(PUB) Investing 2015

15

October 2015

Morningstar FundInvestor

private equity firms, which means the family that founded First Eagle will be a minority shareholder for the first time. This could put the firm’s corporate culture at risk. “The firm has its merits. It offers a limited number of mutual funds, all of which share a distinctive value orientation. Four of the funds—Global, Overseas, U.S. Value, and Gold—are run by its global-value team. First Eagle High Yield is run by a fixed-income group that First Eagle absorbed in 2011 , and the family’s newest offering, First Eagle Global Income Builder, is run by both the global-value team and the fixed- income team. First Eagle Fund of America is run by a subadvisor. “The firm has moved past upheaval before, especially after a 2007 change on the global-value team. The team has been relatively stable since then, though veteran manager Abhay Deshpande departed in 2014 and there has been some analyst turnover. One other negative: First Eagle Global has been allowed to grow to more than $45 billion, impeding its ability to take sizable stakes in smaller-cap stocks (typical here under former longtime skipper Jean-Marie Eveillard).” PIMCO —less than nine months after CEO and co- CIO Mohamed El-Erian himself decided to leave—the biggest questions revolved around the future of the firm, when and how it would stabilize, and whether it would see an exodus of investment staff. While those questions aren’t entirely settled, there have been some good signs. Here is Eric Jacobson’s take on it: “Once the largest mutual fund in the world, PIMCO Total Return PTTRX has since shrunk considerably, recently sliding under the $100 billion mark as combined outflows from Sept. 1 , 2014 , through August 2015 totaled roughly $124 billion. (Gross left on Sept. 26 , 2014 , but outflows over the last three days of the month were massive.) Those redemptions have abated some—the $2 billion that left in August 2015 was the lowest monthly figure since Gross resigned—and shouldn’t be hard for a firm with PIMCO ’s significant resources to manage at that level. But the outflows PIMCO One Year Later In the initial wake of Bill Gross’ resignation from

haven’t yet stopped, much less reversed. From May through August 2015 , they comprised nearly 8% of its assets, while flows out of the overall intermediate-term bond Morningstar Category were a more modest 3 . 5% . “ PIMCO Total Return’s portfolio certainly looks different from a year ago. However, that’s to be expected given the firm’s evolving macro view. There’s little evidence, meanwhile, that group head Dan Ivascyn (Gross’ successor in the CIO role) and this fund’s management crew are really doing anything significantly different from what Bill Gross had done while in charge. That’s not surprising, given that they were a crucial engine behind his success for so many years. The fund boasts notable large-currency and emerging-markets bonds positions, but it is reassuring that, while there are limi- tations to all models, stress tests, and expected levels of volatility, PIMCO has demonstrated a knack as good as any for developing useful tools while not overre- lying on any of them to be fail-safe. “The most notable changes in the portfolio’s exposures have been adjustments to the fund’s currency exposures, which comprised a short position against foreign currencies totaling 11 . 2% at the end of August 2015 . By contrast, until right after Gross’ depar- ture at the end of September 2014 , the fund’s overall currency exposure hadn’t deviated by more than 5% in either direction around the dollar since August 2011 and most recently hadn’t crossed more than 1 . 5 percen- tage points. “For those with a long-enough memory, the specter of that much currency risk in a core bond fund can easily become a source of angst. Currencies can go through long periods of muted volatility, but when they are volatile they can be much more so than bonds. In the early 1990 s, for example, the Japanese yen posted rolling three-year standard deviations in the 10% range—already well ahead of most bond indexes—and spiked up to around 16% thanks in large part to an Asian crisis set off in part by the devaluation of the Thai baht in 1998 . The euro has had its moments, too, with its trailing volatility briefly hitting similar heights in 2011 around the time that trouble in Greece began to call into question the future of the euro.” K