Morningstar lowered its overall Stewardship Grade on Pimco last month from B to C, with an A grade being the highest possible and F the lowest.
Issued since 2004, Morningstar’s Stewardship Grades comprise quantitative data and qualitative analysis around areas including corporate culture, manager incentives, expenses, and regulatory issues.
The change in Pimco’s Stewardship Grade reflects a higher degree of uncertainty about the firm’s recent personnel changes and lower manager investment alongside fund shareholders. As a result, Morningstar also lowered Pimco’s Parent Pillar score – one of the five pillars of the Morningstar Analyst Rating for funds – to Neutral from Positive.
The investment community was taken by surprise in January by chief executive and co-chief investment officer Mohamed El-Erian’s decision to leave Pimco.
The firm quickly named longtime employees Doug Hodge as chief executive and Jay Jacobs as president. The firm also appointed six deputy chief investment officers, three of whom – Mark Kiesel, Dan Ivascyn, and Mihir Worah – were concurrently added to the investment committee. New deputy chief investment officers Andrew Balls and Scott Mather were already on the committee, while equity-group leader and newly-named deputy chief investment officer Virginie Maisonneuve effectively became an adjunct member.
From the perspective of Pimco’s culture, the biggest question about these events is whether the atmosphere within which the firm’s current investment committee and broader investment team work will remain conducive to its success. That atmosphere has long been characterised as a pressure cooker, yet it remains an open question whether the current investment committee members will consistently voice their opinions and fuel the debate that has been crucial to Pimco’s past success.
There’s reason to believe Pimco can thrive given the qualifications of its new deputy chief investment officers and its deep research resources. Yet it will take time to assess whether recent changes prove beneficial for investors.
In spite of Pimco’s prowess, relatively high expenses on many of its funds’ non-institutional share classes have historically kept it from garnering Morningstar’s highest marks.
Arguably, its funds’ boards have not done all they could do to aggressively negotiate for better economies of scale. The firm also no longer stands out versus rivals in terms of its managers’ investment in the funds they run.
These issues, plus the uncertainty associated with the recent disruptions, result in Pimco’s lower Stewardship Grade and Neutral parent pillar rating. Because the parent pillar is one of five pillars of the Morningstar Analyst Rating for funds, the recent downgrade is likely to affect the Analyst Ratings of some individual Pimco funds more than others.
For instance, Morningstar reaffirmed its Gold rating on the flagship Pimco Total Return in March, reflecting its continuing confidence in the fund’s management and strategy. The firm is moving quickly to re-evaluate its ratings on each of the Pimco funds it has under coverage by early April.
Eric Jacobson is a senior analyst and Michael Herbst is director of active funds research, North America at Morningstar
