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Pimco vs Gross: how their unconstrained bond strategies compare

Pimco vs Gross: how their unconstrained bond strategies compare

The decision by Bill Gross to quit Pimco for Janus Capital in September 2014 shook the fund management world, but how have his funds fared in performance terms?

In this analysis, Dr. Nisha Long, head of cross border investment research, takes a look at how the respective unconstrained approaches have fared.*

(*This analysis was undertaken prior to the announcement of the Henderson/Janus Capital merger.)

The flows show

“Bill Gross, King of Bonds, Abruptly Leaves Mutual Fund Giant Pimco”. That was the headline the New York Times ran with two years ago when Bill Gross announced to the world that he was parting ways with Pimco to join Janus.

The ramifications of that announcement hit Pimco with huge outflows from his strategies, namely the Pimco Total Return fund, which took the biggest hit. It was already seeing money depart prior to his exit, with $10 billion being wiped off the fund over the three month period to the end of August 2014 as investors started to notice the poor performance of the fund. 

However, directly after the official exit broke, assets plummeted even further and the fund lost $26 billion in the month of October 2014 alone, and for the three month period of September to December 2014 the fund shed $60 billion in assets.

Management of the fund fell to Scott Mather, Mark Kiesel and Mihir Worah. But the out-going money didn’t move with Gross – instead it was shifted into similar strategies, with the main beneficiary being the DoubleLine Total Return Bond fund, managed by Jeffrey Gundlach. Ironically, Gundlach and Gross had discussed Gross joining DoubleLine prior to his move to Janus.

But perhaps this shouldn’t have been that surprising, as Gross opted not to launch a Total Return mirror at Janus but instead a similar strategy to the lesser-known Pimco Select Unconstrained Bond fund.

Gross had managed this flexible bond portfolio with higher leverage and an absolute return strategy during his time at Pimco. Therefore, those seeking a Total Return alternative were more inclined to move to someone like Gundlach.

Unconstrained on the agenda

With this in mind, when assessing post-Pimco performance, it would not be representative to compare the Pimco Total Return fund with the Janus Global Unconstrained approach over the intervening period. It would be like comparing apples and oranges.

The Total Return fund consists mainly of US treasuries and corporates, while Gross has now moved onto a more widely-diversified, unconstrained approach.

Therefore, this analysis contrasts the Janus Global Unconstrained Bond fund with the Pimco Select Unconstrained Bond fund. Gross managed the latter from December 2013 to September 2014 and his former colleagues Daniel Ivascyn, Marc P. Seidner and Mohsen Fahmi picked up where he left off.  Both funds lie in Citywire’s Alternative Ucits – Bond Strategies sector.

Flows - November 2014-August 2016

FundEstimated Net Flow/€ millions
Janus Global Unconstrained Bond A EUR Acc Hedged21.2
PIMCO Select Unconstrained Bond Inst EUR Hdg Acc-25.41

One potential reason money didn’t pour into the fund at the time was that investors were unsure about the unconstrained approach – and Gross didn’t really have much experience in this type of market, having only managed the Pimco fund for less than a year.

His track record on this fund saw him ranked in the bottom quartile versus his peers in the Alternative Ucits – Bond Strategies sector for his one-year total returns to the end of September 2014. So this strategy was proving a challenge before he joined Janus.

The Janus Global Unconstrained fund has grown to only $1.54 billion, and about half of that is Gross's own money. The shift in strategy meant institutional and retail investors were less likely to give him credit for his long record in core bonds, and were perhaps put off by the weak start in the Alternative Ucits – Bonds Strategies sector.

Having said this, he has entered a highly-competitive sector, with the likes of the BSF Fixed Income Strategy, managed by Michael Krautzberger and the JPM Income Opportunity fund, managed by Bill Eigen, which in contrast have taken in estimated net flows of $5.9 billion and $4.1 billion, respectively, over the past 22 months.

However, in the Pimco vs Janus stakes, investors have preferred the Janus strategy over the Pimco strategy, and over the past three months it is seen inflows of $133 million, while the Pimco fund has taken in just $0.6 million.

Performance at a glance – Janus unconstrained vs Pimco unconstrained (All data to end of August 2016 in euro, TR %)

 Janus Global Unconstrained Bond A EUR Acc HedgedPIMCO Select Unconstrained Bond Inst EUR Hdg Acc
1 month-0.20.21
3 months-1.560.67
6 months3.996.45
12 months0.94-0.91
18 months-2.98-3.2
22 months-13.14-13.25

Over the shorter term, the Pimco fund has better returns. However, over the longer term, which is 12 months or longer, it is the Janus fund which triumphs. Both funds are in negative territory in performance over the last 18 and 22 months, but it’s the Janus fund that has limited losses - although just by a few basis points.

Conclusion

Janus pips Pimco in the flows stakes, as well as with performance for these unconstrained strategies. However, this is a minor battle in the bigger picture, as it doesn’t mean it is a winning strategy and it still has a long way to go to beat most of its peers active in the sector.

Gross currently ranks 49th out of 112 peers in the Alternative Ucits – Bond Strategies sector for his one year returns. He has made some unfavourable calls over the past year which has seen his fund suffer, such as his positioning in interest rates which hit the fund in the second quarter of this year.

The fund is still young and Gross still needs to build a decent track record in the flexible bond market. Citywire Investment research will continue to monitor his performance to see how he fares on his new investment style.

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