PIMCO: Outflows Do Not Pose Systemic Risk

Asset managers and outflows from their funds do not pose a systemic risk to the financial system, PIMCO has argued.

In a 27-page letter to the Financial Stability Board (FSB), the Newport Beach, California-based bond shop said its handling of runs from the Total Return Fund after Co-Founder and CIO Bill Gross’ exit proves their stability.

“There were no ‘fire sales’ or ‘forced selling,’ and PIMCO never had to—or even considered—supporting the Total Return Fund or any of its other funds,” CEO Douglas Hodge wrote.

PIMCO’s submission comes as the FSB and other regulators are assessing the systemic risk posed by the largest asset managers and investment funds in the wake of the financial crisis. Earlier this month, BlackRock argued that risks in asset management should be addressed through product and market regulation rather than a “too big to fail” approach.

According to the firm, Gross’ abrupt resignation in September last year sparked $23.5 billion and $27.5 billion in outflows in September and October 2014, respectively, “specifically concentrated in the days surrounding the announcement.”

Despite heavy runs, PIMCO said it was able to maintain risk exposures and replenish cash buffers across other funds. The firm said liquidity and redemption risks were a priority, adding that it used derivatives for exposures and inflows to support cash buffers.

“There were no ‘fire sales’ or ‘forced selling,’ and PIMCO never had to—or even considered—supporting the Total Return Fund or any of its other funds.” —Douglas Hodge, PIMCOFurthermore, concerns about asset sales putting “downward pressure on market prices” are misplaced, PIMCO claimed, as bond market performance was driven by macroeconomic and geopolitical issues, “not PIMCO’s redemption activity.”

“Even if mass redemptions were to occur and prices were to decline, we do not believe they would lead to a systemic event given the unlevered nature of mutual funds,” Hodge said. “While investors may lose invested capital, those losses have limited spillover effects to the rest of the financial system.”

In the immediate aftermath of Gross’ exit, fixed income managers told CIO the longer-term impacts on bond markets from the move would be minimal. This was despite speculation that some market shifts were at least partially linked to large PIMCO exposures that were expected to be unwound.

The now-$110 billion Total Return Fund surrendered its crown as the world’s largest bond fund to Vanguard in May, following 24 consecutive months of outflows. The firm’s data showed investors had pulled more than $110 billion from the fund since its peak of $293 billion two years ago.

In the same month, the firm’s Global Equities CIO Virginie Maisonneuve resigned after 17 months on the job. It was also reported that PIMCO would be shutting down two active stock strategies.

However, the bond giant continues to push into equities and announced Monday that it has launched six new stock funds in collaboration with Research Affiliates using the subadvisor’s smart beta strategies.

PIMCO said the new funds will cover equity exposures in US large, US small, international, global, global excluding the US, and emerging markets.