Bill Gross’ lawsuit has not changed Morningstar’s rating of PIMCO, but the ratings agency will monitor how the firm charges fees.
Morningstar said it was concerned about references to how PIMCO calculates and discloses fees, especially “Gross suggesting that PIMCO has been deliberately obfuscating the allocation of some fees in order to make it easier for the firm to raise them.”
The lawsuit claimed PIMCO Managing Director Brent Harris was “particularly proud of his efforts to raise the annual fees… through creatively labeling such fees ‘administrative costs.’”
The complaint added that Harris’ efforts in raising fees and the resulting profits “led to conflict” with Gross.
When Gross suggested Harris begin reducing fees, the managing director became “one of the most vocal supporters for ousting Mr. Gross,” the suit said.
Morningstar first raised concerns about PIMCO’s fee practices in 2011, particularly its splitting of costs into “investment advisory fees,” and “supervisory and administrative fees.”
“What is noteworthy is the parity between those line items,” Morningstar said. According to its data, both types of fees for the flagship Total Return Fund added up to more than $450 million each in 2010.
“It doesn’t make sense that the true cost of servicing PIMCO’s funds is anywhere close to their fair value of investment advisory services—for one of the best mutual fund managers around,” the ratings agency added.
PIMCO’s parent company Allianz said the lawsuit “has no merit.”
The Newport Beach, California-based firm will keep its stewardship grade of C, the ratings agency said, while the Total Return Fund would also maintain a bronze rating.
Related: Inside Bill Gross’ Lawsuit