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Too Early to Hit the PIMCO Panic Button
Ebola is a bigger threat to the market right now than Bill Gross, according to Robert C. Lawton, president of Lawton Retirement Plan Consultants LLC in Milwaukee.
First, Lawton tells PLANADVISER, the months of outflows from PIMCO in no way resemble a run on an individual bank, and the situation differs greatly from previous examples wherein the falling out of an investment manager and his employer caused significant disruptions in firm operations. Lawton cites the example of Jeffrey Gundlach abruptly leaving TCW, where he headed the firm’s Total Return Bond Fund, to establish another firm called Doubleline Capital. “A number of people followed Gundlach from TCW,” Lawton says, “and so far no one is following Bill Gross to Janus.”
Even though $23 billion flooded out of the fund during the last days of September, according to Lawton, there’s been no “mass exodus of funds” that he knows of. “I think most advisers would attribute the prior slow bleed to Mohamed El-Erian leaving, and Gross’s own erratic behavior,” Lawton says. In fact, he observes, it’s possible that PIMCO staff are “overjoyed at seeing Bill Gross leave.” Citing Gross’s several instances of bizarre behavior—the sunglasses worn at a conference, the public investor letter addressing his deceased pet cat—caused Lawton and many others to worry about his stability and what he was doing at PIMCO. “There was yelling and screaming and sending confrontational emails that were negative,” Lawton notes. “The fixed-income world is very conservative. Erratic behavior causes people to be nervous.”
Lawton also notes that Gross was listed as lead portfolio manager on 18 funds. “In order for him to do any of that work efficiently, there had to be had strong portfolio management teams in place on all of them,” he says, theorizing that it’s likely very little will change in the real management effort of those funds, even without Gross. “The actual management and day-to-day work done by Gross was probably pretty low.”
Succession Planning
The timing of Gross’s departure may have come as a surprise, feels Tracey Manzi, vice president of investments at Cammack Retirement Group in Wellesley, Massachusetts, but this should come as no surprise to the market. “At age 70, you start to worry about who is going to manage that fund,” she tells PLANADVISER. It’s good to look at succession planning to see if there is continuity and stability in an organization, Manzi says, noting that managers move from funds all the time.
“Someone of Gross’s stature makes the headlines,” Manzi admits, “but the strategy of the Total Return Fund is more important. I think the new management team is very strong and seasoned, and all have good long-term track records.” While the change in manager could be something to think hard about, Manzi says, “It doesn’t necessarily signal an automatic sell recommendation.”
Lawton agrees, noting some mostly encouraging signs that include PIMCO’s stability, and the extreme probability that the firm “probably had a succession plan in place for him at age 70 for quite some time, so they were not caught flatfooted by his departure.”
Lawton says very few plan sponsors are shedding PIMCO funds, and few are even offering replacement funds for the PIMCO Total Return Fund. He maintains that a majority of plan sponsors, more than 90%, are opting for a third stance: “They are standing pat,” he says, “communicating to their participants, either via email or hard copy, but nobody in the plan sponsor world is panicking.”
As Manzi points out, all investment committees on a retirement plan have a process to follow on how they will evaluate and monitor equities or fixed-income funds. Many place a fund on watch or review when there’s a manager change, she says, but it doesn’t mean they necessarily sell. “Long term, (the Total Return Fund) delivered solid returns for its investors,” she says.
Fiduciary Responsibility
From the standpoint of fiduciary responsibility, Lawton recommends plan sponsors think about what they’re not required to do. “They are not required to communicate about the suitability of investments,” Lawton says emphatically, “but that doesn’t mean they shouldn’t issue communications about PIMCO or the Total Return Fund.”
Communication about the future prospects of an investment does not fall under the type of communication plan sponsors are required to deliver, he says, if it is not company-issued stock. “But it makes sense to describe fiduciary process they have ongoing,” he says.
For instance, the company can deliver explanatory communications to plan participants about the investment committee, and what it does. “They are charged with evaluating investments in the plan, and the company has retained an investment adviser,” he says, “and together they are carefully monitoring the situation.” It would be inappropriate for employers to tell plan participants that they should stay away from PIMCO funds for six months, Lawton says, or that the funds or investments do not seem suitable.
Good communications describe the company’s internal fiduciary process that ensures appropriateness of the investments being offered, and that the company is performing appropriate due diligence along with the adviser. “Describe what is going on behind the scenes,” he says. “That’s the gist of good communications I’ve seen being issued.”
The worst-case scenario would be a truly significant amount of outflows from the Total Return Fund, Lawton says, and people will be awaiting results of the October outflows, due November 3. It could start another round of outflows and a domino effect, as plan sponsors say, “We don’t want to be the last ones in this fund,” Lawton feels. The estimates now are that 20% of the assets at PIMCO will probably leave. “If it is less on November 3, then that would seem like a very positive outcome,” Lawton says.
Lawton feels PIMCO is still a good place for fixed-income offerings, or other appropriate vehicles for a retirement plan, such as the commodity fund. “I can’t see a good reason why anyone is dumping the PIMCO funds,” Lawton says, citing their “deep bench” and strong management teams. “Anytime you do a knee-jerk reaction to almost anything in the investment world, it’s almost always the wrong thing to do.”