Wednesday, July 18, 2012

PIMCO Total Return: Too Big To Manage?

With the disparity in performance between the PIMCO Total Return Fund (PTTRX) and the PIMCO Total Return ETF (BOND) that was launched earlier this year, there have been many questions raised as to whether the managed mutual fund has become too big for Bill Gross and his team to manage effectively.  The answer is no.

True there has been a difference in performance.  BOND has gained 7.53% since March 1st and PTTRX has gained 4.05%.  I would hardly say PTTRX has not been managed effectively with a gain of 7% so far for the year.  This isn’t the first time a funds size has been brought up as a concern.  It amused me in 1997 when many were blaming the Fidelity Magellan Funds (FMAGX) lackluster performance on its size.  It was once the largest mutual fund in the world, but today is merely an afterthought for those that remember the fund.  I was amused because everyone was questioning the funds size and ignoring the easiest answer as to why the fund’s performance could no longer beat the market.  To me the answer was simple.  The greatest equity manager in the history of the world, Peter Lynch, stopped managing the fund in 1991.  What an insult to him that the lack of performance was being blamed on size.

The size of PTTRX (and all other share classes of the fund) may be a concern, but their situation is much different than the Magellan’s fund back in the 1990’s.  The glaring difference is the PIMCO Total Return Fund is still being managed by the greatest fixed income manager of all-time.  He has not retired.  The fact is BOND does offer investors insight into the mind of Gross and his team.  The ETF is much more nimble in its infancy, and has given us an idea of what Gross is managing for today.  The mutual fund presents many more challenges for the management team when it comes to execution.  The following things have to be taken into consideration when managing the fund versus managing the ETF:

1)     Liquid cash needs to be accounted for in case the need to fulfill shareholder redemptions arise.

2)     Holdings need to be evaluated before sold to account for tax consequences that will be passed on to shareholders in the form of capital gain distributions.

3)     Gross and his team may simply like their positions in the managed mutual fund and do not want to liquidate them to fund another idea.  That is where the ETF becomes a useful alternative to be able to continue to move forward with investment opportunities.

The world of money management is vastly different today than it was twenty years ago.  Size is not an issue.  Funds like the PIMCO Total Return Fund are managed as a team, which is an approach I prefer as a shareholder of the mutual fund, because I do realize that Gross will retire one day.  The team approach, over a long-period of time, should lead to a continuation of a successful management philosophy.  Instead of comparing the mutual fund and the ETF, which I was ignorant enough to recently do, their differences should be admired and embraced.

Alas, the question of size does not bother me when heard asked.  What bothers me is the ignorance of people out here in blog land.  You know the ones who take shots at people much more qualified than they are just so they can go back and read their posts, or comments.  When I see people actually questioning the long-term risk of the holdings of the PIMCO Total Return Fund and ETF, I quickly realize we live in a whole new era.  Are you kidding me?  Do you seriously think Bill Gross does not know the risk of what he owns?  Do you think he doesn’t have a profit taking or exit strategy for what he buys?  He is the greatest fixed income manager of all-time people.  What is so hard about admitting that?  I don’t understand.  I, Jon Orcutt, cannot navigate the fixed income markets or credit markets with the same skill and expertise as Bill Gross and his management team.  Is that so hard to say?  Not for me, and that is why I hire them to manage that portion of my assets.

Thank you and good luck everyone!

Disclosure:  I am long BOND and own shares of the PIMCO Total Return FUND D (PTTDX)

Jon R. Orcutt, founder of Allocation For Life, is an asset allocation strategist and author of “Master the Markets with Mutual Funds: A Common Sense Guide To Investing Success”