By Kirsten Grind
For almost two decades, Pacific Investment Management Co. has
laid claim to the world's largest bond fund.
On Monday, it lost that title to Vanguard Group, whose Total
Bond Market Index fund ended April with $117.3 billion in assets
under management, surpassing the Pimco Total Return fund, which
closed the month with $110.4 billion, according to estimates from
both companies.
A year ago, the two funds were more than $100 billion apart,
demonstrating the remarkable turnabout in fortunes at Pimco in
recent years that began with sagging performance of the fund and
culminated in the striking departure of its star manager and
co-founder Bill Gross.
The toppling of Total Return marks a significant turning point
for the industry as investors flock to plain-vanilla funds that
follow market indexes rather than relying on star managers to pick
winners.
Malvern, Pa.-based Vanguard, known for its hands-off approach to
investing, won an unprecedented race among asset managers for
investor money sparked when Mr. Gross left Pimco in September.
Pimco Total Return first became the industry's largest by assets
in 1997 and at its peak in April 2013 had $293 billion in assets
under management. It was the flagship of a company that became a
behemoth overseeing almost $2 trillion in assets. The company's
complex, located about a mile from the Pacific Ocean, was called
"the Beach" on Wall Street trading desks.
But Pimco's grip weakened as Mr. Gross's returns began to suffer
in 2014 and outflows increased. He left Pimco after clashes with
Pimco executives and increasingly erratic behavior. He now runs a
smaller mutual fund at rival Janus Capital Group Inc. and declined
comment through a spokeswoman.
Another blow for Pimco was a trend away from fund managers such
as Mr. Gross and toward so-called passive investments that mimic
indexes and other benchmarks for a fraction of the cost of the
typical mutual fund.
"The indexing story helps," said Joshua Barrickman, senior
portfolio manager of Vanguard's Total Bond Market Index fund, which
tracks a version of the Barclays U.S. Aggregate Bond Index. "It
continues to have a lot of momentum and people are starting to see
that it makes sense."
A Pimco spokeswoman declined to comment. Pimco, with about $1.6
trillion under management, is based in Newport Beach, Calif. and is
a unit of German insurer Allianz SE.
Vanguard's ascension is significant, say analysts and industry
observers, because the Pimco Total Return fund has for so long
dominated the world of mom-and-pop fixed-income investing as Mr.
Gross presided over its massive growth and helped to make it a
household name.
"There's no guarantee of staying on top forever," said Jeff
Tjornehoj, head of Americas research for mutual-fund-research firm
Lipper. "It's shocked a lot of people how quickly things changed at
Pimco from the company that seemed to have very few setbacks to
finding themselves over the last year and a half struggling to
overcome them."
The Pimco fund is more expensive but has seen higher returns
than the Vanguard fund, which is tasked with tracking the
index.
So far this year through Friday, the Pimco Total Return fund has
returned 1.36%, compared with 0.91% for the Barclays U.S. Aggregate
Bond Index, while the Vanguard fund has returned 0.94%, according
to Morningstar. The Pimco's fund average annual return over three
years through Friday is 3.24%, compared with 2.54% for the index.
Vanguard's fund returned 2.44% over that time.
The Vanguard Total Bond Market Index fund's largest share class
has an expense ratio of 0.07%, or $7 for every $10,000 invested,
compared with 0.46%, or $46 for every $10,000 invested in the Pimco
Total Return fund's largest share class, according to
Morningstar.
Investors pulled about $103 billion from the Pimco Total Return
fund last year, the bulk of it after Mr. Gross left, according to
Morningstar and Pimco. The loss of an additional $5.6 billion in
April was the 24th consecutive month of withdrawals.
As money managers scrambled for billions leaving the firm, the
Vanguard Total Bond Market Index fund became one of the biggest
recipients of that cash, Vanguard says.
Mr. Barrickman's fund saw about $15 billion in investor inflows
last year and has seen its assets increase from $110.6 billion at
the end of 2014 to $117.3 billion in April.
Mr. Barrickman, who is also head of fixed-income investing
Americas, has nabbed investors without increasing marketing or
relying on tough sales pitches. In an interview Monday, he said the
interest from investors is just an affirmation of Vanguard's low
cost-model. Actively managed funds often come with higher fees.
"Assets show up and that's great, because it's verifying what
we're doing is valuable," he said.
Surpassing Pimco as manager of the largest bond fund marks a
banner year for Vanguard, which also runs the biggest stock fund
and set a mutual-fund-industry record in 2014 for the highest
amount of annual investor inflows. The firm also hit $3 trillion in
assets under management last year.
Pimco has been scrambling to keep clients following its
tumultuous 2014 but in early December one of three new Total Return
managers said the firm had moved past the knee-jerk reaction in
terms of flows that you would expect to happen.
Outflows slowed each month this year, down from last year when
investors pulled as much as $8 billion on one day in October. The
slowdown in withdrawals has coincided with strong performance
compared with rivals.
Write to Kirsten Grind at kirsten.grind@wsj.com
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