Battle for share of PIMCO spoils is getting hotter

The money spigot is expected to keep flowing for PIMCO competitors who are working hard to snare the billions in fixed-income investments in play following September's departure of William H. Gross from the firm he co-founded.

Western Asset Management Co., TCW Group Inc., DoubleLine and Loomis Sayles & Co. are among the beneficiaries, said Michael Falk, a consultant to money managers and a partner with Focus Consulting Group in Chicago.

Those firms have sufficient scale to easily digest big new amounts of assets in a bond market plagued by low interest rates, tight spreads and low liquidity, Mr. Falk said.

Spokesmen from WAMCO, TCW, and DoubleLine declined to comment. Loomis Sayles did not respond to inquiries for this story.

Money managers interviewed say the assets in play are mostly from PIMCO's $201.5 billion Total Return Fund, and to a lesser extent the $20 billion PIMCO Unconstrained Bond Fund, both of which Mr. Gross managed.

They say other assets under management at PIMCO are not in play. They say they expect PIMCO to keep those assets unless the strategies start performing poorly.

But the competitors to PIMCO insist that momentum is in their favor. Even if the new investment team on the Total Return Fund starts producing solid results, it will be at least several years before the tide turns for PIMCO, because a new team managing the funds needs to build a track record, they say.

Mr. Falk said he expects Janus Capital Group, Mr. Gross' new home, will also be a major recipient of inflows. Analysts have estimated Janus could receive as much as $45 billion in assets in the next two years.

While the odds and their capabilities may favor larger managers, medium-sized firms also are benefiting. Russell Investments, for example, chose Scout Investments, with $17.7 billion in fixed-income assets, to manage money it moved from PIMCO, while the board of the San Francisco Employees' Retirement Plan is expected to replace PIMCO's Total Return Fund with a fund from Baird Advisors, with around $25.8 billion in fixed-income assets.

In comparison, WAMCO manages $471 billion in fixed-income assets, TCW manages $105 billion and DoubleLine manages almost $56 billion.

Mr. Falk said large amount of money flowing from PIMCO creates opportunity for competitors to grow their assets under management. “It's a gold rush,” he said.

The thorny question, however, is how to strike gold without being too obvious. “We don't want to seem like a vulture,” said one fixed-income manager, who asked that neither he nor his firm be named.

While the salespeople from PIMCO's competitors might not be mentioning the firm by name in their pitch for business, they are certainly being aggressive, trying to take advantage of the firm's difficulties, said Russell Campbell, a Las Vegas-based consultant to money managers who is president of Your Second Opinion LLC.

Mr. Campbell said he expects sales people will get more aggressive in getting institutional investors to terminate PIMCO's products managed by Mr. Gross. “There is no upside in staying with PIMCO,” he said.

Mr. Campbell said given the low interest rate fixed-income environment, returns will challenge all core bond strategies, but those outside PIMCO won't come with the baggage of PIMCO's recent personnel changes.

In the last month, dozens of institutional investors joined retail investors in terminating PIMCO, which with $1.87 trillion in AUM is one of the largest asset management organizations in the world and an important profit center for its parent, Allianz SE, the German multinational finance company.

Consultant Michael Rosen, president of Angeles Investment Advisors, Santa Monica, Calif., said the terminations are logical. He said institutional investors in the Total Return Fund, (the world's largest mutual fund until poor performance knocked it to second place a year ago) signed up because they believed in Mr. Gross.

“Bill Gross was seen as the most important part of the strategy,” he said.

Mr. Rosen said the new multiperson investment team that replaced Mr. Gross on the fund might improve its recent performance, but that might not be enough to retain investors.

“It may be better, but it is not what investors signed up for, which is Bill Gross,” he said.

He said the new team also has no track record on the fund, another reason why is why his firm has recommended clients terminate PIMCO investments that were managed by Mr. Gross.

One CEO of a major fixed-income firm, who asked not to be named, said his firm has already seen billions of dollars in inflows, mostly retail. He said company executives see the potential for tens of billions of dollars of additional inflows if more institutional investors terminate PIMCO.

The CEO said even institutional investors keeping PIMCO are still talking to his firm about moving some of their money because they are now concerned about having “all their eggs in one basket.” The poor performance of the Total Return Fund, combined with the departure earlier this year of Mohamed El-Erian, former CEO and co-chief investment officer, and the abrupt exit of Mr. Gross is a tsunami of change most investors can't overlook, he said.

“PIMCO was seen as a safe choice by plans sponsors and consultants, but that image of stability has been eroded by recent events,” he said.

Statistics from mutual fund data provider Lipper Inc., Denver, show two of the largest mutual funds that compete with PIMCO's Total Return Fund — TCW's Metropolitan West $32.3 billion Total Return Bond Fund and the $37.4 billion DoubleLine Total Return fund — had $3 billion and $1.1 billion in inflows, respectively, in the first 15 days of October.

In comparison, the TCW fund had $270 million in inflows in the first 15 days of September; the DoubleLine fund, $180 million.

PIMCO announced $23.5 billion in outflows in the Total Return Fund in September, vs. $25.9 billion for the first eight months of the year.

Some 63% of PIMCO's $201.59 billion Total Return Fund was in its institutional share class as of Sept. 30, according to data from Morningstar Inc., Chicago. Sources say at least $100 billion of that is from defined contribution plans. Comparable data aren't available for separate accounts.

Mr. Gross' job change coincided with a spike in consultants and asset owners using the database of eVestment, Marietta, Ga., to search for managers in core and core-plus fixed-income areas, said Rich Donnellan, product manager, research, in an interview.

Mr. Donnellan said search activity was almost 30% higher in those universes between Oct. 1 and Oct. 20 than it was for all of September.

“The managers getting attention in these universes are being researched to replace PIMCO,” he said.

eVestment data show the three largest institutional strategies that compete with PIMCO's total return strategy are run by The Capital Group Cos., WAMCO and TCW/ Met West.

As the push continues for a slice of PIMCO's assets, money managers are also reaching out to pension trustees.

One board member at a major public pension plan, who asked that he and his plan not be identified, said several board members have been approached by officials from fixed-income firms, touting their core strategies. He said PIMCO was not mentioned by name, but the message was clear: There are takers waiting in the wings for PIMCO's money.