Will the Bernanke Hire Make a Difference at Pimco?

Former Federal Reserve Chairman Ben Bernanke has joined the payroll as a senior adviser at investing giant Pacific Investment Management Co., better known as Pimco.
Could this move translate into a boon for shareholders of Pimco mutual funds and ETFs? And in the big picture view of giant investment firms, is it really beneficial to have a star manager or adviser on the payroll, either for media attention outside the firm or for useful knowledge to gain an edge on the inside?
Certainly having a star manager on board has helped Pimco in the past, to say the least. Bill Gross, who famously left Pimco last year for Janus Capital Group (NYSE: JNS), was a co-founder of Pimco and manager of their flagship fund, Pimco Total Return (PTTRX).
Gross would eventually become known as the “bond king.” The Pimco Total Return fund became the largest bond fund in the world and, for a brief time, was the largest mutual fund of any kind in the world.
But problems at Pimco and the tarnishing of Gross’ crown – punctuated by his exit last year – has led to two years of massive outflows from the Total Return fund. Just recently the fund lost its No. 1 position to Vanguard Total Bond Market Index (VBMFX).

Can Bernanke Make a Difference at Pimco?

With the Bernanke hire, Pimco would like to stop the bleeding and turn things around with a huge name in the world of economics and capital markets.
In an interview with Reuters, Bernanke commented on Pimco: “From my perspective, they are a firm that the way they operate is by taking a macro view – they try and decide how they see the economy evolving both in the United States and abroad and they base their investment strategies on that macro view. That’s something where I believe I can be helpful, thinking about where the economy is going.”
There is no doubt that a man of Bernanke’s stature can help calm the nerves of Pimco’s remaining shareholders and perhaps attract more assets in the short term. And his knowledge of macroeconomics and of the minds and practices of the Federal Reserve board members is sure to add at least some small measure of value.
But can Bernanke really make a material difference in fund performance and attracting new assets to Pimco’s mutual funds and ETFs? Only time will tell.

Bottom Line: Does Star Status Matter Anymore?

The backdrop of  the Vanguard Total Bond Market Index recently overtaking Pimco Total Return for biggest bond fund in the world may help offer clues about the value of having a well-known name associated with a mutual fund company in the future.
For example, can anyone name the manager of Vanguard Total Bond Market Index? Probably not many people outside the doors Vanguard’s headquarters could even take a wild guess. But the notoriety of an index fund manager doesn’t matter as much as the underlying philosophy and practice of low-cost, passive investing that investors are increasingly shifting toward.
For more evidence of a shift to passive investing, the No. 1 mutual fund of any kind in the world is Vanguard Total Stock Market Index (VTSMX).
The relevance of star status appears to have faded in the minds of investors, at least for the foreseeable future. The idea of chasing performance and jumping on board with a star fund manager or adviser won’t likely resurface any time soon, especially after seeing what can happen when the star falls.
If Pimco Total Return and other Pimco funds have long-term success it won’t be because of Ben Bernanke. It will be due to a combination of smart security selection and below-average expenses.
As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities, although he recommends and holds VBMFX for some of his advisory clients. Under no circumstances does this information represent a recommendation to buy or sell securities.

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