Pimco's Stunning First Month

 | Apr 02, 2012 | 11:02 AM EDT
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On Friday I wrote about a few of the noteworthy ETF launches from March, highlighting some of the latest additions that I thought might be useful for investors building a long-term portfolio. You probably noticed that I didn't include perhaps the most highly anticipated ETF launch of the last several years – Pimco Total Return ETF (TRXT), based on the ultra-popular fund of the same name. (The ticker symbol is expected to switch over to the more catchy BOND later this week.) When TRXT began trading in early March, it was hailed as a potential game-changer for the active ETF space, and a sign of the ongoing switch away from mutual funds and toward ETFs.

I wrote last month that there were reasons to be hesitant about jumping into TRXT, an actively managed fund that seeks to beat a benchmark that some of the most popular fixed-income ETFs replicate. For one, the new Pimco ETF is quite a bit more expensive than some of the perfectly good passive ETFs that have been around for quite a while.

But, though the fund now has a track record of only about four weeks, its early performance has reminded investors why there was so much hype surrounding the launch. TRXT has come flying out of the gates, adding some 1.6% in March, turning in an early performance that has more than justified the relatively hefty price tag. Meanwhile, ETFs linked to the Barclays Capital U.S. Aggregate Bond Index -- such as iShares Barclays Aggregate Bond (AGG) and Vanguard Total Bond Market ETF (BND) -- were down slightly on the month.

In other words, TRXT delivered about 200 basis points of alpha over its first four weeks of existence. That's a pretty impressive start that even exceeded many investors' lofty expectations.

The fund also finished the month with more than $300 million in assets, and is trading close to 200,000 shares daily. That means very narrow bid-ask spreads, and plenty of liquidity for those who value the ability to move into or out of a position quickly.

Of course, we shouldn't expect TRXT to deliver these huge quantities of alpha in every month. Last year serves as a reminder that even the most successful and highly regarded fixed-income managers stumble once in a while For instance, Pimco's Total Return mutual fund lagged far behind its benchmark and peer group in 2011. Bill Gross has made what has turned out to be a smart bet on mortgage backed securities, but not even his calls will be right 100% of the time.

Nevertheless, the stellar start for TRXT serves as a powerful argument to the notion that active management is always and everywhere a way to destroy value. I'm still a firm believer that active management makes no sense in highly efficient markets such as those of U.S. equities, but remain equally convinced that there are corners of the investable universe where the expertise of a skilled and experienced manager is extremely valuable.

Still, particularly in regard to this fund, I can't help but smile at the incredible array of tools that ETF investors now have available to them: Among many other things, we now have the ability to buy and sell a portfolio managed by the legendary Bill Gross. Of course, judging by the early performance figures for TRXT, there's probably going to be quite a bit more buying than selling.

So, I admit I was skeptical about TRXT when the fund debuted a month ago, and expressed some concern here about the fact that the ETF version of the fund would face some handicaps relative to the mutual fund. But Bill Gross is making a believer out of me rather quickly: A few additional basis points go a long ways towards eliminating any concerns about forking over a bit more in the way of management fees. So far, the bit of additional expense ratio has been one of the best investments fixed-income investors could have made.



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