Bloomberg News

Pimco Attracts $60 Billion as New Funds Offset Total Return Woes

January 18, 2012

Jan. 5 (Bloomberg) -- Pacific Investment Management Co. won $60 billion in net deposits last year despite redemptions from Bill Gross’s Total Return fund as investors put money into stock funds and products designed to weather falling markets.

Pimco’s assets rose by $110 billion in 2011 to about $1.35 trillion, the fourth-largest increase in its 40-year history, Mohamed El-Erian, the chief executive officer of the Newport Beach, California-based investment firm, said today in an interview. Clients put money into Pimco’s new equity funds, so- called tail-hedging funds that protect investors from swings in the market, and asset-allocation products that can invest in an array of securities, El-Erian said.

Over the last three years, Pimco has sought to reduce its reliance on Total Return and traditional U.S. fixed-income products by expanding into stocks and other strategies. The $244 billion Pimco Total Return fund, which more than quadrupled in size over the past decade to become the world’s largest mutual fund, had its first yearly withdrawals in 2011 after Gross trailed benchmarks because of his avoidance of U.S. Treasuries.

“We recognized that the large rate of growth of our core U.S. fixed-income business was unlikely to be sustained,” El- Erian said in the interview. “We had a strong obligation to our clients to evolve our product and solution capabilities commensurate with what we identified as major transformations in the global economy and markets.”

New Funds

Since 2008, the firm has opened funds such as the Pimco Unconstrained Bond Fund and Pimco Global Multi-Asset Fund, which seek to minimize risk from systemic shocks. In 2009, Pimco hired Neel Kashkari, a former U.S. Treasury official, to lead an expansion into stocks. The stock unit has since opened the EqS Pathfinder Fund, which has gathered $2.1 billion in assets, and the EqS Emerging Markets Fund, which has $492 million, according to data compiled by Bloomberg.

The firm opened exchange-traded funds and started an advisory unit to help government agencies and financial institutions assess the value of complex fixed-income holdings. Pimco in September named Jennifer Bridwell as head of alternatives product development as it expands hedge funds and distressed-debt offerings.

Pimco has also added investors outside the U.S., with such clients now accounting for about one-quarter of the firm’s assets, El-Erian said.

‘Morphing’ View

The expansion into other asset classes coincided with Pimco’s “new normal” forecast for slower growth in the developed economies, higher unemployment and subdued market returns in the period following the 2008 financial crisis. Gross wrote in his investment outlook yesterday that Pimco’s new normal forecast was “morphing” into a view of extreme outcomes characterized by credit risk and zero-bound interest rate risks.

“The financial markets are slowly imploding -- delevering -- because there’s too much paper and too little trust,” Gross wrote yesterday.

Gross reversed his earlier aversion to U.S. Treasuries and the dollar, saying that investors should hedge their bets given the extreme risks in the market and the possibility of a “credit implosion” in Europe. Gross, who eliminated his Treasury holdings from the Total Return fund last February, has since increased his holdings in U.S. government debt to 23 percent of the fund as of Nov. 30.

Total Return

Gross’s avoidance of Treasuries in the early part of 2011 caused him to trail benchmarks as investors rushed to the safety of government-backed debt amidst the European sovereign-debt crisis. Treasuries rose 9.8 percent in 2011, their best year since 2008, according to Bank of America Merrill Lynch indexes.

The Total Return Fund rose 4.2 percent last year, trailing 69 percent of rivals, according to data compiled by Bloomberg. The fund had $5 billion in withdrawals last year, according to Chicago-based research firm Morningstar Inc.

--Editors: Steven Crabill, Christian Baumgaertel

-0- Jan/05/2012 19:46 GMT

-0- Jan/05/2012 19:58 GMT

To contact the reporter on this story: Sree Vidya Bhaktavatsalam in Boston at sbhaktavatsa@bloomberg.net

To contact the editor responsible for this story: Christian Baumgaertel at cbaumgaertel@bloomberg.net -0- Jan/05/2012 19:17 GMT


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