Pimco's $18 Billion Question: What Should Count as New Assets?by
Money managers differ on how to classify reinvested dividends
Pimco change cut reported outflows by $18 billion last year
A change in how Pacific Investment Management Co. accounts for reinvested dividends and capital gains helped the bond manager minimize an exodus of clients by about $18 billion last year.
Pimco at the start of 2015 began counting such payouts as inflows, a departure from the way it used to report flows. The change, made as the Newport Beach, California-based firm was under pressure to stem a flood of redemptions following the departure of co-founder Bill Gross, has put a spotlight on a controversial issue among money managers -- what to count as new money.
Competitors including Vanguard Group, Fidelity Investments, DoubleLine Capital, Legg Mason Inc. and JPMorgan Chase & Co. all discount or exclude payouts that clients elect to leave in the funds. Others, such as BlackRock Inc., the world’s largest money manager, and Janus Capital Group Inc., Gross’s new employer, roll such reinvestments into net flows.
Pimco is under pressure to reverse client withdrawals and cut expenses after losing about 30 percent of managed assets since they peaked at $2.04 trillion in 2013. The firm’s parent, German insurer Allianz SE, last week appointed Jacqueline Hunt to lead asset management, replacing Jay Ralph. Allianz Chief Executive Officer Oliver Baete said in February he expects Pimco to see inflows by the end of the year.
Pimco said it had been considering the change long before Gross departed, to align its methodology with other parts of Munich-based Allianz.
“Given the need for consistency and greater clarity, Pimco decided to implement the change at the most responsible time for any accounting change -- the start of the new fiscal year,” spokesman Michael Reid said in an e-mailed response to questions. “While it’s true that Pimco was under greater scrutiny from investors at that time, that made it all the more important to be consistent with the Allianz group in our approach.”
Pimco had 16.6 billion euros of reinvested dividends and capital gains last year (equal to about $18 billion as of Dec. 31), Allianz said in a Feb. 19 presentation. Without that cash, Pimco’s 125 billion euros in outflows would have been 141.6 billion euros, or 13 percent higher.
“I can’t speak to their actions directly, but a benefit of the change in reporting would be improved perceptions by investors,” Todd Rosenbluth, director of ETF and mutual fund research at S&P Global Market Intelligence, said in an e-mailed response to questions. “Investors will see inflows or outflows as a sign of general confidence. So if you were considering putting money back into Total Return, you might be concerned that others were continuing to pull money out.”
Allianz disclosed the change in footnotes to earnings presentations starting with the first quarter of 2015, which ended six months after Gross’s exit. Pimco cited the reporting switch this January, when it said its flagship Total Return Fund in December had its first net deposits since April 2013. It noted that the fund’s redemption streak would have extended to 32 months without the reinvested money.
The majority of last year’s reinvested cash came in the fourth quarter, when Total Return had a December inflow of $1.3 billion, according to Pimco. Bloomberg and Morningstar Inc., backing out all or most of the reinvested payouts, estimated outflows for the month of $2 billion and $1.6 billion, respectively. Reported net outflows resumed at Total Return in January and February, when reinvestments declined, according to Pimco.
Including reinvestments “is consistent with general accounting treatment, which characterizes anything that leads to the creation of new shares as an inflow,” according to Reid. “Reinvested distributions reflect the choice by an investor to put that payment back into the fund, thereby creating new shares.”
More peers are implementing the same reporting approach, Thomas Atkins, an Allianz spokesman, said by e-mail. “This is why Allianz made the move.”
For many investors, reinvesting dividends and capital gains is a set-it-and-forget-it decision rather than an active monthly choice, according to S&P Global’s Rosenbluth. The Investment Company Institute, like Bloomberg and Morningstar, doesn’t classify reinvestments as inflows.
“A shareholder that has set up dividend reinvestment, which is quite common, does not consciously make a decision to buy more of the fund,” Rosenbluth said.