Pimco could see further outflows but is stabilizing, Morningstar says

Pimco could see further outflows but is stabilizing, Morningstar says
Pimco, thrown into turmoil by Bill Gross' departure in late September, has taken an array of steps to restore order and make the case that its investors are better off now than they were six weeks ago. (Mark Boster / Los Angeles Times)

Pimco could see money continue to flow out of its flagship fund at a rate of $10 billion to $15 billion a month for the next couple of months, but the firm has begun to repair much of the damage related to the tumultuous departure of its star manager, William H. Gross, according to research firm Morningstar Inc.

In a top-to-bottom review of Pimco six weeks after Gross' abrupt exit sent investors fleeing, Morningstar said the Newport Beach fixed-income giant had largely succeeded in retooling its investment apparatus under Daniel Ivascyn, Gross' successor as chief investment officer.

And crucially, Morningstar said, the financial performance of key funds at Pacific Investment Management Co. has held up well.

Morningstar analysts said one of the more encouraging signs for the firm is that it has managed to attract investment talent to the firm despite -- or perhaps because of -- the departure of the temperamental Gross.

“While money has been flowing out, the flow of human capital is actually going the other way, “ said Morningstar's Russel Kinnel.

Pimco has been under the spotlight for most of the year since its chief executive, Mohamed El-Erian, left abruptly in January amid reported clashes with Gross.

Gross himself had been under criticism for erratic behavior and -- mostly -- for the underperformance of Pimco's signature Total Return fund, which had experienced investor defections since the spring of 2013.

Gross' Sept. 26 resignation led to record outflows mainly from Total Return, including $32 billion in October alone, according to Morningstar.

Morningstar said its estimate of future outflows from Total Return was based on trends during October when outflows spiked to billions of dollars a day immediately after Gross' departure. They tapered to less than a $1 billion a day by the end of the month.

Morningstar's analysts said that Pimco's new executive structure, led by Chief Executive Douglas Hodge, provided for more stability than the previous setup dominated by Gross and El-Erian and that the atmosphere among investment-level executives is much improved from the tension that prevailed under Gross.

The global bond market, Morningstar said, is expected to see declining prices and outflows as the Federal Reserve contemplates raising interest rates.

Even so, it said, Pimco should be able to withstand outflows of $300 billion to $350 billion from its current total assets of nearly $1.9 trillion under management without affecting the performance of its funds.

Twitter: @deanstarkman