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Pimco Unconstrained Bond Fund Downgraded by Morningstar

April 21 (Bloomberg) -- Bill Gross’s Pimco Unconstrained Bond Fund had its analyst rating lowered by Morningstar Inc., which said the fund has had weak returns and is exposed to key risks of traditional bond funds.

Pacific Investment Management Co.’s $24.3 billion Unconstrained fund was cut to neutral from bronze, according to a report posted today on the Chicago-based research company’s website. Morningstar also lowered the analyst rating for Pimco EqS Pathfinder to neutral from bronze, while raising Pimco CommoditiesPlus Strategy to silver from bronze.

The Unconstrained fund, one of Pimco’s most important offerings as clients increasingly turn away from traditional fixed-income products in favor of more flexible strategies, returned 1.2 percent this year through April 17, behind 55 percent of similar funds, according to Morningstar data. The fund’s sensitivity to interest-rate moves makes it a less compelling option for investors seeking alternatives to conventional bonds, even though it has invested in less risky and speculative-grade debt, Morningstar’s Michael Herbst, director of active funds research, and senior analyst Eric Jacobson said in the report today.

“While there’s a reasonable case to be made that the fund’s more modest overall performance is a fair trade-off for taking less credit risk, it’s more difficult to champion the fund as a competitive non-traditional alternative to core funds when it has displayed comparatively high correlations to those funds’ key risk factors while still producing weaker returns,” they wrote.

Last year, the fund fell 2.6 percent to trail 84 percent of peers, and has lagged behind 65 percent of rivals over the past five years, Morningstar data show.

Overhauling Investments

The Federal Reserve’s timetable for pulling back its stimulus and increasing interest rates has spurred investors to turn away from traditional bond funds such as the Pimco Total Return Fund. Even as similar non-traditional bond funds have been the most popular category with investors this year, Pimco’s Unconstrained lost $2.7 billion to redemptions through March, according to Morningstar. Similar offerings from Goldman Sachs Group Inc., JPMorgan Chase & Co. and BlackRock Inc. have seen a surge of deposits.

Pimco chief investment officer and co-founder Gross replaced Chris Dialynas as manager of the fund in December and overhauled the fund’s investments. After taking over, Gross scaled back 30-year Treasuries and most of its agency mortgage bonds while boosting a wager on corporate debt through credit-default swaps, according to data on Pimco’s website.

Leadership Changes

Dialynas joined Pimco in 1980 and had managed the Unconstrained fund since its inception in June 2008. Pimco announced his plan to take a sabbatical in the beginning of December, a month before the abrupt resignation of Chief Executive Officer Mohamed El-Erian spurred leadership changes at the $1.9 trillion investment firm.

“It’s not entirely clear how much change to expect along with Gross’ leadership, but he has signaled he’s likely to be a bit more intrepid than Dialynas was,” the Morningstar analysts wrote. “That’s notable because while the fund’s performance has been less volatile than its largest competitors, it has produced correspondingly modest relative returns.”

Pimco branched into stocks by opening the EqS Pathfinder Fund in April 2010 to invest in deep-value securities. That fund, now $2.2 billion, has trailed 46 percent of rival funds over the past three years, according to data compiled by Bloomberg. Charles Lahr, a co-manager of the Pathfinder fund, left Pimco amid the management changes earlier this year.

To contact the reporter on this story: Mary Childs in New York at

To contact the editors responsible for this story: Shannon D. Harrington at Sree Vidya Bhaktavatsalam, Mary Romano

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