By Jessica Toonkel
NEW YORK (Reuters) - When Bill Gross bolted Pimco in late September after months of mediocre performance in his Total Return Fund, clients including Wells Fargo & Co. and Charles Schwab Corp pulled over $61 billion from the Newport Beach, California-based money manager. Where the money landed may be no better than where it left.
The reaction to Gross's sudden exit has put some money in rival bond funds that charge higher fees, produce lagging returns, have limited track records and in some cases, riskier holdings.
"Investors have made a knee jerk reaction away from Pimco, but in doing so they need to make sure that what they are buying is a better alternative," said Todd Rosenbluth, director of mutual fund research at S&P Capital IQ.
Some funds with very short track records have shown inflows that coincide with the Pimco money exodus.
For example, the two-year-old, $576 million JPMorgan Global Bond Opportunities Fund, received $346 million in inflows since Sept. 26, the day Gross quit, according to Morningstar Inc. The fund has returned 4.54 percent for the past year, ranking it among the top 30 percent of its peers, according to Morningstar.
Still, the fund's year-to-date total return of 3.56 percent lags the 4.74 percent total return of the $162.8 billion Pimco Total Return Fund, which Gross ran for 27 years. And the JPMorgan fund costs more, with a net expense ratio of 0.66 for its institutional shares.
It is rare to see a less established fund gather that much in assets so quickly, Rosenbluth said.
"Usually investors like to see a three year track record," he said.
JPMorgan attributes the flows to its performance, low volatility and investor comfort with the manager, Bob Michele, who has been managing unconstrained funds for 10 years, a spokeswoman said.
Wells Fargo Advisors moved assets in its Freedom managed account platform from Total Return to at least three portfolios: the MetWest Total Return Bond Fund, the AMG Managers Bond Fund and the Fidelity Advisor Strategic Income Fund, sources told Reuters.
Schwab dropped the Pimco Total Return Fund from its 10 target date funds and collective trusts, temporarily reallocating the Pimco assets to the Schwab Total Bond Market Fund and the Loomis Sayles Investment Grade Bond Fund.
A Wells Fargo spokeswoman declined to comment on the changes, but said the decisions were made based on "the long term view for clients."
At Schwab, the temporary reallocation to the two funds aimed at maintaining the overall risk/return characteristics of the Schwab Target Funds' fixed income portfolios rather than pick the "historically best performing" replacement funds, a spokeswoman wrote in an e-mailed statement. The firm expects to choose a permanent replacement for the Pimco fund in the first quarter of 2015, she wrote.
Pimco declined to comment. In November, the Pimco Total Return Fund, under a new team led by long-time Pimco portfolio manager Scott Mather, posted returns of 1.00 percent, beating 99 percent of its category, according to Morningstar. By contrast, in the 18 months ending in September, Total Return gained 0.49 percent, trailing 83 percent of its peers, according to Morningstar.
The bulk of money leaving Pimco went to reasonably priced and top-performing funds managed by BlackRock, TCW's Metropolitan West Asset Management, DoubleLine Funds and The Vanguard Group.
LAGGING PEERS
But Wells Fargo, for example, chose to replace Pimco offerings with Fidelity's strategic income fund and its short fixed income fund that have lagged a majority of their respective peers for the past three years, according to Morningstar.
And while the MetWest fund has outperformed 94 percent of its peers for the past three years, with a total annualized return of 5.76 percent, the Wells Fargo clients who had money in the Pimco Low Duration Fund, which Gross also managed, were moved to the Fidelity Advisor Short Fixed-Income Fund. That has lagged the Pimco fund for the past 10 years, according to Morningstar.
The Fidelity short fixed income fund has beaten its benchmark for the past five years and is less volatile than most of its peers, a Fidelity spokeswoman said.
Though the AMG Managers Bond Fund has outperformed over the past 10 years, total expenses for institutional shares of the fund, which are usually the cheapest class, are 91 basis points, almost double the 46 basis points of Pimco Total Return.
"Right now investors have been rewarded despite the higher costs, but there have been times, like in 2008, when the fund has significantly underperformed its peer group," Rosenbluth said.
The AMG fund fell 16.31 percent in 2008, compared to the category which dropped only 4.7 percent, according to Morningstar.
Schwab's decision to put Pimco assets into its own Total Bond Market Fund and the Loomis Sayles Investment Grade Bond Fund has had mixed results – while the Loomis Sayles fund is a top performer for the past one, three and five years, the Schwab fund has underperformed its peers for the past three, five and 10 years. However, the fund is only 29 basis points, analysts note.
"Because it is cheap it might make sense on a short-term basis, but the performance is weak and it raises questions on whether it was chosen only because it is its own fund," Rosenbluth said.
(Reporting By Jessica Toonkel; Additional reporting by Jennifer Ablan; Editing by Tim McLaughlin and John Pickering)