PIMCO Files For Active Stock & Bond ETFs
September 03, 2008
Pacific Investment Management Co., the world's biggest bond fund manager, is setting its sights on moving into actively managed stock exchange-traded funds markets.
On Wednesday, the Newport Beach, Calif.-based home of star bond manager Bill Gross filed its second ETF-related exemptive relief request with the Securities and Exchange Commission. But unlike its initial filing, PIMCO's asking to be granted approval to offer active strategies.
And besides bonds, it also wants to launch active ETFs focusing on stocks, commodities and asset allocation ETFs.
"These are all areas where we have existing expertise and related investment products," said Don Suskind, a PIMCO product manager.
On July 29, PIMCO filed for exemptive relief with the SEC to offer passively managed, index-based bond ETFs. But its executives told IU.com at the time the request was the first in a larger initiative that could lead to active bond ETFs as well as other types of nonpassively run funds. (See related story.)
Now, such an expansion strategy is being set in motion. PIMCO won't speculate on how long the regulatory process should take. But based on past filings, industry experts say they wouldn't be surprised to see the first PIMCO active ETFs hit the market within six to nine months.
"This clearly is an inflection point in the ETF market," said Rich Romey, president of ETF Portfolio Solutions in Overland Park, Kan. "PIMCO is sending a message to the Vanguards and Barclays [Global Investors] of the world that they're going to mount an assault on every major front along the ETF landscape—not just bonds."
With $829.4 billion in assets under management through June, PIMCO has established one of the fund industry's best records in the active fixed-income arena. That includes its flagship PIMCO Total Return Fund (PTTRX), which has been run by Gross for more than 20 years. Under his stewardship, the intermediate-term mutual fund has consistently beaten a lion's share of its active rivals. In the past 10 years alone, PIMCO Total Return has outperformed 97% of its peers, says Morningstar Inc.
But PIMCO hasn't just relied on bonds. Its CommidityRealReturn Strategy Fund (PCRAX) launched in June 2002 and has attracted more than $13.5 billion in assets. It buys derivative instruments linked to the Dow Jones AIG Commodity Total Return Index. That's a wide-ranging commodities benchmark and one that's used by a popular Barclays exchange-traded note, the iPath Dow Jones-AIG Commodity Index (NYSEArca: DJP).
PIMCO's active mutual fund differs in that it uses extra cash made available by the relatively small upfront investment needed to buy structured notes and other related vehicles to buy Treasury Inflation Protected Securities (TIPS).
The added income gained from its bond exposure means this is a unique sort of commodities fund. If PIMCO decides to use a similar strategy in an ETF structure, it could introduce an interesting new twist on commodities investing. Whether regulators are ready to make such a leap into such sophisticated portfolios, however, remains a big question.
So far, only five active ETFs have been launched. Two are bond portfolios (see related article).
Two of a trio of active stock ETFs appear to be more souped-up quantitatively managed portfolios. Only one has trading flexibility that compares directly with most actively managed mutual funds. (See story here).
PIMCO was bought by German-based financial services giant Allianz in 2000. Four years later, the PIMCO brand was removed from stock funds run independently by another company but also part of the Allianz umbrella. The separation came after some of the other firm's stock funds were charged with market-timing by regulators.
If PIMCO turns to a more stock-focused ETF strategy, that raises the question of whether the bond shop is planning to branch out on its own or through a partnership with another Allianz or outside active management shop.
But using its own in-house managers, PIMCO has been running its StocksPlus Fund (PSPRX) for more than a decade. The fund invests in futures contracts and other derivatives to track the S&P 500 Index. With excess cash made available by dealing in futures, StocksPlus also invests part of its portfolio in short-term bonds in an effort to enhance the fund's overall returns.
Gross also manages the enhanced indexing strategy. And while it offers just one fund on the retail level, PIMCO also offers various versions in separate accounts to institutional investors. Those combined assets using similar StocksPlus methodologies represented nearly $30 billion in assets through June, according to PIMCO.
"We've managed equity portfolios since 1986 through the StocksPlus strategies," said PIMCO's Suskind. "Therefore, we have demonstrated an in-house ability to manage against equity benchmarks."
The new filing doesn't identify any portfolio managers. "PIMCO's entry into active ETFs represents a broader business strategy. As an investments solutions provider, it's important for us to have an array of products and a full set of investment vehicles," added Suskind.