SEC Warns PIMCO Over Potential Legal Action

The US Securities and Exchange Commission (SEC) could take legal action against PIMCO over valuations within its Total Return exchange-traded fund (ETF).

The Newport Beach, California-based asset manager announced last night that it had received a Wells Notice from the SEC relating to an investigation first reported in September last year.

“We will continue to engage with the SEC and we are confident that this matter will not affect our ability to serve our clients.” —PIMCO statementThe SEC has been investigating whether the asset manager overstated valuations of mortgage-backed securities held in PIMCO’s Total Return Active ETF. The investigation relates to “smaller-sized positions” purchased between the ETF’s launch on February 29 2012 and June 30 2012.

The $2.5 billion fund is a low-cost product based on the Total Return strategy run by Bill Gross, until he quit the group suddenly last year to join Janus.

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The regulator has warned PIMCO of a “preliminary determination to recommend that the SEC commence a civil action” against the fund management group. The issuing of a Wells Notice is a preliminary procedure by the US regulator and does not imply that any wrongdoing has taken place.

“The Wells process provides us with our opportunity to demonstrate to the SEC staff why we believe our conduct was appropriate, in keeping with industry standards, and that no action should be taken,” PIMCO’s statement read. “We will continue to engage with the SEC and we are confident that this matter will not affect our ability to serve our clients.”

The PIMCO Total Return mutual fund—which is now run by Scott Mather, Mark Kiesel, and Mihir Worah—is not covered by the notice or the investigation. The fund has shrunk drastically in size in the past two years as investors have withdrawn cash due to underperformance and the departure of Gross. According to PIMCO’s website, the fund had $102.8 billion in assets at the end of June.

US-based foundations are investing a surprisingly small amount of capital to real estate, according to Preqin.

The firm’s data showed foundations made up 28% of US-based real estate investors, but represented just 2% of total invested assets.

More than two-thirds of foundations allocated less than 5% of their total assets to real estate, Preqin said. Some 28% invested between 5% and 9.9%, while just 8% allocated more than 10% to the asset class.

Endowments exhibited similar figures, Preqin found. While they made up one-fifth of total real estate investors, they accounted for only 6% of total allocated capital.

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Preqin real estate foundations These disproportionate allocations paled in comparison to pension and sovereign wealth funds.

According to Preqin, only 21% of real estate investors were public pension funds but they represented nearly half of aggregate allocation to the asset class.

Just seven sovereign wealth funds also collectively made up the same proportion of capital invested in real estate as foundations.

In a previous report, Preqin found some 77% of sovereign funds currently allocate up to 9.9% in real estate and 93% have a target allocation of between 5% and 14.9%.

“Foundations’ relatively small real estate allocation reflects the investor type’s typically small assets under management,” the report said.

Nearly 45% of foundations in Preqin’s dataset had less than $250 million, 80% had less than $1 billion, and only 5% managed $5 billion or more.

Foundations invested in real estate were also concentrated in California, New York, Illinois, Massachusetts, and Pennsylvania, the report said.