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A fiduciary approach to fund due diligence and what to do with Pimco funds

Posted by Bennett Aikin on December 10, 2014

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As redemptions from Pimco reach $100 billion in the wake of departures by both Bill Gross and Mohamed El-Erian, investors and advisors still holding Pimco funds are left to figure out if they too should be making changes to their portfolios. Fiduciaries, however, need to be deliberate in their decision-making. Context is everything and it would be a mistake to act rashly and without a clear rationale for how a particular decision is ultimately the best decision for the portfolio.

THE QUALITATIVE SIDE OF DUE DILIGENCE
 

In his most recent Fiduciary Corner column, fi360 CEO Blaine Aikin addresses the qualitative side of fund due diligence, using Pimco as a case study for how disruptive events should factor into fund selection and monitoring.

Blaine first stresses the importance of following the guidelines found in a portfolio’s governing documents, such as the investment policy statement. This might include a requirement to exit any fund that loses the primary fund manager. In that case, the course of action is clear cut and must be followed.

Absent such guidance, or when the disruption has an impact at an organizational level, such as the case with Pimco, Blaine suggests evaluating three levels of qualitative review:

  • The credibility of the organization’s response
  • Likely marketplace ramifications
  • Factors that are specific to the portfolio

To see how Pimco’s example fits this framework, make sure you check out Blaine’s article.

PORTFOLIO-SPECIFIC FACTORS
 

Because the column is primarily focused on Pimco’s actions and the broader impact on the fund market, we didn’t go into depth on some of the key considerations a fiduciary should consider at the portfolio level. Blaine cited costs, portfolio strategy, and the availability of suitable alternatives as factors to consider. Here we add some detail to how those areas should be addressed:

  • Costs: What are the transaction expenses, possible tax liability, and required effort associated with the analysis and selection of new investments?
  • Strategy: What are the size and role of each position under review in the portfolio and would the current market dynamic and set of available investment options prompt changes in asset allocation?
  • Availability of suitable alternatives: Are there good alternatives available to the existing positions? If so, change may be relatively easy and prudent. If not, change is likely to be problematic.

The Fiduciary Corner column appears monthly in InvestmentNews. 

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