PIMCO Papers Over the Cracks and Today’s Other Top Stories

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In early June, PIMCO Chief Executive Douglas Hodge took to the stage in the southern Californian sun to open PIMCO’s shiny new 21 story headquarters building. Hodge standing before hundreds of PIMCO employees took the opportunity to publicly praise his boss Bill Gross.

“Forty-three years ago, he founded Pimco with a vision and a fire in his belly, and we are living that vision today,” Hodge said, with the 70-year-old Mr. Gross, the firm’s chief investment officer, standing beside him. “We all owe so much. Thank you.”

The PIMCO employees present then gave Gross a standing ovation, before the two executives warmly shook hands, almost hugging, according to some witnesses. It was a rare show of warmth and unity from Gross who is known for his high-pressure working environment.

But the Wall Street Journal reports today that under the well polished veneer, fault lines continue  to exist more than six months after the shock resignation of PIMCO’s previous CEO, Mohamed El-Erian.

According to people familiar with the matter, three months ago, a group of PIMCO senior executives became so concerned about Mr. Gross’s dealings with the media that they warned him to stop making public comments they viewed as divisive.

The warning came following Gross’s appearance on Bloomberg TV, on April 10. In which Gross responded to questions about El-Erian’s resignation by claiming he didn’t fully understand why Mr. El-Erian had quit, urging him to publicly explain his resignation. “Come on, Mohamed, tell us why,” Mr. Gross said in the interview.

The comments raised eyebrows within PIMCO, partly because it was known that Mr. El-Erian had signed a pledge not to publicly address his departure. A group of senior executives subsequently issued a warning that Mr. Gross should avoid inflammatory public comments, according to people close to the matter.

The revelations come at a critical time for PIMCO as clients continue to abandon the firm, including its flagship Total Return fund which Gross himself manages.

Total Return (TLT), the world’s largest bond fund, saw $4.5 billion of net investor outflows in June—its 14th consecutive month of defections—despite outpacing two-thirds of it rivals in the second quarter, according to fund-research firm Morningstar Inc.

Over that period, investors pulled $64 billion from the now-$225 billion fund, an amount that dwarfs the total size of most mutual funds. The withdrawals came as investors, industry wide, added money to bond funds. Pimco has suffered net outflows across all its mutual funds for the past 13 months.


Todays Other Top Stories

Learn Bonds

LearnBonds: – Detroit public workers vote on $7.4 billion in cuts. – Last Friday, Detroit’s public workers, retirees and bondholders finished voting on a plan which would impose $7.4 billion in cuts on investors and pensioners. The plan, if approved, would result in current and former city employees, as well as investors, to take less than the $10.4 billion they are owed if U.S.


Municipal Bonds

Barron’s: – Janney ‘increasingly skeptical’ of S&P’s muni ratings. – Janney Montgomery Scott published a note today warning investors about grade inflation in Standard & Poor’s rating methodology for municipal bonds. Janney takes issue with what it sees as an acceleration of S&P upgrades compared with its main rival, Moody’s Investors Service.

Businessweek: – Invesco closing high-yield muni fund as supply dries up. – Invesco Inc., which runs the third-largest high-yield municipal bond fund, is closing it to new investors on Aug. 1 as sales of local junk debt dwindle.


Bond Market

FT Adviser: – Fears grow of future bond crisis. – Bond managers have voiced fresh fears about buying behaviour in fixed income markets, claiming it could be “sowing [the] seeds for a future crisis”.


Treasury Bonds

WSJ: – Treasury bonds pull back as Yellen sparks price swing. – Treasury bonds pulled back as comments from Federal Reserve Chairwoman Janet Yellen raised some anxiety about higher interest rates.

ETF.com: – Hedge fund shorting Treasury bond ETFs. – Fixed-income strategies, especially long-dated bonds, are currently a tough sell in today’s environment when rates look likely to be heading higher. Some investors, including hedge fund manager George Schultze, are preparing for rates to move higher by buying shorter-dated debt and value-oriented equity.


Investment Grade Bonds

Donald van Deventer: – Yum Brands and Goldman Sachs lead best value bond trades with 1-5 year maturities. – We rank the 20 “best value” trades by the ratio of credit spread to default probability.


High Yield Bonds

Citywire: – Global HY: five standout managers revealed. – Citywire Global shines a light on the best-performing global HY fund managers over the past three years.

Indexology: – High yield gives up ground to investment grade. – After having risen 19 basis points the first week of July, the yield on the S&P, Current 10 Year U.S. Treasury Bond Index dropped 20 basis points from the July 3rd 2.72% to its current 2.52%, offsetting the initial increase.

Citywire Global: – T Rowe HY veteran: Why I’m cautious on first time issuers. – High yield veteran Michael Della Vedova is looking at the European secondary market for opportunities as he believes first time issuers’ ultimate returns are increasingly less attractive.


Emerging Market Bonds

Bill Greiner: – Emerging market bonds: Are yields high enough? – It is the wise investor who looks not only at markets offering opportunity but also at markets at risk. There is no sure-fire way of identifying markets that may be at pricing risk. I have usually observed variables that tend to indicate, based on historical relationships, markets that may be offering opportunities for outsized returns, as well as markets that may be at risk.

Citywire Global: – Pioneer EMD manager on top HY country bets and stocks. – Pioneer Investments’ Colm D’Rosario has increased his exposure to Mexican high yield bonds in order to capitalize on the country’s growth opportunities.


Investment Strategy

ETF.com: – High yield corp vs. bank loans ETFs. – When it comes to capturing yield in the corporate debt space, ETF investors are showing a preference this year for senior bank loans over high-yield corporate bonds. That preference, some argue, is largely due to what looks like an overvalued junk corporate bond segment, but it is a choice that has its trade-offs.

ETF.com: – Hedge fund shorting Treasury bond ETFs. – Fixed-income strategies, especially long-dated bonds, are currently a tough sell in today’s environment when rates look likely to be heading higher. Some investors, including hedge fund manager George Schultze, are preparing for rates to move higher by buying shorter-dated debt and value-oriented equity.

Brad Kenagy: – Projecting bond total returns for rising rates. – I attempt to estimate the total returns that bond ETFs will have when interest rates start rising.

Simon Moore: – Why leaving government bonds out of your portfolio is risky. – Many believe that bonds, especially US government bonds, are a poor investment right now, but there are many reasons to think otherwise.

About.com:  – Should you invest in the highest yielding bond funds?  – The first question most people ask when choosing a bond fund is “How much does it yield?” While yield is important, of course, this is just one of many considerations – and not necessarily the factor that should be at the top of your list.


Bond Funds

Financial Advisor: – Mutual fund costs decrease for retirement plan. – The cost of long-term mutual funds continues to decrease for participants in 401(k) plans, according to a study by the Investment Company Institute released Monday.

Investment Coach:  – The problem with target date mutual funds.  – It’s a simple story. You plan to retire at a date in the future, say 2025. You invest primarily through your 401(k) plan at work. At your “target date” for retirement you want an investment vehicle that offers reasonable assurance that funds will be there to meet financial independence goals. Sounds good, right? So you study the fund choices available in your plan and settle on a target date mutual fund that fits your time frame.


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