Trouble has been brewing at Pacific Investment Management Company, LLC (PIMCO) for some time, and investors have taken notice. PIMCO is one of the largest asset managers in the world, with over $1.9 trillion in assets under management. While the PIMCO Total Return Bond Fund is the largest bond fund in the world, the firm also offers asset management services across real assets, private equity, and global equities.
PIMCO has been under the spotlight for some time as several key employees have left the firm, including Scott Simon (head of mortgages – January, 2013), Neel Kashkari (head of equities – January, 2014), Mohamed El-Erian (CEO and co-chief investment officer – March, 2014), and Bill Gross (CEO and co-chief investment officer – September, 2014). Bill Gross is commonly referred to as the “bond king” and is one of Wall Street’s highest-profile portfolio managers.
Potentially the most troublesome issue for PIMCO is news that the Securities and Exchange Commission (SEC) is examining the Total Return Exchange Traded Fund (ETF). The SEC is investigating whether PIMCO altered the return data for the ETF, which mirrors the firm’s flagship Total Return Fund.
The SEC is determining if PIMCO has been improperly valuing bonds in the ETF. For the ETF, PIMCO has bought smaller blocks of bonds, known as “odd lots.” The firm purchased these bonds at a discount and then marked their prices upwards using estimates of values derived from larger blocks of bonds they have on their books.
PIMCO denies any wrongdoing and claims it should not be penalized due to their size and ability to combine these smaller odd lots into larger “round” lots. Some industry experts agree with PIMCO and do not find much merit to the SEC investigation.
This SEC investigation is only adding to the dilemmas at PIMCO. The flagship Total Return Fund has now experienced 17 consecutive months of outflows, totaling over $92 billion, leaving assets in the Fund just above $200 billion. Investors decided to pull almost $25 billion in September when news of Bill Gross’s departure and the SEC investigation hit the markets. Many analysts are expecting more redemption from PIMCO once investment committees across the globe complete their review of PIMCO.