The fallout from Bill Gross leaving PIMCO for Janus Capital Group has continued to spread through the financial community and ultimately generated a review from Morningstar of their flagship fund’s rating. The PIMCO Total Return Fund PTTRX has been downgraded from a gold rating to bronze based on the departure of the company’s CIO and recent outflows suggesting investors are losing patience with recent performance. You can read the full recap here.
While the author makes some sound points regarding the changing of the guard at PIMCO and uncertainty regarding the future outlook for this fund, I find the overall rating structure confusing at best. In addition, the timing of this change seems more in line with generating headlines for Morningstar rather than giving investors insightful and forward thinking guidance for owning the Total Return strategy.
Morningstar currently uses a combination of stars and precious metals badges to indicate a mutual fund’s worthiness for an investors’ portfolio. In the case of PTTRX, it currently has 4 out of 5 stars and a bronze rating. The goal of this system is to compare a particular fund against its peers with similar investment mandates and objectives. This includes performance track record, fees, portfolio makeup, and manager process.
The star rating is based strictly on past performance versus a fund’s peer group. However, the analyst rating can is based on qualitative factors that Morningstar’s team believes will impact future returns. This can ultimately lead to a conflicting situation where a fund’s historical performance is listed on the low side, while their analyst outlook is rated as very bright. That certainly doesn’t lend itself well to an unbiased ranking system that filters the top funds regardless of short-term changes.
As a complimentary example, the DoubleLine Total Return Bond Fund DBLTX currently has a 5-star designation with a secondary label as “not ratable†by Morningstar. That seems murky at best despite Jeffrey Gundlach’s reputation as a sound fixed-income manager. I have owned this fund in my own account for years and found it to be an excellent performer relative to other actively managed bond funds.
