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Pimco Total Return suffers record $23.5bn outflow

Pimco Total Return suffers record $23.5bn outflow

(Update) The acrimonious departure last week of bond fund manager Bill Gross from Pimco has, as expected, led to huge withdrawals of money by investors in his main fund, Pimco Total Return.

New figures show the fund suffered a record $23.5 billion (£14.5 billion) of redemptions in September as a result of Gross' exit and concerns about prospects for the giant fund. 

The sheer size of the redemptions, equivalent to 10% of the fund's assets, were its biggest ever monthly outflow and have refuelled fears of the impact this could have on bond markets, which are jittery as the UK and US move towards a rise in interest rates.

Liquidity risk

Because it is the world's largest bond investor, Pimco holds large positions in many smaller or specialist fixed income markets which could be hard for it to sell in a hurry and satisfy investors wanting back their money.

Since the announcement that Gross was joining Janus Capital, several ratings agencies, such as Morningstar, and consultants, including Mercer, have downgraded Pimco Total Return. The California-based asset manager has held conference calls with key investors in a bid to stem outflows and the group said these have eased following an initial spike after the news broke.

Mark Holman, chief executive officer of TwentyFour Asset Management, a specialist in asset-backed bonds, said investors were right to have been concerned that this could be 'the big liquidity testing event that markets have feared for some time'.

Well constructed fund

However, having inspected the Pimco Total Return's portfolio with its 6,200 different holdings, Holman was impressed with what he saw. He said the fund had lots of big holdings in global government bonds and around 60% of its assets were in highly liquid credits in which billions could be traded every day. Moreover, the use of derivatives linked to interest rate exposure and bond indices provided more liquidity. 'Overall, I have to say that I was a lot less concerned that I thought I would be,' he wrote in a note to clients. 

September also marked the fund's seventeenth consecutive month of contraction with investors having consistently pulled out cash since the US Federal Reserve first started talking about interest rate rises last May. Data from Morningstar reveals the fund saw $41.1 billion of redemptions in 2013 and a further $24.8 billion in the first eight months of the year. Following September's further $23.5 billion of withdrawals, the fund has shrunk by around a third from its record peak of $293 billion last April.

Far from being worried, Rob Harley, senior research analyst at Tilney Bestinvest, the wealth manager and investment supermarket, argued this meant Pimco was used to dealing with big outflows. 'On balance we believe those looking for a larger market reaction to this event alone, might be disappointed.

'However, this is not to say that investors should remain complacent to the risk of price volatility in this market. Liquidity risk is now a greater and more permanent feature of the corporate credit markets, something investors will have to learn to live with going forward.'

Think before you leap

Nick Dixon, investment director at Aegon, the pension and savings group, urged investors to think carefully about the costs and benefits before jumping ship. Aegon's analysis of 11 funds run by departing star fund managers, like Gross, found that most funds continued to do well, something Pimco is hoping to replicate with its reshuffled team.

'Bill Gross has left a distinct investment DNA at Pimco, with talented analysts and a strong team culture,' said Dixon. 'It is also important to think hard about the costs associated with moving money: potential fees, out of market risk and missing likely gains from existing funds,' he added.

Nevertheless, for investors looking for other funds with broad exposure to bonds, Harley recommended the following:

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