Recent allegations of improper mutual fund trading at firms under the PIMCO brand brought by New Jersey regulators have prompted fund tracker Morningstar to recommend selling funds run by PIMCO Equity Advisors (PEA).
Morningstar maintains that it will make no changes to its opinion of PIMCO, the fixed-income operation run by veteran Bill Gross, despite the fact that the complaint implicates all three units of German insurance giant Allianz AZ. The situation here is particularly "messy" because the corporate structure under which all of those firms fall are not easily unpacked.
Due its enormous size and number of affiliates, theres an increased risk that an attempt to placate different cultures will create an organizational structure thats "too unwieldy to provide accountability," said analyst Eric Jacobson. "This sets the stage for transgressions that are embarrassing, or worse." He went on to say that the allegations against PEA are "extremely troublesome."
The complaint against PEA alleges that it entered into agreements that allowed hedge fund Canary Capital Partners to market time its funds in exchange for long-term or "sticky" assets in other PEA funds or hedge funds. In its prospectus, PEA explicitly said that investors making more than six trades per year will be scrutinized and ejected from the funds. Based on that premise, Jacobson believes that PEA committed a "blatant violation of the spirit of the funds prospectus."
Morningstar said that Kenneth Corba, PEA's chief investment officer and a portfolio manager, put the interests of his company ahead of fund shareholders. "Until the firm takes steps to dispel the doubts that this episode has cast over PEA's commitment to shareholders, investors are better off taking their business elsewhere."
Furthermore, Morningstar believes that the fixed-income operation PIMCO should consider a divorce from other subsidiaries in order to maintain the appeal of the rest of the lineup of PIMCO branded funds.