PIMCO has been in the news since September last year after its founder Bill Gross, who managed the PIMCO Total Return Bond Fund, quit the firm amid management differences to join Janus Capital.
The US-domiciled PIMCO Total Return Bond Fund has a longer track record than the Luxembourg-based Nordea 1 – US Total Return Bond Fund.
Launched in 1987, the PIMCO fund had assets worth $162.8bn on 30 November.
The Nordea fund was launched in September 2012 and had assets under management worth $1.4bn as of the end of November.
In Asia, PIMCO offers the Ireland-based version of this strategy, which has been running since 1999, with assets worth $10.9bn.
Nordea has an agreement with US-based fixed income investment firm DoubleLine Capital to manage its fund. Nordea’s fund is based on DoubleLine’s Total Return Strategy, which has had a track record since April 2010.
Jeffrey Gundlach, the chief executive officer and chief investment officer of DoubleLine Capital, has been managing the Nordea fund since its inception and is often viewed as a fierce rival to Gross.
Leonardo Drago, chief investment officer at Al Wealth Partners in Singapore, provides a comparative analysis of the underlying funds, which have investment strategies similar to the Asia vehicles, but have relatively longer track records.
Investment strategy review
The PIMCO fund seeks to invest at least 65% of its assets in a portfolio of intermediate-term investment grade fixed income securities, investing primarily in US government, mortgage and corporate bonds. But, the fund can also have a tactical allocation to municipal, high yield and non-US markets.
The Nordea fund seeks to invest at least two-thirds of its assets in fixed income bonds in the US, within and across subsectors of the mortgage market. The rest is deployed in low-rated debt securities.
Drago sees the PIMCO fund as more diversified because nearly a fifth of its portfolio is invested in emerging markets and non-US developed markets.
“In contrast, Nordea focuses only on US investments, with 59% of its portfolio in US agency debt.”
“With the current low interest rates and meager opportunities to add yield, it is little surprise that there is a concentration in certain sectors [agency debt in this case], as this is the best way to aim for market outperformance.”
The Nordea fund also has higher exposure to non-investment grade securities, with 17% of its portfolio deployed in CCC- or below-rated papers. The PIMCO fund has allocated just 6% of its assets in high yield credits.
The PIMCO fund has about 43% of its assets invested in US treasuries, which includes notes, bonds, futures, and inflation-protected securities.
In the November factsheet, the PIMCO fund management team said they will continue to hold intermediate US Treasury inflation-protected securities (TIPs), as they believe policymakers will ultimately be successful in raising inflation expectations. Also, inflation protection is attractively priced at these maturities.
The overall effective duration of the PIMCO fund is 4.73 years compared to 4.05 years of the Nordea fund. The 12-month yield on the PIMCO fund is 2.85% compared to 2.83% of the Nordea fund.
Performance review
“Nordea’s fund has outperformed PIMCO in 2014 and since inception has generated +1.75% in excess of PIMCO,” Drago said.
Since inception, the Nordea fund (+5.9%) has outperformed the PIMCO Total Return (+3.3%).
“PIMCO’s fund has significant exposure to TIPs. Currently, there are quite a few deflationary forces in the world, such as the collapse in the price of oil in recent months. This exposure has likely been a big contributor of the funds’ underperformance compared to Nordea year-to-date.”
Manager review
Following Gross’ departure, PIMCO suffered significant outflows from its funds, though the Total Return Fund remains the largest actively managed bond fund in the world, Drago noted.
Since September, the PIMCO fund has been managed by a team comprised of Mark Kiesel, Mihir Worah and Scott Mather.
Managing director Kiesel has been with PIMCO since 1996 and is currently a global head of the corporate bond portfolio management group and a senior member of the investment strategy and portfolio management group.
Worah joined PIMCO in 2001 and is the deputy CIO and a managing director. He is the head of the real return and multi-asset portfolio management teams. Managing director Mather has been with PIMCO since 1998 and is currently the CIO of the US core strategies.
Jeffrey Gundlach, who founded DoubleLine Capital in 2010, is the manager of the Nordea fund. He was formerly associated with TCW as CIO and head of fixed income activities and is recognised as a leading expert in bond and fixed income investments.
Gundlach was the head of the TCW Total Return Bond Fund, which was ranked in the top 2% of all bond funds over the previous 10 years, Drago pointed out.
In Drago’s opinion, Gundlach has proven himself to be a good asset manager.
Fees
PIMCO’s US-domiciled fund charges a management fee of 0.46% compared to the Nordea fund that levies 0.55% fee.
While the PIMCO fund levies lower fees, the minimum investment is significantly larger for the PIMCO fund than the Nordea one, Drago explained.
Minimum application in PIMCO’s US-domiciled fund is $1m while the same for Nordea’s product is €75,000 ($88,766).
In its similar product that is available in Asia, the PIMCO fund levies varying fee levels depending upon the share classes.
For institutional investor, administrative classes, the PIMCO Asia product levies 0.5% management fees while the same for Class H institutional is 0.67%. E share class and M retail share class charge 1.4%.
The Nordea vehicle in Asia levies 1.1% annual management fees on a minimum sum of €50.
Conclusion
Bill Gross’ departure from PIMCO has caused significant outflows from PIMCO’s funds, but these have now slowed considerably to $9.5bn, compared to $27.5bn in October, said Drago.
Drago was of the opinion that the exit of Gross should not be a cause of concern for an asset management company the size of PIMCO. Investors should rely on the performance of the fund rather than focusing on the departure of a single person.
“A conservative investor may want to stay on the sidelines and see how the future performance of the PIMCO fund develops.”
PIMCO’s current portfolio positioning is important, as it is primarily reliant on the inflation outlook, he said.
“Bond investors who fear inflation may be better protected via PIMCO’s Total Return Fund.
“Assuming the respective managers keep the broad portfolio exposure as it currently stands, an increase in inflation will benefit investors in PIMCO’s Total Return Bond Fund more [than the Nordea fund],” Drago said.
However, if deflation becomes a more significant issue in the near future, investors in the Nordea fund might benefit, he added.
