Q&A: Pimco and the SEC’s bond ETF probe
Why is the regulator considering action against the investment management company?
Long renowned for its bond investing prowess over three decades, Pimco was a late arrival to the increasingly popular world of exchange traded funds.
The launch of an ETF tracking the company’s Total Return Fund, with the catchy ticker symbol of Bond, certainly made a splash in 2012 for Pimco, then under the stewardship of Bill Gross, the group’s former chief investment officer.Now, the US Securities and Exchange Commission has issued Pimco with a Wells Notice, indicating that the regulator may take action against the asset manager.What has the SEC done?
A Wells Notice sent to a company or individual indicates that the SEC believes that wrongdoing has occurred and may warrant civil action. For its part, Pimco said on Monday: “The Wells process provides us with our opportunity to demonstrate to the SEC staff why we believe our conduct was appropriate, in keeping with industry standards, and that no action should be taken.”
Why does the SEC think Pimco has a case to answer?
Since mid-2014, the SEC has been examining whether investors in Pimco’s Total Return ETF received a misleading picture of performance in its early days, from February to June of 2012.
The focus of attention is the valuation of mortgage-backed securities (MBS), performance disclosures and compliance policies and procedures at the time. The regulator has queried Pimco’s practice of buying small amounts of MBS, known as odd lots, then over time pooling these securities together and revaluing the larger holding of bonds at a higher price. The question appears to be the basis for then revaluing these securities once they were held within the ETF, to what Pimco considered their true value.
Mr Gross was among the executives interviewed by the SEC.
How good was the early performance?
Pimco’s ETF quickly proved to be a better investment than its namesake, gaining almost 5 per cent in value in the 10 weeks after its launch, compared with a 2 per cent rise in the value of the mutual fund. Managed at the time by Mr Gross, with $100m of assets at launch, the stellar debut of Bond prompted hefty demand from investors.
At the time the performance was attributed to the ETF’s simplicity and comparative small size. It held about 300 securities, compared with more than 19,000 in the mutual fund.
However, it appears the odd lot strategy was also a driver of the divergent performance between the Bond ETF and the Total Return mutual fund....MORE
