How Should PIMCO Fund Shareholders React to the Departure of Bill Gross?

Posted on September 26, 2014 | Investing, Quarterly Mutual Fund Update
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“Bond king” Bill Gross is leaving PIMCO, a company he co-founded, to join Janus Capital Group (JNS). Our mutual fund guide shows Gross as the lead manager on eight PIMCO mutual funds. Our exchange-traded fund (ETF) guide shows Gross as the lead manager on one PIMCO ETF. The Closed-End Fund Association’s website shows Gross managing two close-end funds. It is possible that there are institutional funds that Gross manages as well. A list of funds managed by Gross that are readily available to individual investors is displayed below.

If you own shares in a PIMCO fund managed by Gross, the big question is what should you do now? In situations when a manager leaves, the best move can be to sit tight and monitor the situation. If the fund(s) still meets your criteria for buying it, then don’t make a kneejerk reaction. Rather, see who takes over the fund and how that manager (or group of managers) performs relative to their category peers. Though likely to be less outspoken, the new manager(s) may prove to be as talented as or even more talented than Gross. They could also be worse. Until actual results begin to appear, nobody knows with any certainty how the funds will perform.

I realize that the advice to sit and monitor the situation can seem tough to follow. If you are uncomfortable doing so, go through the data in our fund guides. Look at the long-term performance of comparable funds, paying attention not only to the recent top performers, but also to those funds that have been able to best their peers over several years without experiencing considerably higher levels of volatility in their year-by-year returns. When doing this, be aware that bond market conditions going forward are likely to be different than they have been over the last five or 10 years. Pay attention to manager tenure, since the returns of a past manager don’t tell you how the new manager will perform. Don’t forgot to review the expense ratios as well, since every dollar spent on fees is a dollar you will never see again.

PIMCO Mutual Funds Managed by Bill Gross:

  • PIMCO Fundamental IndexPLUS Absolute Return (PIXDX)
  • PIMCO StocksPLUS Absolute Return (PSTDX)
  • PIMCO Small Cap StocksPLUS Absolute Return (PCKDX)
  • PIMCO StocksPLUS Absolute Return Short Strategy D (PSSDX)
  • PIMCO Low Duration (PLDDX)
  • AMG Managers Total Return Bond (MBDFX)
  • PIMCO Total Return (PTTDX)
  • PIMCO Unconstrained Bond (PUBDX)

PIMCO ETFs Managed by Bill Gross:

  • PIMCO Total Return ETF (BOND)

Closed-End Funds Managed by Bill Gross:

  • PIMCO Corporate & Income Opportunity Fund (PTY)
  • PIMCO High Income Fund (PHK)

How to Invest Like a Quant Fund

Posted on September 25, 2014 | Investor Update


Quant funds utilize computer algorithms to guide their investment strategies. These computerized methods pick securities based on quantitatively identifiable characteristics. Rather than selecting stocks with a good story (e.g., Alibaba (BABA)), they select stocks based on various fundamental or technical criteria.

Many hedge funds follow quantitative strategies. Smart beta funds also follow these strategies. Last week, Morningstar announced that it is now designating quant exchange-traded funds (ETFs) as strategic beta funds. The investment research company described these funds as those that try to improve returns or isolate a specific return relative to a benchmark, increase or decrease the level of risk relative to a benchmark, or follow non-return or risk-oriented strategies, such as equal-weight strategies.

The basic idea behind quant funds is to identify anomalies or return factors that lead to higher returns or less volatility. By giving a preference to investments with these characteristics, higher returns, less volatility or both are sought. It can be an unemotional way to invest as long as personal biases are not allowed to interfere with either the creation or the execution of the model. The better you are able to stick to the model, the more you will be able to invest like a quant fund.

Creating your own model does require a level of comfort with a good screening program such as our Stock Investor Pro and, depending on the model used, a spreadsheet. If you are unwilling or unable to do the mathematical and computer work, following a quantitatively oriented screen or buying a strategic beta fund may be the better option.

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One Quarter of AAII Members See Improvement in Labor Market

Posted on September 25, 2014 | AAII Survey

This week’s special question asked AAII members for their opinion about the current state of the job market. About 5% described conditions as improving. Slightly more than 24% of members said the labor market is improving, but the pace of growth remains too slow. At the other end of the spectrum, 24% said the job market is still weak.

Common themes among respondents were wages and job skills. Many members thought too many entry-level or lower-skill jobs were being filled and too few higher paying jobs were being created. Several members also discussed skills, either in terms of workers not having enough skills or being overqualified, or in terms of companies not providing adequate training.

Here is a sampling of the responses:

  • “Improving and likely to continue. However, there are a lot of low-paying jobs out there.”
  • “Much of the current unemployment is due to a lack of skills.”
  • “Stagnant, woeful and lacking for all but the most menial jobs.”
  • “Stronger, but wages are too low and there aren’t enough good-paying jobs.”
  • “Many workers are being forced to take jobs below their qualifications.”

AAII Sentiment Survey: Steady Optimism Remains Above Average

Posted on September 25, 2014 | AAII Survey

Optimism among individual investors about the short-term direction of the stock market remained above its long-term average for the seventh consecutive week, according to the latest AAII Sentiment Survey. Although above the long-term average, bullish sentiment fell slightly compared to last week. Neutral sentiment also declined this week, while pessimism rose.

Bullish sentiment, expectations that stock prices will rise over the next six months, declined 0.4 percentage points to 41.8%. This week now ties the seven-week stretch that the bullish sentiment stayed above its historical average of 39% between November 28, 2013, and January 9, 2014. The next record will be surpassing the 14-week stretch between December 29, 2011, and March 29, 2012.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, declined 4.9 percentage points to 29.9%. This puts the neutral sentiment below its historical average of 30.5%, breaking the three-week streak.

Bearish sentiment, expectations that stock prices will fall over the next six months, rose 5.2 percentage points to 28.2%. This increase pushes the bearish sentiment reading closer to its historical average of 30.5%. Bearish sentiment last passed its historical average level on August 7, 2014.

Keeping many individual investors optimistic about the short-term direction of stock prices is the S&P 500’s overall upward momentum, earnings growth, sustained economic expansion and the Federal Reserve’s tapering of bond purchases. Causing other AAII members to be pessimistic are prevailing valuations, the failure of the S&P 500 to set new highs, events in the Middle East and Ukraine, the pace of economic growth and Washington politics.

This week’s AAII Sentiment Survey results:

  • Bullish: 41.8%, down 0.4 percentage points
  • Neutral: 29.9%, down 4.9 percentage points
  • Bearish: 28.2%, up 5.2 percentage points

Historical averages:

  • Bullish: 39.0%
  • Neutral: 30.5%
  • Bearish: 30.5%

The AAII Sentiment Survey has been conducted weekly since July 1987 and asks AAII members whether they think stock prices will rise, remain essentially flat or fall over the next six months. The survey period runs from Thursday (12:01 a.m.) to Wednesday (11:59 p.m.). The survey and its results are available online at:

Managing Cash Flow in Retirement

Posted on September 24, 2014 | AAII Journal

Combining a year’s worth of cash with a long-term investment portfolio protects immediate needs while still enabling the portfolio to grow.

Given the headwinds of inflation, return sequence, and a low return environment, what’s an investor to do?

The traditional income portfolio (i.e., one that provides annual cash flow from dividends and interest) will not work for a number of reasons. First, the current level of interest rates and dividend yields has no relationship to what would be an appropriate retirement portfolio allocation. For example, the current yield on a 20-year A-rated corporate bond is about 3.9% and the yield on the S&P 500 index is 1.8%. For a client looking to achieve a 4% cash flow, that means his portfolio allocation would have to be 100% bonds. Of course, this would be a short-lived solution, as over time the purchasing power of the nominal return from bonds would be eroded annually by inflation. Plus, the investor’s income is variable as interest rates change. Not to mention that how the investor feels and the economic reality of the value of his or her portfolio move in opposite directions, exacerbating the situation. When rates are down, portfolio income decreases and the investor feels poor, even though the portfolio value would actually be increasing. When interest rates rise, portfolio income goes up and the investor feels richer, even though the reality is his or her bond portfolio value is dropping.

A viable solution must provide consistent real cash flow in a volatile, long-term low return market environment. It was with this in mind that we created the Evensky & Katz two-bucket approach back in the early 1980s. Here’s how it works.

An investor’s nest egg is bifurcated into separate portfolios: the Cash Flow Reserve (CFR) portfolio and the Investment Portfolio (IP). When originally designed, the CFR was funded with two years of cash flow needs; subsequent research at Texas Tech University determined that a one-year reserve was optimal. Figure 1 visually describes the strategy.

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Figure 1. Evensky & Katz Portfolio Approach

Sell OF THE WEEK 9/24/2014

Posted on September 24, 2014 | Podcast

AAII Journal Editor Charles Rotblut explains to Chuck Jaffe of MarketWatch why Yum! Brands (YUM) is his “Sell of the Week” on the MoneyLife Radio Program. MoneyLife is a daily personal finance show that sorts through the financial clutter to bring you the information you need to lead the MoneyLife.

Audio url: Sell of the week

Murphy Technology Screen

Posted on September 23, 2014 | Stock Screens

Identifies superior technology companies with rapid growth and excellent financial ratios that are undervalued.

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Posted on September 23, 2014 | Weekly Features

This week’s AAII Weekly Features has been updated.
View this week’s Top AAII Articles, Featured Stock Screen and Member Question.

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BUY OF THE WEEK 9/23/2014

Posted on September 23, 2014 | Podcast

AAII Journal Editor Charles Rotblut explains to Chuck Jaffe of MarketWatch why Allstate (ALL) is his “Buy of the Week” on the MoneyLife Radio Program. MoneyLife is a daily personal finance show that sorts through the financial clutter to bring you the information you need to lead the MoneyLife.

Audio url: Buy of the week

An Inside Look at Exchange-Traded Funds

Posted on September 22, 2014 | AAII Journal

Exchange-traded funds (ETFs) have been one of the most successful financial innovations in recent years.

Since the introduction of ETFs in the early 1990s, demand for these funds has grown markedly in the United States, as both institutional and individual investors have increasingly found their features appealing.

In the past decade alone, total net assets of ETFs have increased nearly twelvefold, from $151 billion at year-end 2003 to $1.8 trillion as of June 2014, as shown in Figure 1.

With the increase in demand, sponsors have offered more ETFs with a greater variety of investment objectives.

Like mutual funds, ETFs are a way for investors to participate in the stock, bond and commodity markets; achieve a diversified portfolio; and gain access to a broad array of investment strategies.

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Figure 1. Total Net Assets and Number of ETFs
figure 1

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