Morningstar's Current View on PIMCO

Still Formidable, With Areas for Improvement and A Few Open Questions

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The memo is contributed by:
Eric Jacobson, Senior Analyst of Active Funds Research
Michael Herbst, Director of Active Funds Research
Bridget Hughes, Associate Director of Funds Research

On Jan. 21, 2014, PIMCO announced former CEO and co-CIO Mohamed El-Erian would be departing the firm by mid-March 2014. Those announcements took both PIMCO and PIMCO observers by surprise. The firm announced a number of additional changes to its leadership ranks on Jan. 29, 2014.

Since those announcements, a number of media articles have focused on the fractious interactions between CIO Bill Gross and El-Erian; short-term performance challenges and outflows at a few of the firm's funds; and Gross' at-times tempestuous behavior. Those articles generally did not directly address the question of whether El-Erian's departure, Gross' behavior, or the recent leadership changes have actually impaired or benefited PIMCO's investment process and investment culture.

Over the past six weeks, we've been delving into that question in a series of extensive conversations with PIMCO's leadership. Specifically, in this memo we weigh in on two main questions:

  • What is the real impact of El-Erian's departure and the recent leadership changes on PIMCO's day-to-day investment process?
  • Is PIMCO as formidable an investment firm now as it was prior to El-Erian's departure?


In addition, we detail the changes we are making to our Stewardship Grade and Parent Pillar rating for PIMCO.

We will follow up in coming weeks with fund analyses and in early April with a related piece to address questions we are receiving from investors regarding individual PIMCO funds.

A Brief Synopsis of What Happened at PIMCO
In the wake of El-Erian's departure, PIMCO announced a number of changes to its leadership ranks, some on Jan. 21, 2014 , and the rest on Jan. 29, 2014 , including the following:

  • Doug Hodge was named the firm's CEO, and Jay Jacobs was named president, assuming many of the noninvestment duties formerly handled by El-Erian.
  • Six senior-level portfolio managers were named deputy CIOs—Mark Kiesel, Virginie Maisonneuve, Scott Mather, Andrew Balls, Mihir Worah, and Dan Ivascyn—to shoulder investment and personnel management duties formerly handled by El-Erian.
  • Several of the deputy CIOs—Kiesel , Worah, and Ivascyn—as well as Tony Crescenzi, join Balls, Mather, Saumil Parikh, Christian Stracke, and Gross as permanent members of PIMCO's Investment Committee, the body charged with setting PIMCO's macroeconomic views.
  • Deputy CIO Maisonneuve's primary focus will be to lead the Equity Portfolio Management Committee, and she will be immediately available to the Investment Committee to provide input for PIMCO's expanding investment platform.
  • Equities portfolio manager Chuck Lahr and fixed-income generalist portfolio manager Marc Seidner left PIMCO—Lahr for personal reasons, while Seidner stepped into a new role overseeing fixed income at Grantham, Mayo & Van Otterloo.
  • PIMCO alum Sudi Mariappa will be rejoining the firm as a generalist portfolio manager, from hedge fund GLG.


What Morningstar Has Done Thus Far to Assess the Situation
Thus far, Morningstar has published a number of videos, articles, and fund analyses touching on the impact of these changes—a list of those pieces can be found in the Appendix to this memo.

Since the changes were announced, Morningstar analysts have been in frequent contact with PIMCO's senior leadership, including Gross, Worah, and other portfolio managers directly or indirectly affected by the changes. We've also had extensive conversations with other members of PIMCO's leadership, including CEO Hodge. These conversations culminated in an on-site visit to PIMCO on March 10, 2014.

Given our current view, we have lowered the Corporate Culture component of PIMCO's Morningstar Stewardship Grade for Mutual Fund Firms to C from B. We have also lowered the firm's Manager Incentives component to C from B, reflecting a lower percentage of the firm's mutual fund assets in which at least one of the fund's managers invests in fund shares worth more than $1 million, the highest ownership level reported to the SEC. As a result of those changes, PIMCO's overall Stewardship Grade falls to C from B, with an A grade being the highest possible and F the lowest. We have appended the full text and scoring for PIMCO's current Stewardship Grade to this memo.

On a related note, PIMCO's Parent Pillar score—one of the five pillars of the Morningstar Analyst Rating for Funds —falls to Neutral from Positive.

What Morningstar Is Doing Next
The changes to PIMCO's Stewardship Grade and Parent Pillar score do not automatically affect PIMCO funds' overall Morningstar Analyst Ratings for Funds, yet it is logical to assume that Morningstar analysts would move quickly from here to reassess those ratings on a fund-by-fund basis. We are preparing a follow-up piece for early April 2014 that will summarize our current opinions on individual PIMCO funds. In that piece we'll also answer a number of PIMCO-related questions that we have been receiving most frequently from investors.

You can read the complete memo on Morningstar's Stewardship Grade for PIMCO.

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