Never Buy Based on a Star Money Manager

Buying a fund due to the celebrity reputation of its manager is not a good idea.

When I worked for a large brokerage internal wholesalers visited our office.  Their job was to convince us to put our clients into house mutual funds. They would weave colorful stories about managers’ experience and track record.  It made these people sound like both geniuses and rock stars.

But that is sales.  The real world is quite a different place.

In June, 2014 I bought some Pimco High-Income Fund (NYSE: PHK).  At the time my portfolio did not have much exposure to high yield.  So it seemed like a good diversification play.  PHK’s substantial dividend, in the neighborhood of 10%, was also attractive in a low interest rate climate.  This was especially true because some pre-2008 financial crisis, higher-interest bonds in my portfolio were about to mature.

A big reason for investing was because back then it was managed by the famous Bill Gross.  Not only had Gross co-founded Pimco, but my perception of his money management reputation had always been good.  It also seemed reasonable that if he left there would be an orchestrated succession plan.  This would likely mean a minimum of disruption.

It did not go that way at all.  There were rumblings that Gross might be replaced by PIMCO’s parent company Allianz.  Then he abruptly left in September, 2014 to join Janus.  My cost basis was $13.32.  All of the sudden the fund was trading between $11-12.00 on this news.

The pain did not end there.  After Gross’ departure new management decided to decrease leverage used by PHK.  The dividend was cut and shares declined again.  Then, just when the perception of continued rising interest rates was beginning to bring them back up, another dividend cut was implemented.  Currently the fund trades between $8-9.00.

This has not been a total disaster.  Interest rates likely will continue to rise.  If they do the dividend will probably recover, as will the share price.  And despite recent cuts the dividend yield, based on my original cost basis, is still around 7.5%.  Additional shares were purchased at lower prices to bring that cost basis down to $11.84, also bringing yield up to about 8.1%.  Even though the position has a capital loss, substantial dividends received over three years puts it right now at about break even.

But this investment is clearly stuck in the waiting game.  And while there are no immediate plans to sell it would be better not to have gotten stung this way.  There are plenty of high yield funds out there.  Choosing one managed by Bill Gross has caused nothing but trouble.

 

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Articles presented here are general opinions for your own consideration. They are not specific advice for any one investor.

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