst at Lipper Americas Research.
Yet both advisors and industry observers note that Gross's sudden departure just accelerated an investor retreat already in progress. Pimco has "been in redemption mode for most of the last few months," says Fennell. "And there's a good chance they will remain in redemptions for the next two to three months."
The October outflows make it Total Return's worst month ever, topping the $23.5 billion that exited the fund in September -- largely in the days immediately following Gross's move. Releasing the October figures, Pimco noted in a statement that half of the withdrawals occurred during the first five trading days of October, and that redemptions "slowed sharply" afterward.
ALREADY LOOKING
Fennell notes that investors were already looking at alternatives to Pimco even before Gross's departure. Among the problems, he says, is that the fund's performance has lagged the broader Barclays U.S. aggregate bond index by almost 100 basis points. That underperformance, he says, "is an extra catalyst to leave the fund," he says.
Other planners say Gross's departure was an inflection point. "I am reaching out to clients and recommending they bail," says David Mendels, director of planning for Creative Financial Concepts in New York. "There is so much uncertainty there that it doesn't give me a reason to stay."
Mendels says Gross was the reason why he kept funds with Pimco in the first place. "When I go into a managed mutual fund, it is primarily for the jockey, and the jockey changed," he explains, adding that he is reallocating those positions among other bond funds he holds. "There are still some good people there -- Dan Ivanscyn was named bond fund manager of the year -- but I didn't go in his fund. Add to that all the uncertainty -- what impact are these massive withdrawals going to have, nobody knows? I wish them well."
Yet other advisors downplayed a broader spillover at Pimco. Dean Harman, founder of Harman Wealth Management in The Woodlands, Texas, says concern about the Total Return Fund will not affect his decisions regarding other Pimco funds in client accounts.
He says he expects outflows to get worse for Total Return, since it is popular in many 401(k) accounts and many companies have put the fund on their watch list, but downplays a spillover for other Pimco products. "I don't expect there to be big outflows just because it's Pimco," Harman says. "We don't look at it as a Pimco problem, but more a problem with the fund."
REASSURING CLIENTS
Another challenge for advisors may be how to discuss Pimco holdings with worried clients.
At Modera Wealth Management, Westwood, N.J.-based investment analyst Peter Somich says many clients called after Gross's departure, inquiring about Pimco positions in their portfolios. Somich says that because the firm's positions with Pimco were not managed by Gross, there wasn't much of an impact when he announced his departure.
"We explained our philosophy," he says. "Some clients understood, but others were nervous overall and wanted to find an alternative for their portfolio."
The firm is trying to avoid a knee-jerk reaction, Somich says. "We don't want to be part of the fire sale, knowing that Pimco has a very deep bench of skilled and intelligent managers. We wanted to let the dust settle and then reevaluate at that time."
Similarly, New York advisor Erika Safran characterizes the mass outflows from Pimco as an overreaction.
"The day he resigned, my only thought was, 'Do we add to this position?'" she says. "I wasn't of mindset that that entire bond market would implode. This wasn't a Lehman Bros. event; this was a fund manager going. I don't like panic situations -- if anything it probably created opportunity."
Her firm did not sell out all of Pimco funds after the news of Gross's departure, she says, and clients still hold some Pimco income funds. "I didn't see this as a reason to panic or run to the hills -- the same reason I don't see anyone running to Janus to follow this amazing fund manager."
OUTSIZED PERSONALITY
Still, the impact of Gross's oversized personality on Pimco's performance cannot be overlooked, says Hutch Bryan, director of fixed income at South Texas Money Management in San Antonio.
"Obviously the firm's reputation was bruised by the unexpected departure by Gross and earlier this year Mohammed El-Arian," Bryan says. "I think there are some investors in the fund that decided not to wait and took action, given that they didn't really know too much about the new management team taking over the Total Return Fund.
"That's the risk of having a star manager," Bryan continues. "He was really the face of the Pimco firm. Obviously Pimco has lots of talented people, but if you ask a person in the street who was the most instrumental, it was Bill Gross."
Having met Gross during due diligence trips to Pimco headquarters, Franklin says that Gross lives up to a reputation of possessing a grand opinion of himself. "I don't think he wants to retire until he puts up some strong numbers," Franklin says. "He's got a big ego and that isn't necessarily a bad thing -- I think he will definitely be motivated to prove himself again."
Meanwhile, Pimco will face increased scrutiny on what it does next -- both within and outside the Total Return Fund, says Larry Petrone, director of research at asset management consulting firm Kasina.
"There will be a laser focus by advisors who stick with Pimco on its performance," Petrone says. "The sentiment will be, 'Let's look at performance relative to peer group; are they able to be in the top quartile over that period of time? Now that Gross is gone, let's see if they are able to accomplish that still.'
"It's not entirely fair to Pimco," he adds -- "but that is the reality of industry."
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