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How Advisors Are Playing the Pimco Carnage

By Murray Coleman October 23, 2014

Bill Gross’s former employer has been bleeding assets all year, and the latest redemption news is poignant. Pacific Life Insurance Co., Pimco’s former parent company, is moving money to Janus Capital, as Bloomberg reports. The assets aren’t coming out of the Total Return Fund, Gross’s former charge, or going into his new one, Janus’s Unconstrained Bond Fund. And the insurer tells Bloomberg its decision to move assets from Pimco was made before Gross’s departure.

For some advisors, the move was further proof that the company’s problems go beyond Gross or his former fund. “The fact is we’re still seeing a lot of money being pulled from Pimco as a whole,” says advisor Doug Flynn of Flynn Zito Capital Management in Garden City, N.Y., which manages more than $300 million. He is contacting clients who own Pimco products in their employers’ retirement plans, warning them the fund family could be prone to volatility for a while longer. Besides Pacific Life, other large institutions shedding Pimco assets include Ford Motor Co.’s 401(k) plan, Alabama’s college savings 529 plan, Florida’s state pension system and the Orange County Sanitation District.

Flynn thinks mass-affluent investors are overreacting to recent events. “The handwriting was on the wall that something was wrong long before Gross moved to Janus,” he says. His firm unwound its positions in Total Return nearly two years ago. And now, he’s putting about 3% of a typical client’s fixed-income allocation into Gross’s Janus fund. “We see this as an opportunity,” says Flynn. “Gross has so much more leeway in picking new bonds in a smaller fund,” he says, adding that the Unconstrained Bond Fund was two thirds in cash before Gross took it over.

Furthermore, he says, he’s encouraged by Gross’s eagerness to stay in the game. “In my 25 years as an advisor working with successful professionals, I’ve noticed that as they get older their natural tendency is to deemphasize things they don’t like to do as much,” Flynn says. “To me, the fact that Gross at age 70 wants to keep working is a strong indicator that he’s still got a passion to prove his value as a portfolio manager.”

Doug Flynn

Devoting a sliver of his client assets to the famed bond manager’s new fund is a bit of a flier, he admits. “But we’re just dipping our toes into the water — something we’d advise our clients to do if they see the Janus fund show up in their 401(k) plans in the future,” he says. “We also are telling them to keep their eyes open for Gross becoming a comanager of other Janus funds. That could be an interesting opportunity down the road.”

Mark Donnelly, a portfolio manager at AEPG Wealth Strategies in Warren, N.J., is also looking at Gross’s Janus fund — but he’s telling clients it’s way too early to make the leap. For core bond exposure, he thinks a product like Vanguard’s Total Bond Market ETF is a better bet. At his firm, which has AUM of $800 million, a typical client’s portfolio has about 30% of its fixed-income allocation in the Vanguard product. “Certainly active management has its place in a bond portfolio,” he says. “But with bond markets so volatile these days, it just makes sense to remain highly diversified and cut costs on management fees as much as possible.”

But some managers are standing by Gross’s former shop. Although Roger Nusbaum of Your Source Financial in Scottsdale, Ariz., isn’t putting individual clients into Pimco funds, he’s recommending the Total Return Fund for a small employee retirement plan that Your Source Financial advises. “We see this fund as continuing to be a viable option for advisors to recommend with retirement plan sponsors,” says Nusbaum, whose firm manages $150 million. “Injecting some new blood from Pimco’s deep bench into the fund is likely to be a net positive. We’re not telling our clients who own it as part of their 401(k) plan to give up on it yet.”