Should Pimco exit the mutual fund business?
Josh Brown passes on the question being asked at brokerages around the country: “Do we need to fire Pimco?”
If I were Pimco, however, I’d give serious consideration to the flipside of that question. Should Pimco, in other words, fire its brokers?
Here’s Josh:
Pimco’s flagship fund, Total Return, can be found in allocations everywhere. From pensions to endowments, from 401(k) sponsors to retirement plans, in the accounts of private investors and insurance companies, wirehouse FAs, bank branch brokers, RIAs – Total Return is ubiquitous. It’s got one of the only mutual fund ticker symbols that brokers call out as though it were a stock, as in “Why don’t you just buy the guy some P-Tax”, a shorthand for PTTAX, the call letters of the fund’s A class shares.
And here’s the problem: for all that Pimco CEO Doug Hodge can repeat until he’s blue in the face that Pimco is much bigger than Total Return, the fact is that no one is going to listen. Pimco will be judged by the fate of Total Return, a juggernaut of a bond fund whose raison d’être has just spectacularly walked out the door.
So, what’s the solution? How about this: Pimco should get out of the mutual fund business altogether. Just liquidate all of its actively-managed mutual funds, and go for a barbell strategy. If you’re an individual with money to invest, you can buy a passively-managed ETF, or maybe something else from within the Allianz family. And if you want active management, then you need to be a serious Pimco client, big enough to get personal attention, your own benchmarks, your own segregated funds, the whole bit. If you come to Pimco with more than say $1 billion to invest, the company will build you a bespoke portfolio, giving you exactly the strategy you want.
Remember, here, that the Total Return Fund accounts for only about $240 billion or so of Pimco’s $2 trillion in total assets under management: Hodge isn’t wrong when he says that Pimco is much bigger than Bill Gross’s old fund. And the fact is that most of Pimco’s money is “dark”: it’s not invested in any of the firm’s mutual funds at all. It’s already being managed, on a bespoke basis, for some (probably most) of the biggest investors in the world — sovereign wealth funds foremost among them.
Bond funds are curious beasts at the best of times, none more so than Total Return — a fund whose name makes it sound like an aggressive hedge fund, but whose investors are generally looking for the relative safety of bonds, rather than the risk inherent in stocks. Pimco likes to talk of Total Return as a “strategy”, but really the only strategy, for most of its lifetime, was “let’s give Bill Gross lots of money and see what he does with it”. That strategy’s time has come — to be honest, it stopped being a sensible one a couple of years ago, not on Friday.
There’s a case to be made, then, for Pimco to get out in front of the painful and inevitable exodus of funds from Total Return. Rather than try to keep those assets, why not hand them back?
Here’s one reason why that might be a good idea: Pimco is too big. Its assets are so enormous, it can’t twitch without moving the market. There’s a hilarious bit in today’s press release where Total Return’s new managers start talking about how it “is invested in highly liquid securities, and currently has above average liquidity” — er, no, it isn’t. It’s invested in bonds. And if you’re invested in bonds, you’re having liquidity issues.
Pimco, along with all other operators of bond mutual funds, is constantly at risk of a wave of redemptions: that’s one of the reasons why it can credibly be considered a systemically important financial institution. If Pimco got out of the mutual fund business, a lot of that risk would go away: its big bespoke clients don’t suddenly dump their holdings overnight, and if they did want to move to a different manager, would probably just move their assets over to the new guy, rather than forcing Pimco to sell them in the open market. The new manager would then start selling bits and pieces, around the edges, but in a much less disruptive manner to bond markets more generally.
With hindsight, Pimco’s glory years were when it had between about $500 billion and $1.25 trillion in assets under management. $2 trillion is too much — and one easy way of getting back down to that sweet spot would be to just jettison all of the mutual funds. There are big financial reasons why fund managers always want to increase their assets under management, of course, but maybe it’s time for Pimco to take a leaf out of the book of various hedge fund managers, and just say that it wants out of the game.
At a stroke, Pimco would no longer be defined by the vicissitudes of Total Return, because Total Return would not exist any more. Instead, it would be an ultra-high-end bond-management company for institutions with multi-decade time horizons and billions of dollars to invest; it would also be a provider of ETFs for everybody else. That’s it; that’s enough.
The new management at Pimco don’t want to be household names; no one there has any desire to spend countless hours on CNBC and be known as the “bond king”. The high-visibility strategy worked well for Bill Gross and Mohamed El-Erian, but it’s gone now, and with it should go the attempt to keep Pimco growing into an ever-larger investor base. Jason Zweig is absolutely right to differentiate “performance” from returns: when the fund manager is involved in a grand public performance, investor returns (which matter much more than investment returns) always suffer.
Pimco shouldn’t reach its clients on TV, it should reach them in person, and talk in detail about exactly what they want to achieve. And it should then put the best professionals in the business to work executing against that mandate. It would still make billions of dollars in profits, even if mutual-fund fees are bigger, on a percentage basis, than the fees paid by sovereign wealth funds and the like. But it would never again need to worry about what Josh Brown, and his ilk, might think of it.
Felix Salmon is a senior editor at Fusion
