A new research note from Morningstar analysts Miriam Sjoblom and Eric Jacobson suggests PIMCO is poised to regain its position as the best bond firm on the Street.
When Bill Gross left PIMCO three years ago, investors went with him. PIMCO’s funds saw significant outflows and many observers wondered if CIO Dan Ivascyn would be able to keep the bond giant afloat. Morningstar says PIMCO has used the past three years to create a more diversified business, backed by a strong track record, and recently upgraded its views to “positive” from “neutral.”
New funds, new faces
Investors are most familiar with PIMCO’s flagship Total Return Fund. At the time of Gross’ departure, the Total Return strategy had faced years of redemptions. Those redemptions have slowed, and the fund now stands at $155 billion as of September 2017, down from $377 billion in 2014. PIMCO Total Return is still a solidly performing bond fund, but it’s hardly the flagship it once was. Now, two new PIMCO funds are capturing investors’ attention and asset flows.
PIMCO’s Income Strategy has tripled in size since 2014 and is the firm’s largest at $177 billion. The strategy invests in deep value credit opportunities like nonagency residential mortgages. These mortgages took a huge hit in the financial crisis and have rebounded, driving much of PIMCO Income’s performance over the past three years. That track record has put PIMCO Income at or near the top of the US multisector bond Morningstar Category consistently.
Alongside PIMCO Income, the firm’s dedicated investment-grade credit strategy has grown to $167 billion. The growth of these two strategies has helped firm assets rebound—overall AUM was $1.3 trillion by the end of September, up from a post-Gross low of $1.1 trillion in 2015. The analysts note that not only has AUM rebounded, but that PIMCO is now less dependent on the fortunes of a single fund. PIMCO also raised its fees on the Income Fund by 11 basis points, without triggering redemptions—a sign that investors are willing to pay for its strategies.
While Ivascyn continues to lead investment strategy, PIMCO has also taken steps to fill out its C-suite in the wake of several high-profile retirements. In November of last year, Manny Roman took over as CEO from Doug Hodge. Robin Shanahan and Peter Strelow also took over as co-chief operating officers, following the retirement of Jay Jacobs. The new guard intends to keep PIMCO’s performance-based model, which has gone over well with investors. Morningstar analysts note that Roman’s previous role as head of quant firm Man Group could help PIMCO stay relevant as quant funds capture more of the investment marketplace.
Bond king once again?
If PIMCO stays on course, the departure of Bill Gross may just end up being a blip in the firm’s history. Morningstar notes that investors seem to feel comfortable with the leadership of Roman and Ivascyn. Roman has signaled his intent to continue to improve PIMCO’s execution by bringing on quant specialists to fine-tune portfolios and make risk-factor exposures more cost effective. Still, the firm will have to manage its market share—the rise of credit ETFs and asset growth at many of PIMCO’s competitors will make it imperative that the firm continues to outperform in order to regain the throne.