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PIMCO Bond Valuation Under SEC Scrutiny

The SEC has taken interest in PIMCO’s valuation process in its Total Return ETF, according to The Wall Street Journal. The Journal reports that the SEC’s focus is on odd-lot bonds purchased at a discount, but then given a higher value by pricing vendors relying on a larger pool of bonds, possibly resulting in reporting of inaccurate performance information and giving the ETF a quick performance bump. According to the article, the investigation has been developing for at least a year, but has “intensified” recently, and that the SEC has conducted a full day interview with Bill Gross, co-founder and co-chief investment officer at PIMCO and manager of the ETF.

It is unclear, however, whether PIMCO’s actions are improper.  The complexities of the bond market make valuations difficult, particularly for the bonds at issue in the investigation.  Dave Nadig of notes that PIMCO is buying “weird stuff, bonds that are the wrong size to be liquid, bonds people don’t understand,” and thus bonds that are very difficult to value. Nadig argues that the price difference at the root of the SEC’s investigation is due to PIMCO’s negotiating power. In fact, Nadig believes that pricing vendors generally “sandbag” values, as demonstrated by his view that “bond ETFs consistently trade at a premium.” In sum, Nadig believes that while there are issues with bond pricing, PIMCO is not to blame, and that “[t]o say that the SEC is barking up the wrong tree here would be an insult to dogs.”

The investigation comes at a difficult time for PIMCO, as its flagship Total Return Fund has experienced consistent outflows, and Gross submitted his resignation this morning. Gross will move to Janus Capital to manage its Global Unconstrained Bond Fund.