The Securities and Exchange Commission is looking at whether Pacific Investment Management Co, artificially upped the returns of a fund that targeted smaller investors. At issue is the way the $3.6B Pimco Total Return ETF (BOND) purchased investments at a discount but depended on higher valuations for the investments when the fund worked out its holdings’ value soon after. This type of move could make it appear as if the fund made rapid gains when it was actually just availing of the variations in how certain investments are valued.
According to The Wall Street Journal, sources familiar with the probe say that SEC investigators have already interviewed firm owner Bill Gross. The regulator could be looking at whether investors ended up with inaccurate data about the performance of the fund. If so, this could be a breach of securities law, even if the wrongdoing wasn’t intentional.
While the probe has been going on for at least a year, it seems to have recently escalated. Other Pimco executives have also been interviewed.
The WSJ reports that the investments involved appear to be small quantities of mortgage securities that are priced low because of their size and due to the fact that backers are typically small institutions. After Pimco would buy the investments, it would designate high valuations assigned by outside pricing companies, in part because a bigger mortgage bond pool would be used to compare them with. This type of action would create an instant gain on the bond. If this were done enough times, then the ETF’s early results could have gotten a boost.
It is not clear whether the alleged activity did inflate the ETF’s results. However, the fund made big gains early on, bringing in more investors. Within six months the funds had acquired $2.4 billion.
In other Pimco news, the firm is dealing with a bevy of investor withdrawals from its $222 billion Total Return Fund, which Gross manages, because of poor returns. Morningstar reports that since May of last year, they’ve taken out over $65 million from the fund. Investors are also withdrawing their funds from other Pimco mutual funds.
Pimco is an Allianz SE (ALV.XE) unit. Allianz is the biggest insurance company in Germany.
Pimco ETF Draws Probe by SEC, The Wall Street Journal, September 23, 2014
SEC’s investigation into Pimco could ripple through ETF, fixed income markets, Investment News, September 24 2014
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