Amid Competitive Outsourcing Landscape, PIMCO to Disband Endowment-Style Fund-of-Funds Group

(September 19, 2011) — Pacific Investment Management Co. (PIMCO) is reportedly ridding itself of its fund unit promoting endowment-style investing.

Four people familiar with the decision told Bloomberg that PIMCO’s fund-of-funds unit — established in 2010 under Chief Executive Officer Mohamed El-Erian after his term as Harvard’s endowment chief — has faced obstacles winning investors. According to the news service, the fund unit promoting endowment-style investing, headed by former Harvard fund manager Mark Taborsky, aimed to take on investment-outsourcing firms such as Makena Capital Management and Investure.

The setback for the world’s largest bond fund follows another blow to the fund last month, when founder Bill Gross admitted he has “lost sleep” over a wrong call on US Treasury bond interest rates, which cost him in his Total Return bond fund. In an interview with the Financial Times, Gross said that it had been a “mistake to bet so heavily against the price of US government debt.” He noted that he wishes he had invested more in US governmental debt earlier this year. “It was my/our mistake in thinking that the US economy can chug along at 2% real growth rates,” the newspaper cited Gross as saying. “The US and developed economies are near the recessionary dividing point.”

Gross said PIMCO had initially dumped the entirety of its US debt holdings in March as he expected economic growth to be higher, resulting in future inflation. The result: underperformance of PIMCO’s Total Return Fund. Since Gross’ moves, however, the US Treasury market has achieved a significant and impressive recovery.