The Securities and Exchange Commission (SEC) is said to be investigating the pricing of PIMCO’s $3.6 billion Total Return exchange-traded fund (ETF) in the latest blow for the manager.
The Wall Street Journal reported that the SEC was looking into whether PIMCO had misstated the ETF’s returns, which is designed to be a low-cost alternative to founder and CIO Bill Gross’ flagship PIMCO Total Return fund. The newspaper reported that the investigation “has been underway for some months”, and claimed Gross had been interviewed by the SEC.
The investigation revolves around whether PIMCO overstated the value of some investments made by the ETF, thereby giving potentially inaccurate information about valuations to investors—which, if true, would be a breach of SEC securities rules.
The ETF deals in small, illiquid bond issuance—which can be difficult to value—as well as large, more easily tradeable securities. It is these smaller bonds that are said to have been susceptible to inaccurate valuations, the Journal reported.
The SEC has not made a public comment on the matter, but a PIMCO spokesperson told the Journal that the company “has been cooperating with the SEC in this non-public matter. We believe our pricing procedures are entirely appropriate and in keeping with industry best practices.”
The main PIMCO Total Return fund is not said to be under regulatory scrutiny, but has endured almost a year and a half of solid monthly outflows. Investors have withdrawn an estimated $65 billion from the fund, which is now $222 billion in size—although it remains the largest mutual fund in the world.
The fund’s performance has stuttered in the short term, while PIMCO was also hit by the unexpected departure of CEO and co-CIO Mohamed El-Erian in January. El-Erian’s resignation gave rise to speculation about the relationship between him and Gross at PIMCO, with several reports alleging the two had clashed.
Morningstar downgraded its “stewardship” and “parent pillar” ratings for PIMCO in March following El-Erian’s exit, citing a heightened level of uncertainty about the company’s new management structure. Gross has appointed six deputy CIOs and a separate CEO, Douglas Hodge.
In May, parent company Allianz reported a 28% fall in profits in the first quarter of 2014 compared with the first three months of 2013, largely due to the outflows from PIMCO funds. The company’s sales slump saw it drop out of the top 25 asset managers in Europe by distribution in 2013.
Perhaps Gross can take comfort from PIMCO’s nomination for Chief Investment Officer’s fifth annual Industry Innovation Awards, for its tail risk strategies.