They say all news gets priced into the stock market. Proponents of the Efficient Market Theory believe that there is “perfect information” in the stock market. Any information or insight that is available is there for all to see therefore negating any possible edge in beating the market. All that being said, no matter how clear your crystal ball is, nobody expected the shocking news we received on Friday.
Bill Gross, the co-founder of Pacific Investment Management (PIMCO) in Newport Beach, quit and packed his bags to join Janus Capital this past Friday. Gross has long been known as the “King of Bonds” and considered to be the nation’s most prominent bond investor. Until last year he was responsible for managing the largest mutual fund in the world – the PIMCO Total Return Bond Fund (PTTRX). That title now goes to the Vanguard Total Stock Market Index but PTTRX is still the world’s largest bond mutual fund. So…what happened here and was the writing on the wall?
As alluded to above PTTRX, and PIMCO in general, has been suffering for quite some time. PIMCO isn’t the only bond fund manager who has struggled with outflows but the sheer volume has opened some eyes. From May to August of 2014 PIMCO has had over $70 billion in assets liquidated and withdrawn. Over the past 72 hours (only 1 trading day including the weekend) the firm has already seen $10 billion bolt for the door!
Investors were already pulling money from bond funds due to fears of increased interest rates. As the Federal Reserve scales back its stimulus of $85 billion in monthly bond purchases, there simply has to be an eventual end to the bond party.
Read the following sentence carefully:
PIMCO and most of its mutual funds will get absolutely blasted in the near future.
The hemorrhaging has already begun but you can expect further massive outflows, which will have a major impact on performance. Several hundreds of billions of dollars are likely to leave the firm. If you own PIMCO funds now you would be wise to quickly reassess. You won’t be alone as many pension funds and their respective consultants will be putting these funds on close watch and likely place them on their sell list. In this instance you, as an individual investor, can likely move much quicker than the larger institutional money managers. Get out now if you haven’t already.
Without patting ourselves on the back we sold PIMCO funds long ago and in our opinion the ‘writing was on the wall’ for quite some time. Even before Friday’s news there were problems at PIMCO. Gross and former CEO Mohamed El-Erian did not see eye to eye and El-Erian left the firm in January. Aside from news like this our main issue was the relative lack of performance in their flagship fund. (PTTRX)
When is the right time to sell a mutual fund? This is the topic for another article but the answer lies in several quick red flags:
- Asset allocation – Do you even need the fund? In other words, are you simply “collecting mutual funds” to eventually hold a cheap garage sale of poorly connected investments?
- Fees – Are the many layers of fees justified? We’re obviously not fans of most mutual funds so in our opinion if you own one it better be worth it!
- Performance – Does the fund beat its respective benchmark? As we’ve written about before most mutual funds can’t consistently beat their benchmark so don’t bother buying them.
- Peers & relative performance – If you insist on owning a mutual fund at least make sure they are beating their peers on a consistent basis.
- Management – This is what we are highlighting in this article. If a manager or team of advisors leaves the fund it can certainly spell trouble on the horizon. Companies like PIMCO are in full disaster mitigation mode right now. There will be a PR blitz and as much damage control levied as possible.
Quickly focusing in on the PIMCO Total Return Bond Fund (PTTRX), it unfortunately meets most of the above warning signs telling any half awake investor that you should already be out. As of this writing PTTRX is down -1.09% for one month, -0.91% over three months, +1.68% YTD, and -0.37% over five years. We use the Vanguard Total Bond Market ETF (BND) as a core holding to track the bond market and it’s respective numbers over those same time periods are as follows: -0.88%, -0.37%, +2.25%, and +3%. PTTRX has been around a lot longer but it’s alarming to see that even over 10 years the fund is not in the black (-0.55% over 10 years!). By owning PTTRX you’re basically paying 0.46% in expenses for a name that has lost its touch. You can own BND for 0.08% ; not only is it far less expensive but it’s outperformed.
Most importantly, one needs to know how you’re doing against the rest of the class. We’re not trying to cherry pick and show you one outstanding mutual fund that happens to be on a hot streak. The fact is that PTTRX has been dead money for some time. The trend is not reversing anytime soon and it currently is underperforming its peers, ranking in the bottom quartile for funds in its category.
The manner in which Bill Gross left confirms deeper issues at the firm. This isn’t a story akin to Steve Jobs being fired from his own company and then coming back to Apple to take things to an even higher level. Gross left PIMCO suddenly and actually announced his joining Janus before officially resigning. There are also numerous stories surfacing of him speaking to arch-rival bond competitors like DoubleLine. After being somewhere 43 years most exectuives make their exits much less abrupt. You can assure yourself that not only will more assets leave but so will other prominent PIMCO employees.
Now that you are caught up to date on this bit of news surrounding PIMCO, perhaps you would like to learn two final snippets of information about Bill Gross? Did you know that he also is one of the nation’s most prominent stamp collectors? Lastly, during his earlier years Gross played blackjack professionally in Las Vegas and actually says this experience contributed to how he spreads risk and calculates odds in many of his investing decisions.
Now that he’s folded his hand of cards, we suggest you step away from the table as well while you still have some chips in your pocket…