Gross Left Behind in Pimco Return to Top as Deputies Rise

Bill Gross promised in May that funds managed by his Pacific Investment Management Co. would be back on top by the end of the year. So far, his prediction is looking good -- unless you count the funds that Gross himself runs.

Nine of Pimco’s 15 largest mutual funds are beating at least 75 percent of peers so far this year, according to data compiled by Chicago-based research company Morningstar Inc. None of those top performers are managed by Chief Investment Officer Gross. Of the four funds trailing more than half their rivals, three including the Pimco Total Return Fund are run by the 70-year-old investor known as the bond king.

Gross has been undermined this year by bets on shorter-term debt, trailing 89 percent of his peers in July, as rising managers including Daniel Ivascyn, Mihir Worah and Mark Kiesel have outperformed. Pimco appointed six deputy CIOs after the sudden departure of chief executive officer Mohamed El-Erian to add more voices to setting investment decisions at Pimco and convey the message that the $2 trillion firm is more than a one-man show.

“A lot of the success at Pimco does not revolve around Bill Gross,” Jeff Tjornehoj, an analyst at Denver-based Lipper Inc., said in a telephone interview. “This shows that the firm has a deeper bench than people may understand.”

Mark Porterfield, a spokesman for Newport Beach, California-based Pimco, didn’t return e-mails and a phone call seeking comment.

Top Percentile

Deputy CIO Ivascyn’s $37 billion Pimco Income Fund has prospered by owning mortgages not guaranteed by the federal government and high-yield bonds and commercial mortgages, according to the fund’s second-quarter report. The fund has gained 6.8 percent this year beating 90 percent of rivals and Morningstar named Ivascyn and the co-manager of the fund, Alfred T. Murata, fixed income managers of the year for 2013 in January.

Kiesel’s $5.9 billion Long Term Credit Fund has advanced 13 percent to beaten 99 percent of peers, the data show, having benefited from owning bonds issued by natural gas pipelines, homebuilders and media businesses. Worah has outperformed 97 percent with his $15.3 billion Pimco Real Return Fund, which attributed its strong performance to inflation-linked bonds in Australia as well as Italian and Spanish debt.

Arnott’s Funds

Two other funds that are doing well this year are collections of Pimco funds run by Robert Arnott, chief executive officer of Newport Beach, California-based Research Affiliates LLC. The $34.6 billion Pimco All Asset Fund is beating 76 percent of rivals this year; the $27.4 billion Pimco All Asset All Authority Fund is ahead of 68 percent of peers, Morningstar data show. On the equity side, Pimco EqS Pathfinder Fund, beat 83 percent of rivals.

Total Return has advanced 3.3 percent this year, beating only 24 percent of comparable funds, Morningstar data show. Pimco’s Total Return Fund has been hurt by Gross’s decision to emphasize intermediate-term bonds over longer-dated ones. Five-to-seven Treasuries have returned 2.4 percent this year, according to the Bank of America Merrill Lynch index data, while 30-year Treasuries have returned 15 percent.

Total Return’s performance was hurt last quarter by “an underweight to the long-end of the U.S. yield curve, as longer maturity yields declined,” according to the fund’s quarterly investment report through June 30.

Redemptions have plagued Total Return for 14 straight months, the longest streak on record. Investors have pulled almost $70 billion from the fund since May 2013, when the Federal Reserve first hinted it would unwind stimulus measures, sparking concern that rising interest rates would create losses in bond funds.

Lost Title

Total Return oversaw $225.2 billion through the end of June, Morningstar data show, down from a peak of $293 billion last year. While it’s still the world’s biggest bond fund, it lost the title of largest mutual fund last October to the Vanguard Total Stock Market Index Fund, now $302.8 billion, according to data compiled by Bloomberg.

“Believe me, by the end of 2014, Pimco’s going to the at the top, not close to the middle,” Gross said in a May 14 interview with Erik Schatzker and Olivia Sterns on Bloomberg Television. “We’re sticking to our guns, our new guns in terms of the new neutral.”

New Neutral

That “new neutral” is Pimco’s investment thesis for the next three to five years, a scenario characterized by global growth converging toward lower, more stable speeds and interest rates that remain below their pre-crisis equilibrium.

The new neutral also predicts less volatile markets, prompting Pimco to wager that volatility across markets will remain abnormally low. The firm is selling “insurance, basically, against price movements,” Gross said in June. The Chicago Board Options Exchange Volatility Index, which measures price swings in stocks, has increased since a reaching a seven-year low of 10.61 on June 18. The metric jumped to 16.95 as of yesterday, back towards its five-year average of 19.3.

Gross’s Low Duration fund is ahead of 44 percent, and the Unconstrained Bond Fund, which Gross took over last year, is doing better than 43 percent of comparable funds, Morningstar data show.

Pimco attributes the Unconstrained fund’s underperformance to a lack of exposure to the longer end of the curve for U.S. government debt, as well as being short German bund futures. The Low Duration fund missed rallies in the Japanese yen and euro “as the currencies appreciated against the U.S. dollar,” according to the fund’s quarterly report.

The fourth underperforming fund, Pimco High Yield, which is managed by Andrew Jessop, is in the 67th percentile. That fund chose the wrong health care and utilities bonds in the second quarter, and missed out on a rally in BB-rated debt and longer-term bonds, that fund’s report said.

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