PIMCO FUND:

PIMCO (Pacific Investment Management Company) is a global investment management

firm that primarily focuses on portfolio management, account management and business
management. PIMCO specializes in fixed income securities and manages the internationally
known Total Return Fund. It serves institutional investors, high-net-worth individuals and
individual investors with its separate account services and mutual funds.
PIMCO, the fixed-income investment management kingpin, has $1.97 trillion in assets under
management and a whopping $237 billion under management for its signature PIMCO Total
Return Bond Fund. Firm founder Bill Gross has been known to take a "clients first" stand.
Since its 1971 founding, whats made Pimco different has been either uncommonly talented
management, or performance that indicated uncommonly talented management. (The two
arent necessarily the same.) The firms most successful fund has consistently beaten the
bond market, albeit by barely a point a year before expenses. That's still enough to keep
fundholders happy, and the people tasked with crafting those funds consistently rich.
Investors who place money under Pimco stewardship are paying for expertise, rather than
going with a simple index fund that has lower expense ratios but runs on autopilot.
Putting clients first is what Gross, and PIMCO, say they are doing with the release of 19 new
actively managed exchange-traded funds (ETFs), filed with the U.S. Securities and Exchange
Commission, under its official firm name, Pacific Investment Management Co.
Tripling PIMCO's ETF Lineup with Spinoffs

The release triples PIMCOs ETF lineup, focusing primarily on spinoffs of existing products,
including (citations are from PIMCO's web site):
PIMCO Income - Seeks to maximize current income. Long-term capital appreciation
is a secondary objective. Holds a broad range of fixed-income securities (0-8 years
average duration).
PIMCO Unconstrained Bond - Seeks maximum long-term after-tax return,
consistent with preservation of capital and prudent investment management. Holdings
include a broad range of fixed-income investments.
PIMCO Municipal Bond - Seeks high current income exempt from federal income
tax, consistent with preservation of capital; capital appreciation is a secondary
objective. Holds investment-grade municipal bonds (3-12 yr. average duration).
StocksPlus - Seeks total return that exceeds that of the S&P 500. Holdings include
S&P 500 Index futures and short-term bonds.
IndexPlus - Seeks total return that exceeds that of the S&P 500. Enhanced RAFI
1000 derivatives backed by an actively managed portfolio of fixed-income securities
with an absolute return orientation.
The active management part of the new ETF fund launch comes into play with all of the
above funds, as active ETFs (unlike their passively managed counterparts), lean heavily on
the trading prowess and investment-management acumen of the managers who run the
PIMCO funds.

We believe actively managed ETFs provide another way for investors to access PIMCOs
global strategies across fixed income, equities and commodities, all backed by the firms
time-tested investment process, PIMCO said in a prepared statement.
Each ETF is specifically designed to mirror the investment exposure, and likely results, of
the PIMCO benchmark mutual funds. For example, if the PIMCO Index Fund generates a
given average annual return (14.6% over the past five years), investors can count on the ETF
generating the same returns as its mutual fund counterpart on an annual basis.
Fee-wise, the funds average an expense fund ratio of 0.33% (with a range of 0.09% to
0.65%), which makes the PIMCO funds on the lower end of the ETF fee range across the
industry.
Still, it's worth noting that PIMCO's fixed-income losing streak continues. According to data
from the first quarter of 2014, PIMCO's signature fund, the PIMCO Total Return Fund,
lagged both its benchmark and its peers, primarily because it was on the wrong side of longmaturity bonds, which outperformed shorter-maturity bonds for the quarter.
Although Pimco maintains dozens of funds, its flagship is the Total Return Bond Fund. With
assets in excess of $200 billion, the Total Return Fund is one of the two largest in the world
and the one that shot Pimco to prominence. Ostensibly, the Total Return Fund invests in
intermediate-term, investment-grade bonds, which sounds nice and conservative on the
surface. But a fund as gigantic as the Total Return Fund didnt get as big as it is by putting all
its money in 5-yeartreasury notes. The securities in the Total Return Fund are eclectic, and
even include such exotic species as Asian credit default swaps.

PIMCO was founded in 1971 by Bill Gross, Jim Muzzy and Bill Podich with the belief that
bonds should be actively traded to enhance returns. The Newport, Beach, Calif., firm has
since expanded into derivatives, mortgage-based securities, emerging markets and other
sectors of the global fixed income market and has grown to be one of the largest asset
management firms in the world. Once a unit of Pacific Mutual Life Insurance, it is now
owned by German financial services firm Allianz SE.
Bill Gross had a great run at the helm of the Pimco Total Return Fund, starting at its
inception in 1987.
Largely through the force of his outsized media presence and ability to turn bond investing
into something retail investors could understand, he was able to build the Total Return fund
into the worlds largest mutual fund.
In a sign of how closely Gross was identified with Pimco, a riptide of client assets followed
in the wake of his abrupt departure from the company last month. Pimco said some $23.5
billion poured out of the fund during the month, most in the aftermath of Gross
announcement that he would join Janus Capital.
But as you can see from the chart below, money has been exiting Pimco for quite a while. (It
lost its title as the worlds largest mutual fund in 2013.) And the truth is that much of the
funds growth came amid a decades long bull market for fixed-income products, which
culminated in sharp rush to the safety of bonds during and immediately after the financial
crisis, the Great Recession, and the sluggish recovery that followed.

Interestingly, the man known as the Bond King, showed difficulty navigating the bond
market over the last few years. He famously had to apologize in 2011 for not recognizing that
the bond rally had further room to run.
The Exit of Bill Gross and other board members:
Things didnt get much better. In 2013, Bill Gross had the worst year of his career. The
unceremonious departure of co-CEO Mohamed El-Erian earlier this year was followed by a
series of stories detailing the difficulties of working under Gross. The Wall Street Journal
reported that Pimco executives planned to fire Gross before he left.
The first major piece of the drama to hit the news occurred in January when Co-CEO
Mohamed El-Erian announced he was leaving Pimco. There were many news stories about
an apparent rift between the two and how they clashed over several issues. El-Erian, for

those that dont know, is the former head of Harvard Management Company and a very wellrespected figure in investing and economic circles. Gross had referred to El-Erian as his heirapparent on several occasions prior to his departure.
Distraction from the Day Job
From that point until Grosss resignation there were numerous stories in the media about
internal strife between Gross and other senior managers stemming in part from his alleged
autocratic and confrontational management style. Towards the end, it was reported that
several senior managers had indicated that if Gross didnt leave they would. Reportedly,
Pimcos parent Allianz Se (AZSEY) was set to fire Gross the day after he made his
announcement to go to Janus Capital Group, Inc. (JNS).
So if you are an investor or perhaps a financial adviser looking to offer your take on the
Pimco situation to your clients here are a few thoughts. Note: these are my thoughts and
opinions and are based on what Ive read and heard in the media and not any sort of insider
information.
Founders Often Leave the Companies they founded
It's not unusual to read about the founder of a successful company stepping aside a few years
down the road as the organization he or she founded evolves to a point where a different style
or level of management is needed. This type of change generally occurs sooner than 40 years
after the founding of the company, but nonetheless it appears that this was at least partially
an issue here.

Allianz acquired Pimco in 2000 and the firm has continued to grow in terms of assets under
management and the number and types of mutual funds and other investment management
services offered.
Not Just Bill Gross
Via his success managing the firms flagship bond fund, Pimco Total Return as well as
growth of the firm via its other funds, Pimco has become a very large asset manager in terms
of both assets under management and headcount. To Gross credit, Pimco is an organization
made up of many very smart and talented people.
If the reports of Gross confrontational management style are accurate, it's not surprising that
some of the more senior managers at the firm had given Allianz the we go or he goes
ultimatum that has been widely reported in the financial press. Given the recent relative poor
performance and outflow of assets from Total Return in recent years (and from the firm as a
whole), combined with the negative press surrounding Gross and the firm, it would seem that
Allianz was ready to make the decision that this group of managers was more important to
Pimcos future than was Bill Gross.
What Does the Future Hold for Pimco Investors?
Certainly this is the $64,000 question. In the short-term, outflows from Total Return and
other Pimco funds may continue as financial advisers and large institutions decide that they
want to move away from the firm in the wake of Gross departure.
Over the long-term, Pimco is a very solid organization that offers a number of quality funds
across the fixed income spectrum, as well as across a wider spectrum of investment types,

such as equity and alternative styles. It will remain to be seen how the Pimco of the future
compares to the Pimco of the Bill Gross era.
Morningstar, Inc. did drop their ranking of the Total Return fund from Gold to Bronze (the
system is on the order of the Olympic medals and does attempt to look at funds from a
prospective viewpoint vs. their star system, which is a ranking based upon past
performance).
Uncertainty...But Promise
PIMCO Total Return enters a new era with uncertainty but also a good deal of promise.
Morningstar's analyst goes on to say that in the short-term there is much uncertainty
surrounding the fund due to the continuing outflows and due to the uncertainty surrounding
the roles and the approach of the new managers. Additionally, the analyst notes that both of
the new co-managers are past Morningstar Fixed Income Managers of the Year with their
prior Pimco funds.
Lastly, Allianz is a very successful, diversified international financial services firm. While
Im guessing they never envisioned that the departure of Bill Gross would happen in quite
this fashion, they had to know that at some point Gross would be leaving Pimco. Further, I
have to believe that Allianz bought Pimco as a long-term going concern rather than just for
Bill Gross. Therefore, I have to think that Allianz will do whatever it takes to ensure that
Pimco recovers from this setback if for no other reason than to protect its investment.

The Bottom Line

The situation at Pimco is certainly unnerving to investors and financial advisers. Many
advisers will choose to move their clients assets away from Pimco, and as we have seen, the
investment committees of many large institutions have been making the same decision.
Understanding the long-term implications for the future is tough for individual and
institutional investors. The truth is that the future is unknowable. Investors in Pimco Total
Return and all other Pimco products need to assess the facts of the situation, how the
company has communicated the transition, and determine the best course of action for
themselves and/or for their clients based on known factors.