PIMCO launched its Total Return ETF in 2012-03-01. The ETF has delivered a return of 7.6% doubled its flagship fund performance – PIMCO Total Return fund, a mutual fund, with a return of merely 3%, since its inception in March 1.
According to Morningstar Inc, the bulk of ETF’s outperformance was derived from the first 3 months, March 1 to May 29m where it beats the mutual fund by 400 basis points. But since May 29, the ETF has a return of 2.81% while the mutual fund delivered 2.14%. The differential in performance is narrowed.
Douglas Hodge, Chief Operating Officer of PIMCO attributed the ETF’s early outperformance to ‘good timing’ as the strategy of the ETF and the mutual fund is the same. However, the ETF’s expense ratio is 55 basis points; the mutual fund’s A-shares is 85 basis points. The mutual fund is more expensive by 30 basis points.
In 1986, Brinson, Hood, and Beebower (BHB), wrote an article titled “Determinants of Portfolio Performance”. BHB regressed the time-series returns of each fund on a weighted combination of benchmark indices reflecting each fund’s policy. They found that the policy mix explianed 93.6% of the average fund’s return variation over time. Though there were some disagreement on the result of the study, nevertheless, the idea that asset allocation policy explains more than 90% of performance has become accepted folklore.
In reality, in my opinion, timing play a vital role, however, the role is only limited to the short term as we could see from the outperformance of the PIMCO Total Return ETF over PIMCO Total Return Fund. Nonetheless, timing is something that is beyond our control – it is a ‘luck’ element. Frankly, if we were to know the market timing, would we still want to spent trillion of dollars in building ‘blackbox’ that try to predict the future movement of the asset pricing by analysing the historical data of the asset with the help of super computer, artificial intelligent, fuzzy logic etc. Afterall, we could be ‘lucky’ with the timing but we could be terribly ‘unlucky’ as well. Thus, in the long run, what contributed to the investment’s performance would ultimately be the asset allocation – what we assets we invested in and not the ‘luck’ play – timing.
Reference: InvestmentNews.com, Jason Kephart, 2012-08-28, “High-flying PIMCO Total Return ETF Finally Returns to Earth”