Investors Pull $19.4 Billion From Pimco Fund -- Update

By Mike Cherney And Kirsten Grind 

The shadow of Bill Gross continues to hover over Pacific Investment Management Co.

The giant bond manager on Friday disclosed a sharp rise in outflows from the flagship fund run by Mr. Gross, who left abruptly in late September. In December clients pulled $19.4 billion from Pimco's Total Return Fund, more than double the $9.5 billion that were yanked in November.

But the new outflows were lower than the $23.5 billion and $27.5 billion lost in September and October, respectively, as investors reacted to Mr. Gross's acrimonious departure to Janus Capital Group Inc., a rival investment firm. Total assets in the Total Return fund, which Mr. Gross managed for 27 years, dropped to $143.4 billion from $162.8 billion in November.

The December pullback suggests the Newport Beach, Calif., firm isn't yet clear of the investor flight triggered by months of internal strife and the departure of its co-founder at the end of September. Pimco, a unit of German insurer Allianz SE, also lost its Chief Executive Mohamed El-Erian last year after clashes with Mr. Gross.

Outflows from the Total Return Fund are expected to vary from month to month, but in December one of three new Total Return managers, Scott Mather, said the firm had moved past the "knee-jerk reaction in terms of flows that you would expect to happen." On Friday, a Pimco spokesman said the pace of withdrawals during December was "significantly below" the peak in September and early October. Mr. Gross left Pimco on Sept. 26.

"I think they've weathered the worst of the storm," said Jeff Tjornehoj, head of Americas research at fund manager Lipper. "But now it's just a matter of convincing more people to get into the fund than leave."

The jump in December withdrawals came as Total Return's performance slipped. The fund, which invests in government and corporate bonds, was down 0.48% for the month, worse than the benchmark Barclays U.S. Aggregate index and the average return of other funds in its category, according to Morningstar. The return figure includes changes in the prices of the bonds held by the fund and interest payments on those securities.

For the full year, the Total Return Fund gained 4.69% compared with 5.97% for the Barclays U.S. Aggregate index.

Traders and portfolio managers say Pimco is a calmer place to work now that Mr. Gross is gone, according to people familiar with the situation. Pimco also has made a series of aggressive moves internally to handle the outflows, including taking positions against rival managers to boost returns, The Wall Street Journal has reported.

But rivals are still trying to position themselves to attract some of the Pimco pullback, and many pension funds and large 401(k) plans haven't yet made decisions about whether to move their money.

To be sure, Pimco had $1.87 trillion under management as of Sept. 30 and can absorb big, billion-dollar losses. Research firm Morningstar Inc. has concluded outflows would have to reach $350 billion in the next two years before Pimco's "ability to function at a high level would be impeded," according to a recent report.

Pimco had a secret succession plan in place for Mr. Gross's departure, The Wall Street Journal has reported, and the firm moved quickly to appoint Daniel Ivascyn as group chief investment officer of the firm, as well as three new portfolio managers for the Total Return Fund.

Yet Total Return's performance lagged behind for the year, said Morningstar official Russ Kinnel, because it invested heavily in emerging-market and high-yield bonds that fared poorly in 2014. It also invested too little in long-dated bonds that did well, said Mr. Kinnel, who is director of manager research. Some of these bets were put in place before Mr. Gross left. Morningstar still gives Total Return a "bronze" rating, the third-highest out of five.

Some funds that compete with Total Return attracted more money than they lost during December, according to estimates from Morningstar. The $51 billion Metropolitan West Total Return Bond fund, which is owned by parent TCW Group Inc., saw inflows of about $7.2 billion, while the $40 billion DoubleLine Total Return Bond fund saw inflows of $1.3 billion.

Pimco wasn't alone in its bad bets last year. Many portfolio managers expected the Federal Reserve to raise interest rates as the economy improved, which would have sent bond yields up and prices down. But geopolitical uncertainty and slowing economies overseas led to an unexpected rally in government bonds.

But for Marc Henn, a financial adviser in Cincinnati, the Total Return Fund's performance during 2014 contributed to a decision to sell holdings worth millions in recent months. The president of Harvest Financial Advisors said he was also concerned about the personnel changes, and an investigation by federal regulators into how a Pimco exchange-traded fund similar to Total Return valued its bondholdings.

"Their investment decisions haven't been the best over the past year and a half," said Mr. Henn, whose firm oversees about $400 million. "That started prompting us to take look."

Brad Cougill, chief investment officer at Deerfield Financial Advisors in Indianapolis, has also been advising clients who have exposure to the Pimco Total Return Fund through retirement plans to switch to a different investment.

"If there's another option that doesn't have that uncertainty surrounding it, we just thought that was a more appropriate choice for our clients," said Mr. Cougill, whose firm helps manage about $500 million.

Write to Mike Cherney at [e-mail] and Kirsten Grind at [e-mail]

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