(Bloomberg) -- Morningstar Inc. cut the rating of Pacific Investment Management Co.’s Total Return Fund, the world’s largest bond fund, to bronze from gold after co-founder Bill Gross’s exit.

The research firm remains “positive overall” on the $222 billion fund, Eric Jacobson, an analyst at the Chicago-based research firm, said in a report dated yesterday. The downgrade was prompted by uncertainty regarding potential capital outflows and the reshuffling of management responsibilities at the Newport Beach, California-based company, Morningstar said.

Gross surprised the market on Sept. 26 by announcing he was resigning from the company he helped found to join rival Janus Capital Group Inc. Pimco, which oversaw $1.97 trillion at the end of June, may see asset withdrawals of 10% to 30% from his departure, Sanford Bernstein said in a report that day.

“Pimco Total Return enters a new era with uncertainty but also a good deal of promise,” Jacobson wrote, referring to new group Chief Investment Officer Daniel Ivascyn. “It will take some time to see how Ivascyn and the new managers will coalesce as a team in their new roles, but there are a number of reasons to believe they will be successful after the dust settles.”


Ivascyn, the new group CIO, and Mark Kiesel, one of the managers who have taken over supervising the Total Return Fund, have both earned Morningstar’s fixed-income manager of the year awards in recent years. They were often credited by Gross for feeding him their best bottom-up ideas, Jacobson wrote.

“The challenges posed by outflows from the fund remain a wild card,” Jacobson said, adding the fund’s 42% stake in a mixture of U.S. Treasury bonds and agency mortgages, as well as cash flows from coupon payments and maturing securities give “cautious optimism” that it would be able to withstand “a significant storm.”

Pimco’s Chief Executive Officer Douglas Hodge said the firm is expecting and is ready for client redemptions.

Withdrawals are “to be expected with any transition of a senior person,” Hodge said yesterday in a conference call with analysts where he was joined by top executives at Pimco parent Allianz SE. “We’re ready for that,” said Hodge, who added that it’s too early to estimate the impact.


Investors had been pulling money from the Total Return Fund as it trailed 63% of peers over the past year, on track to underperform a majority of rivals for the third year in four. The fund’s assets have shrunk from a peak of $293 billion last year.

Hodge said that Pimco Total Return and other funds run by the firm have a strong liquidity position to withstand investor redemptions. He also said many of Pimco’s large clients, including California Public Employees’ Retirement System, are sticking with the firm and that the new investment team under Ivascyn has removed a lot of “uncertainty” for clients.

“It’s important to remember that across the wide spectrum of Pimco portfolios, we do operate and invest in the largest, most liquid sectors of the fixed-income markets,” Hodge said.

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