How you can be a victim of your own success
In active mutual fund investing, size can create its own problems. If you’re investing in a passive vehicle—like an exchange-traded fund (or ETF) such as the iShares Core Total US Bond Market (AGG) managed by BlackRock, Inc. (BLK)—then bigger is better. This is because ETFs have a large asset base that allows them to keep fees lower. Lower fees mean more returns for the investor.
On the flip side, if you have set out to outperform through an active investment vehicle, then going big can be a problem.
When the effective federal fund rate fell (see the chart above), long-term government bond fund returns should have increased. But the PIMCO Total Return Fund wasn’t able to produce good returns.
When a fund is small or moderately sized, it can take any bet it deems fit. But continued outperformance brings in an ever-increasing number of investors. The bigger your fund gets, the more difficult investing a meaningful percentage of your assets under management in new and upcoming ideas becomes. You’re more likely to invest in established ideas that have enough size and liquidity for your investment.
Many people have said that Bill Gross was feeling the pressure from less-than-expected performance in his flagship PIMCO Total Return Fund (PTTPX). The fund has recently lagged the benchmark index. Worse still, the fund had been seeing steady and significant outflows over about a year and a half, costing Gross prestige while also diminishing PIMCO’s profits.
New pastures for Bill Gross
Gross’s new fund, Janus (JNS) Global Unconstrained Bond Fund (JUCTX), is a Lilliputian compared to PIMCO Total Return. JUCTX has $12.9 million in assets as of August 31. The behemoth JNS has $202 billion that Gross used to manage for 27 years. He had outperformed the market with PTTPX, beating the market handsomely in most of those 27 years.
But the last few years have been a different story altogether. PTTPX has underperformed its competitors.