Why You Should Avoid Janus and Pimco Funds

Bill Gross’s abrupt departure from Pimco stunned the investment world. Traders even blamed the news for a minor selloff in Treasury bonds. Gross ran Pimco Total Return D (PTTDX), one of the world’s largest mutual funds, and was Pimco’s chief investment officer. Now he will shepherd tiny, unheralded Janus Unconstrained Bond D (JUCDX).

Investors have a seemingly difficult choice: Should you follow Gross to Janus or should you stick with Pimco, which, despite a large outflow of cash in the wake of Gross’s resignation, still manages some $2 trillion? The simple answer: neither. I’d avoid both fund companies. Instead, you should consider other funds, such as Fidelity Total Bond (FTBFX), Loomis Sayles Bond (LSBRX) and Metropolitan West Unconstrained (MWCRX). (The Fidelity and MetWest funds are members of the Kiplinger 25.)

Don’t get me wrong: Gross is a genius. Years ago, I joked in one of my columns that he must have sold his soul to the devil to be able to produce such consistently superior returns. In 1987, he launched an institutional share class of Total Return (PTTRX), and as of his resignation on September 26, it had returned an annualized 7.9%—an average of one percentage point per year better than the Barclays US Aggregate Bond index. In the world of bonds, that’s a huge margin.

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But the fund lagged most of its competitors in three of the last four calendar years, including so far in 2014. Starting in 2011, I repeatedly urged readers to sell Total Return because the sheer size of the fund, $293 billon at its peak, made it impossible to profit from the bond-picking skills of Gross and his Pimco colleagues. In my view, you could benefit only from Pimco’s big-picture calls.

Given that Janus Unconstrained is tiny—$13 million before Friday’s stunning announcements—buying the fund looks like a no-brainer, at least at first glance. It’s possible that Gross will put up great numbers at his new fund.

But the odds are stacked against Gross. Mutual funds tend to have fragile corporate cultures. Once a fund firm loses its mojo, it rarely gets it back. Firings, resignations and public spats typically presage lousy returns for investors. Perhaps this is because a good money manager can pretty much write his or her own ticket. In any event, the best firms tend to be no-drama shops, such as the American funds, Dodge & Cox, T. Rowe Price and Vanguard.

Janus funds are Exhibit A of a firm that lost its way. In the 1990s, Janus was the go-go firm, with several of its funds chalking up stunning returns. But it collapsed during the tech meltdown. It has repeatedly brought in new managers and executives—to no avail. When three fund managers left in May 2013, Morningstar noted that it was the fourth mass exodus of managers in a decade and lowered the firm’s corporate culture grade to a nearly failing D. (Morningstar analysts assign corporate culture grades based on their assessment of how seriously the companies take their fiduciary duties to fund shareholders.) Janus today has $160 billion in assets, less than half of what it had at its peak of $330 billion in March 2000.

At 70, Gross, a longtime exercise and yoga devotee, looks to be in fine health. But few managers are as good at 70 as they were at 60.

Gross has always been eccentric. But his appearance last summer as a speaker at Morningstar’s annual investment conference marked the most public manifestation of that quirkiness. He wore dark glasses, compared himself to Justin Bieber and suggested to reporters that he was hypnotizing them into writing only nice things about him. Pimco executives hinted that Gross’s behavior led to their decision to fire him. He quit before they could.

Gross has always been a difficult and demanding boss. Unclear is how many Pimco managers and analysts will follow him to Janus. But Gross built Pimco from a start-up with a mere $12 million in assets, so he knows how to hire and keep smart people.

Indeed, Gross leaves behind him perhaps the best group of bond managers, analysts and traders ever assembled. So why not stick with Pimco funds? Because the company has been engulfed by entirely too much turmoil of late. Former chief executive officer Mohamed El-Erian quit just six months ago. The Securities & Exchange Commission is probing bond-pricing practices at Pimco Total Return ETF (BOND), an actively managed exchange-traded fund that Gross managed. Bloomberg reports increased risk-taking by Total Return. For more on Pimco, read my colleague Nellie Huang’s piece.

From 1977 through 1990, Peter Lynch piloted Fidelity Magellan to outsize stock market returns that have rarely, if ever, been duplicated. When he stepped down, Fidelity, then the industry’s dominant firm, didn’t fall apart. Instead, it lost a few steps. Today, only a few of its funds are outstanding; most are no better than average.

As Pimco scrambles to put the pieces back together, my strong hunch is that it will follow Fidelity’s pattern. It has far too much raw talent to fall apart, but it has clearly lost its mojo. Money is flying out the door. It may be quite some time before that trend reverses.

Steven T. Goldberg is an investment adviser in the Washington, D.C., area.