30 September 2014
They say all news gets priced into the stock market. Proponents of the Efficient Market Theory believe that there is “perfect information” in the stock market. Any information or insight that is available is there for all to see therefore negating any possible edge in beating the market. All that being said, no matter how clear your crystal ball is, nobody expected the shocking news we received on Friday.
Bill Gross, the co-founder of Pacific Investment Management (PIMCO) in Newport Beach, quit and packed his bags to join Janus Capital this past Friday. Gross has long been known as the “King of Bonds” and considered to be the nation’s most prominent bond investor. Until last year he was responsible for managing the largest mutual fund in the world – the PIMCO Total Return Bond Fund (PTTRX). That title now goes to the Vanguard Total Stock Market Index but PTTRX is still the world’s largest bond mutual fund. So…what happened here and was the writing on the wall?
As alluded to above PTTRX, and PIMCO in general, has been suffering for quite some time. PIMCO isn’t the only bond fund manager who has struggled with outflows but the sheer volume has opened some eyes. From May to August of 2014 PIMCO has had over $70 billion in assets liquidated and withdrawn. Over the past 72 hours (only 1 trading day including the weekend) the firm has already seen $10 billion bolt for the door!
Investors were already pulling money from bond funds due to fears of increased interest rates. As the Federal Reserve scales back its stimulus of $85 billion in monthly bond purchases, there simply has to be an eventual end to the bond party.
Read the following sentence carefully:
PIMCO and most of its mutual funds will get absolutely blasted in the near future.
The hemorrhaging has already begun but you can expect further massive outflows, which will have a major impact on performance. Several hundreds of billions of dollars are likely to leave the firm. If you own PIMCO funds now you would be wise to quickly reassess. You won’t be alone as many pension funds and their respective consultants will be putting these funds on close watch and likely place them on their sell list. In this instance you, as an individual investor, can likely move much quicker than the larger institutional money managers. Get out now if you haven’t already.
Without patting ourselves on the back we sold PIMCO funds long ago and in our opinion the ‘writing was on the wall’ for quite some time. Even before Friday’s news there were problems at PIMCO. Gross and former CEO Mohamed El-Erian did not see eye to eye and El-Erian left the firm in January. Aside from news like this our main issue was the relative lack of performance in their flagship fund. (PTTRX)
When is the right time to sell a mutual fund?