A Year Later: Bill Gross After Pimco

September 26 marked the one-year anniversary of Bill Gross’s abrupt resignation from Pimco, but, we suspect, the former “bond king” didn't celebrate. That day a year ago represented the culmination of a gradual fall from grace for the cofounder of Pimco, which at its peak controlled nearly $2 trillion in assets, the vast majority of the money in bond funds.

The downturn began with a couple of ill-timed bets on Treasury bonds. The losses on those moves spurred a slew of redemptions from Pimco’s underperforming funds. Then, in early 2014, came the surprise resignation of Mohamed El-Erian, then Pimco’s CEO and Gross’s co-chief investment officer. According to published reports after the resignation, the friction between Gross and other money managers, analysts and officials at Pimco’s Newport Beach, Calif., headquarters intensified as Gross’s behavior grew more erratic.

Pressured to leave, he joined Janus Capital Group, the Denver-based fund firm. He now runs Janus Global Unconstrained Bond (symbol JUCTX), a $1.4 billion fund, from a small office near his home in Newport Beach. Although $1.4 billion may seem like a lot of money, it’s a dust speck compared with the enormous pot of assets Gross once had a hand in directing.

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With the passing of a year, it’s fair to compare the performance of Gross’s current fund with that of the flagship Pimco Total Return Fund (PTTDX), which Gross ran before leaving for Janus. Gross declined to be interviewed for this story. Pimco declined to offer any of its managers or executives for an interview, though Dan Ivascyn, the firm’s chief investment officer, released this statement: “Pimco continues to generate strong outperformance across its portfolios so far this year, and has inflows to more than 40 strategies. Our primary focus is on sustaining that performance over the long term for our clients and investors.”

Indeed, a few Pimco funds, including Pimco Income (PONDX), which Ivascyn comanages,

have continued to perform well through the turmoil. But the firm’s overall performance remains unimpressive. In 2013, 58% of the 97 mutual funds and exchange-traded funds Pimco managed ranked in the bottom half of their peer groups. In 2014, 51% of Pimco funds ranked among the bottom half. And for calendar year 2015 through September 24, a whopping 67% of Pimco funds have lagged their peer groups.

Although some funds may be gaining more new cash than they’re losing from redemptions, the overall picture for Pimco is not pleasant. Investors were taking more money out of Pimco funds than they were depositing even before Gross left. His departure only made things worse. In the 12 months since, the firm has suffered total net outflows of $182 billion. The firm now manages a total of $327 billion in 112 mutual funds and 17 ETFs (Pimco also manages 20 closed-end funds, which are not part of this analysis). That’s one-third less money than it had in-house in September 2014. But net outflows have slowed in recent months, and they totaled a relatively modest $5 billion in August.

The most dramatic shrinkage has occurred at Total Return. The fund, which boasted assets of nearly $300 billion in April 2013, now holds just $98 billion. But the fund is still the firm’s biggest, by far. The next largest, Pimco Income, has $49 billion in assets. All told, Pimco now manages about $1.5 trillion.

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Under Total Return’s new managers—Scott Mather, Mark Kiesel and Mihir Worah, all Pimco veterans—the fund has outpaced its peers, but not its benchmark, Barclays U.S. Aggregate Bond index. Since the trio took over in late September 2014, Total Return has earned 1.5%. That matches the return of the average taxable, intermediate-term bond fund, but lags the 2.8% gain of the Aggregate index. Still, Morningstar analyst Sarah Bush says the new managers are “off to a strong start.” (Returns are for Pimco’s Class D shares; all returns are as of September 24.)

Total Return continues to be a fund that is designed to serve as the core of an investor’s bond portfolio, and the new managers haven’t changed its strategy. Almost 20% of the fund’s assets are invested in U.S. government bonds (a mix of Treasuries and Treasury inflation-protected securities), and more than half sits in mortgage-backed securities. But the managers are concerned about rising interest rates—they expect the Federal Reserve to hike short-term rates once before the year ends—so they have kept the fund’s average duration, a measure of interest-rate sensitivity, on the low side, at 4.3 years. By contrast, the Aggregate Bond index’s duration is 5.6 years. Bond prices and interest rates move in opposite directions, and a 4.3-year duration implies that if rates were to rise by one percentage point, the fund’s net asset value per share would fall by 4.3%. The fund yields 3.0%.

We’ve recommended this fund in the past. And Harbor Bond, run by Pimco in the same fashion as Total Return, was once a member of the Kiplinger 25, the list of our favorite no-load mutual funds. But with interest rates near rock bottom and poised to rise, we wouldn’t recommend Total Return today. We’re wary of adding new money to any fund with a hefty stake in Treasuries, which are especially susceptible to rate moves. But we have confidence in this new team. Current shareholders of Pimco Total Return should hold the fund; it’s in good hands, and its managers are doing their best to carry on in the tradition of the fund as it was founded.

Gross, meanwhile, officially took over Janus Global Unconstrained Bond (formerly known as Janus Unconstrained Bond) on October 6, 2014. In July, he took on a co-manager, Kumar Palghat, a former Pimco executive. Since Gross assumed the reins, Global Unconstrained Bond has lost 2.3% (returns are for the fund’s Class T shares). That’s more than the 1.8% loss suffered by its typical peer (Morningstar assigns Global Unconstrained Bond to the nontraditional bond fund category).

In truth, it’s hard to know which benchmark is best for the Janus fund. The fund’s annual report cites a three-month, dollar-denominated LIBOR index. But the fund has lagged against that bogey as well. Over the past 12 months, Global Unconstrained Bond lost 2.7%, and the BofAML three-month USD LIBOR index returned 0.3%. The fund yields 0.7%.

Gross (who is lead manager) and Palghat can invest in any fixed-income asset class anywhere in the world. That means they can invest in any type of bond, of any maturity, with any kind of credit rating, be it an investment-grade bond or the foulest-smelling junk. In recent months, the fund had about half of its assets invested in foreign debt—mostly in emerging-markets countries. And emerging-markets bonds have had a tough time of late. Funds that invest in emerging-markets bonds have lost an average of 11.0% over the past year.Gross has a lot more leeway with Global Unconstrained Bond than he did with Total Return. The Janus fund, for instance, has no limit on how much it can invest in junk bonds (Total Return has a 10% cap). And the Janus fund can invest up to half of its assets in emerging-markets debt (Total Return can invest only up to 15% of assets in emerging-markets bonds).

It occasionally makes sense to follow a good fund manager with a proven track record when he or she jumps ship and starts another fund. Not this time. Gross’s new fund isn’t like his old one; it has a different mandate and is far more flexible. Gross also lacks the army of analysts he once had immediate access to at Pimco. Plus, we’re not exactly wowed by the fund’s performance so far. As a result, we are not ready to endorse Global Unconstrained Bond, even with a veteran like Gross at the helm.