A new "bond king"

Vanguard Overtakes Pimco As the World’s Largest Bond Fund

The newly crowned Vanguard Total Bond Market Index Fund now has over $117 billion under management overtaking Pimco’s $110 billion

After peaking in 2013 with $293 billion under management, Pimco’s Total Return Fund reputation, performance and assets have been on a steady decline. Ever since the Federal Reserve began to hint about tapering, investors started to pull out of the bond market.

Worried about the prospects for the seemingly eternal rally in bonds coming to an end, Capital began to look for alternatives for the world’s biggest bond fund. In the meantime, the glory of Bill Gross has been questioned with some of his bets going sour. As the fund has been underperforming the company also parted with Mohamed El-Erian.

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Fees at Pimco are close to 85 basis points, while Vanguard’s solution costs merely 7

With the U.S. central bank out of the market, some bets of activist investors such as the co-founder of Pimco, Bill Gross, went sour. After co-Chief Investment Officer of Pimco, Mohamed El-Erian, resigned in January last year, the outflow didn’t stop. Currently, there are just over $110 billion invested in the fund.

With performance becoming an issue, the “bond king” Bill Gross also parted ways with the company in September 2014. He joined Janus Capital to manage the Janus Unconstrained Bond Fund. At the time of his joining the company, the fund had merely $13 million under management.

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The treasury flash crash in October has also somewhat contributed to investors pulling out of bonds. That said, flash crashes have occurred in pretty much every asset class in the past five years.

Although with over $110 billion under management, Pimco’s fund continues to bleed cash. For cost-effective investors that may not be a big surprise. The difference in fees of actively managed funds versus a passive approach such as the Vanguard Total Bond Market Index Fund has been substantial.

Fees at Pimco are close to 85 basis points, while Vanguard’s solution costs merely 7. With the bulk of investors in Vanguard’s fund being closer to the retail and 401-K side, their time horizon is also much longer than that of impatient institutional investors who are not satisfied with mediocre performance.

Under new management by Scott Miller, Mark Kiesel and Mihir Worah, Pimco’s Total Return Fund has recently been beating the market average. In the first quarter of 2015, the fund returned 1.62 per cent after fees, which puts it in the top 25 percent amongst its peers, according to Morningstar research.

In the meantime, the “bond king” has made a bold prediction – he said that the bond and stock markets “supercycle” was nearing its conclusion, with “credit-based oxygen running out.” Judging from the performance of both of these markets since Mr. Gross published his monthly investment outlook, he certainly has regained some credibility… at least in the short run.

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