People have been talking about how the PIMCO Total Return mutual
fund (Nasdaq:PTTAX) is being outperformed by the PIMCO Total Return
ETF (NYSEARCA:BOND). The controversy is that both bond funds are
actively managed by the same person: Bill Gross, the "Bond King"
otherwise known as the "man in the mirror."
If you're a shareholder in the PIMCO Total Return mutual
fund(s) is it time to bail in favor of the lower cost BOND ETF?
The PIMCO Total Return mutual fund has as 26-year track record,
$289 billion in assets, and is widely regarded as the crme de la
crme of active bond funds. On the other hand, BOND is just over a
year old and has just $4.7 billion of investor's assets.
The PIMCO Total Return fund comes in maze of different share
classes, each with a different fee structure.
For instance, the institutional share class (Nasdaq:PTTRX) has
no sales load and charges annual fees lower than BOND of just
0.46%, but requires a minimum $1 million investment. In contrast,
the A-shares have a minimum investment requirement of just $1,000
but charge an onerous upfront sales load of 3.75% along with annual
expenses of 0.85%. By comparison, BOND has no load (ETFs are bought
and sold on exchanges and have trading commissions) and annual
expenses of just 0.55%.
What about performance?
Although much ado has been made over how BOND has outperformed
the PIMCO Total Return mutual fund by approximately 5% over the
past year, a one-year time frame is really too short to judge
Other Key Factors
In a piece titled, "
Upstart Fund Beats its Daddy
," Jason Zweig of the Wall Street Journal did a good job of
contrasting the portfolio characteristics or differences between
PTTAX has around 31% invested in cash and equivalents, whereas
BOND holds just 9%. Likewise, PTTAX has higher exposure to U.S.
Treasuries (28%) and less exposure to mortgage securities (26.22%)
and municipal bonds (3.05%) compared to BOND.
Another big difference is intraday liquidity. If you want the
flexibility of being able to determine a specific purchase or
selling price for your fund, along with the ability to buy or sell
shares during market hours, BOND is probably the right choice
versus its mutual fund counterpart.
Besides the cost and tax ramifications of bailing on PTTAX in
favor of BOND, investors better not overlook manager tenure. (
Watch our latest video:
Trading Commission Free ETFs the Smart Way
Here's what I mean: Before buying into BOND or even PTTAX,
investors need to guess how much longer Bill Gross will continue
managing either of these funds. Gross turns 69 on April 13th and is
still a sharp guy. But betting your money on an aging horse is a
risky proposition for an investor with a 20 to 30 year time
horizon. On the other hand, for someone with a five to 10 year
horizon, it might not matter.
Today, there are 58 actively managed U.S. listed ETFs with $12.9
billion in total assets, according to AdvisorShares.
Why would PIMCO offer Bill Gross's coveted investment management
services via BOND - a lower cost package? The first reason is that
PIMCO understands that ETFs are a viable threat to its mutual fund
business. (Of course, besides understanding that ETFs are just
The second reason is competitive. PIMCO would rather risk losing
mutual fund assets to its own ETFs versus a competitor's ETFs.
Basically, it's the Starbucks business model of
Naomi Klein, author of NO LOGO explains, "Its (Starbucks)
cannibalization strategy preys not only on other Starbucks outlets
but equally on its real competitors, independently run coffee shops
and restaurants. The idea is to saturate an area with stores until
the coffee competition is so fierce that sales drop even in
individual Starbucks outlets." Could the same thing happen in the
mutual fund industry?
Although PIMCO can't create an additional ETF share class of its
existing mutual funds (Vanguard owns the patent), it's established
the almost perfect template or model for not just itself, but other
mutual fund companies with the same problem; how to package
all-star fund managers inside lower cost ETFs. Up until now,BOND
proves the model works.
For mutual fund executives concerned about the risks of
self-cannibalization, I'll offer up some good advice given to me by
a beloved late uncle years ago. At the time, he was trying to
convince me to buy a laptop computer. "How much will it cost me," I
asked him. "You're asking the wrong question," he retorted. "How
much will it cost you if you don't buy it?"
Needless to say, I bought the laptop and never looked back.
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