US regulators are monitoring trading and fund flows surrounding Pimco’s $223bn Total Return Bond fund and other products, in what could prove a test case in the debate over whether asset management groups contribute to systemic risk.
Officials at the Securities and Exchange Commission, the Federal Reserve and the US Treasury, among other bodies, have been talking to industry executives and other investors and warning they should contemplate unintended consequences of pulling their money from Pimco.
Meanwhile Morningstar, the influential mutual fund research group, stripped the Total Return fund of its “gold” analyst rating late on Monday, downgrading it to “bronze” because of the “uncertainty regarding outflows and the reshuffling of management responsibilities”.
California-based Pimco is trying to staunch outflows from its funds, including its flagship bond fund, following the acrimonious departure of its founder and star bond investor Bill Gross on Friday.
Many of the assets held by his Total Return fund have tumbled in price as traders anticipate that many Pimco investors will pull their money, and rivals report strong flows into their own products in recent days.
Regulators around the world are discussing new rules for large asset management firms and curbs on some of their activities, amid concern that the next “too big to fail” institutions may not be banks but asset managers.
US officials want to make sure that investors, including hedge funds and other investment managers, are not exacerbating risks if they contemplate moving their money from Pimco, people familiar with the efforts said.
Representatives from the agencies concerned are telling investors to be sure they understand the potential knock on effects of their actions.
The conversations with executives do not signal imminent concern so much as an effort to understand the market dynamics when a large asset manager finds itself under pressure. Outflows have so far been managed in an orderly way, according to people familiar with the regulators’ efforts.
Pimco, which manages almost $2tn in total, has been trying to ease clients’ concerns in a series of calls and one-on-one meetings that included a conference call with Asian clients on Tuesday morning. Rival groups, meanwhile, are working to exploit the management upheaval and tempt Pimco clients to move at least some of their money.
A report commissioned by the US Financial Stability Oversight Council argued last year that the largest asset management firms are interconnected in complex ways through their various businesses and suggested that in a panic, counterparties might not distinguish between the firm and its funds, which could exacerbate stress in the markets.
It also warned that large funds might be subject to “runs” if investors believe there is an advantage to pulling their money first, and it suggested regulators gather more data to test the concerns.
Pimco and other large asset managers intensely and successfully lobbied against the idea that they should be designated as systemically important financial institutions, which would subject them to tougher oversight. In July, FSOC decided instead to focus on particular industry activities, such as lending securities or taking on leverage, and types of funds, rather than focusing on firms themselves.