PIMCO's 2013 Struggles

John Rekenthaler

Not According to Plan
Mohamed El-Erian has them muttering. Steve Goldberg of Kiplinger writes, "El-Erian's PIMCO Fund falls flat … PIMCO Global Multi-Asset has been little short of a disaster." An email correspondent, after seeing yet another headline about PIMCO's forecasts, quips that El-Erian is "overexposed in the media and underperforming on the fund statement."

The reason: PIMCO Global Multi-Asset (PGMAX) is down 8% for the year to date (through Nov. 25), which is something of a feat given that developed-markets stocks have been strongly positive in 2013, and developed-markets bonds have been roughly flat (aside from long U.S. bonds, which have taken a beating). The fund bet big on a small asset class--emerging-markets bonds. As of Oct. 31, the fund had a 24% position in emerging-markets bonds, which make up less than 1% of its investment universe. Now that's investing with conviction.

PIMCO's 2013 problems are not confined to El-Erian's funds. Officially, Mohamed El-Erian is listed as a manager or comanager of only two of PIMCO's 87 mutual funds, one of which, Global Advantage Strategy Bond (PSAIX), is faring pretty well. (His influence as a key PIMCO strategist is clearly much larger, but that effect is difficult to quantify.) Through yesterday, 22 of the company's funds showed in the bottom decile for their year-to-date return, by investment category. In contrast, only six PIMCO funds were in the the top 10%.

Nine of the laggards come from a single PIMCO investment unit, the group responsible for the company's target-date and retirement-income funds. Its funds are small by PIMCO standards. On the other hand, entering 2013, PIMCO's target-date series was making a name for itself and was regarded an important growth area for the company. Barring a massive relative turnaround in those funds' performances, that sales momentum will be stalled.

However, the problems have not been confined to the company's smaller funds. The company's flagship fund, Total Return (PTTRX), which made PIMCO's reputation, continues to hover near the category average. That's no disaster, but Total Return didn't become temporarily the world's largest mutual fund (before being dethroned earlier this year by Vanguard Total Stock Market Index (VTSMX)) by matching the competition during lean years. In 2008, for example, when the rest of the category averaged a 4% loss, PIMCO Total Return scored a profit.

The company's next two largest funds after Total Return, All Asset (PAAIX)and All Asset All Authority (PAUIX), are both in the bottom quintile for the year. Managed by a subadvisor, Research Affiliates, the All Asset funds have suffered from a similar affliction as Global Multi-Asset Class: too few stocks, too many emerging-markets bonds. Once again, the funds' stumbles come after strong sales figures.

Aside from the two All Asset funds, and not counting Global Multi-Asset (which despite its notoriety is not one of PIMCO's bigger funds), five more of PIMCO's 20 largest funds land in the bottom quintile for the year to date.

When a hot fund company hits a rough patch, the immediate thought is that the company must have grown too rapidly and it's having difficulty assimilating the new assets and adjusting to the demands of being an industry giant. That doesn't seem to be the case with PIMCO. Yes, Morningstar analyst Kevin McDevitt argues that the All Asset All Authority Fund is now encountering asset constraints, in part because of its leverage, and the enormity of Total Return has long been a concern. Elsewhere, though, this year just seems to be one of those things.

Every fund company encounters favorable and unfavorable climates for its investment lineup, and every fund company makes decisions that help or hinder its cause. In 2013, PIMCO flipped two tails. The investment climate was unfavorable and the company's tactical views misfired.

PIMCO's balanced funds are typically light on stocks and heavy on commodities, Treasury Inflation-Protected Securities, emerging-markets bonds, and other alternatives. (That positioning makes perfect sense for an organization with roots in bond-market analysis and that spends most of its time analyzing economic signals, not doing company-by-company research.) Thus, 2013 was bound to present challenges. That the company was particularly skeptical on equities and an aggressive buyer of emerging-markets bonds hurt further.

Such is the investment business, especially when it comes to the difficult task of tactical asset allocation. As PIMCO has morphed from being a bond-market specialist to a generalist that prides itself on asset allocation, its mission has become harder. In its day, PIMCO Total Return would post year after year of above-average results. Expect less consistency with the company's balanced funds; such is the nature of the asset-allocation beast.

To answer my initial question: No, for the most part, I do not think that PIMCO has become too big. Perhaps it has become overly ambitious, but not overly large.

Who Knows?
The uncertainty meme is back!

Common in 2009-10, when financial journalists blamed seemingly every market ill on "uncertainty" about U.S. tax and budget policies, the meme sprang back to life in today's The Wall Street Journal. "M&A Mystery: Why Are Takeover Prices Plummeting" informs readers that"companies think it's too uncertain a time to do major deals." As a result, the average premium paid for a stock-market acquisition has declined from its 20-year norm of 30% to 19%, per the most recent data.

The article cites "political uncertainty, industry cycles, a tepid economic recovery, and expectations that the Federal Reserve may soon reverse policies that have kept interest rates near historic lows" as reasons for this slide.

Say what? As Cliff Asness would say, "When was the future ever certain?" Also, via that same data, the acquisition margin was more than 30% in 2009, when the uncertainty bell was also being rung, very loudly. With better reason too, as at the time the U.S. was not only in a recession, but it also faced a debate about the level of personal income taxes that has since been resolved.

This uncertainty lies with the source, not the markets.

John Rekenthaler does not own shares in any of the securities mentioned above.

John Rekenthaler has been researching the fund industry since 1988. He is now a columnist for Morningstar.com and a member of Morningstar's investment research department. John is quick to point out that while Morningstar typically agrees with the views of the Rekenthaler Report, his views are his own.