Gundlach’s ‘TOTL’ About To Jump PIMCO’s ‘BOND’ In Assets

The reigning king in the segment of actively managed midterm total return bond strategies has long been the PIMCO Total Return Active ETF (BOND | C). That may be about to change, and any day now.

The four-year-old BOND once boasted Bill Gross’ expertise at the helm and went on to become the second-most-successful ETF launch ever—behind only the SPDR Gold Trust (GLD | A-100)—gathering its first $1 billion in assets in only three months after it launched in 2012.

But BOND’s uncontested top spot in terms of assets under management is now being challenged by the 16-month-old SPDR DoubleLine Total Return Tactical ETF (TOTL | C)—a fund that marked Jeffrey Gundlach’s and his firm DoubleLine’s entry into the ETF market.

Nipping At BOND’s Heels

TOTL hit its first $1 billion in about five months, and has quickly been gathering assets, sitting now some $25 million away from matching BOND’s $2.58 billion in total assets. Day after day, that spread has been narrowing—the wind is certainly behind TOTL’s back.

Perhaps what’s most interesting about the rising success of TOTL and the declining popularity of BOND is just how important investor perception is when it comes to active managers.

Some in the industry say that one of PIMCO’s biggest head winds these days is just that: investor perception.

The headline-making departures of Mohamed El-Erian and, later, of Bill Gross in the past few years marked by first a break between the two managers, and later between Gross and PIMCO as a firm, has done little to foster investor confidence in PIMCO as a company.

Big Gap In New Inflows

Today BOND is managed by a very competent team comprising Scott Mather, Mark Kiesel and Mihir Worah—well-known and respected investment managers in the bond space, no doubt. But there’s no question that a large part of BOND’s resonance with investors in its early days was Gross’ star power. As Morningstar put it in its fund report for BOND, “it will still take some time to see how these three, all strongly opinionated and talented investors, coalesce as a team.”

Perhaps BOND’s biggest asset-gathering challenge is keeping investors put, and attracting new ones during this transition process. Gross left PIMCO late in 2014 to join Janus Capital. (PIMCO did not respond to request for comment.)

In the past 12 months, BOND has seen modest net inflows of $107 million, according to FactSet data, while its main competitor, TOTL, has gathered $1.71 billion in the same period, or more than 10 times as much.

“The world of active fixed-income investing has seen significant turnover in terms of individual portfolio managers as well as leadership firms,” said Ron Redell, executive vice president at DoubleLine. “The senior portfolio managers at DoubleLine have worked together on average for nearly two decades. That long-tenured cohesion has been a source of stability.”

According to Redell, TOTL’s success also stems from DoubleLine’s strategic partnership with State Street Global Advisors, the third-largest ETF issuer in the country today, “whom we consider the best-in-class in ETF product creation and distribution.”

Different Exposures

But there’s also the issue of performance.

Year-to-date, TOTL has delivered about 70 basis points more than BOND, as the chart below shows. The gains have come as investors poured more than $664 million in fresh net assets into TOTL, and yanked about $90 million from BOND:

Chart courtesy of StockCharts.com

The portfolios tap into the segment of intermediate-term bonds with different tilts, BOND focusing on U.S. government bonds such as Treasurys, but also including debt from around the world. TOTL focuses on mortgage-backed securities—more than 54% of the portfolio.

As these portfolios currently stand, PIMCO’s BOND is shelling out more attractive yields, with a 30-day yield of 3.47% versus TOTL’s 30-day yield of 2.90%. The 30-day SEC yield is a measure of actual dividend yields paid out, so they offer a good metric of investor experience.

But BOND’s higher yield comes with higher duration risk—something that many investors fear in anticipation of higher rates ahead, and could be another reason why some are picking TOTL over BOND.

Longer Duration, Higher-Rate Risk

According to PIMCO’s data, BOND has effective duration of 5.67 years, or two full years more than TOTL’s 3.65 years. The longer the duration, the more susceptible the portfolio is to interest-rate risk.

These statistics give BOND a yield-to-duration ratio of 0.6 and TOTL of 0.8. To many fixed-income investors, the higher the yield-to-duration ratio the better, because that points to a portfolio that’s shelling out more yield relative to duration risk.

For comparison, for an index investor who owns the index-based iShares Core U.S. Aggregate Bond ETF (AGG | A-98), that portfolio currently has a yield-to-duration ratio of 0.36—very low relatively to BOND and TOTL—with a 30-day yield of 1.9% for a duration of about 5.24 years.

Today BOND has $2.58 billion in total assets, and TOTL has $2.55 billion. And it could be that in the near term, if U.S. yields continue to face pressure and the Federal Reserve keeps rates at ultra-low levels for longer, BOND may pick up some steam with investors looking to capture as much income as possible in a compressed-yield environment.

But longer term, when rates do rise, the longer-duration bonds are those at most risk. A portfolio profile like TOTL’s may find a strong footing among investors. Time will tell, and there’s no question that, given that these ETFs are actively managed, their portfolio managers will tilt allocations and portfolio characteristics as they see fit to match the times.

Contact Cinthia Murphy at [email protected].