One of the most influential pension consultants has stripped Pimco’s $223bn Total Return bond fund of its top rating, complicating the asset manager’s attempts to persuade clients to stick with the fund.
Mercer downgraded the Total Return and four other funds that had been run by Bill Gross, the Pimco founder who walked out of the firm after 43 years last week, according to people familiar with the move.
The downgrade immediately triggered a review of Pimco holdings by one of its UK pension fund clients.
Mercer cut Pimco’s Total Return fund and four other funds to a B grade on its A-to-C scale. Pension consultants hold considerable sway, particularly with smaller funds with fewer resources to assess investment opportunities, and Mr Gross’s Total Return fund has been a core recommendation of many consultants for a generation.
Pimco planned to fire Mr Gross as chief investment officer last weekend, but he quit to start a new bond fund at Janus Capital before the firm could move against him.
Morningstar, the research group most widely followed by retail investors, has also taken action against the Total Return fund, scrapping its “gold” analyst rating late on Monday. It downgraded the fund to “bronze” because of the “uncertainty regarding outflows and the reshuffling of management responsibilities”.
Many of the assets held by the Total Return fund have tumbled in price as traders anticipate that Pimco investors will pull their money, and rivals report strong flows into their own products in recent days.
US regulators are monitoring trading and fund flows, in what could prove a test case in the debate over whether asset management groups contribute to systemic risk.
Officials at the Securities and Exchange Commission, the Federal Reserve and the US Treasury, among other bodies, have been talking to industry executives about market developments and the potential for unintended consequences if investors pull their money from Pimco.
Regulators around the world are discussing new rules for large asset management groups and curbs on some of their activities, amid concern that the next “too big to fail” institutions may not be banks but asset managers.
US officials want to make sure that investors, including hedge funds and other investment managers, are not exacerbating risks if they contemplate moving their money from Pimco, said people familiar with the efforts.
Representatives from the agencies concerned are telling investors to make sure they understand the potential knock-on effects of their actions.
The conversations with executives do not signal imminent concern so much as an effort to understand the market dynamics when a large asset manager finds itself under pressure. Outflows have so far been managed in an orderly way, according to people familiar with the regulators’ efforts.
A report commissioned by the US Financial Stability Oversight Council
warned that large funds might be subject to “runs” if investors believe there is an advantage to pulling their money first.
Additional reporting by Katrien Van Hoof, MandateWire