(Bloomberg) — Pacific Investment Management Co. is losing a client it has had for three decades — the latest sign of the asset management industry’s intense squeeze on fees.
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The firm is being replaced as manager of the $1.6 billion Harbor Bond Fund in favor of Income Research + Management. With the switch, investors will pay at least 30% less in fees, according to a regulatory filing.
Harbor Bond is switching managers as investors seek ever-lower fund expenses. It also expects a shakeout in fees for a key segment of the fixed-income market known as core-plus funds. Such funds combine riskier fixed-income instruments with core holdings in investment grade debt to supplement returns.
“I would expect there to be a repricing” in the category in the next two to four years, Kristof Gleich, president of Harbor Capital Advisors, said in an interview. “We wanted to get ahead of that.”
Officials at Newport Beach, California-based Pimco declined to comment. Harbor Capital continues to employ Pimco as a sub-adviser to separate accounts. Gleich said the firm “has been a great steward of our capital for 35 years.”
Pimco started managing the Harbor Bond Fund in 1987. At the start, it was run by Pimco’s Bill Gross using the strategy the star manager employed for his successful Total Return Fund. Even after Gross’s departure from Pimco, it has continued to run Harbor Bond with that strategy.
The impetus for replacing Pimco began after Chicago-based Harbor Capital did an internal study that showed core plus fund managers were taking an ever larger bite out of the yield their portfolios produced. As a result, Harbor Capital decided to preemptively move to lower the bond fund’s fees.
Under Income Research, the annual cost for an investor in Harbor Bond Fund’s retirement share class will fall to 30 basis points from 43 basis points. The fund will also change its name and investment strategy starting in February.
While the advent of exchange-traded funds and index investing has forced down industry fees, the trend hasn’t hit core plus funds as hard. The asset-weighted average fees for intermediate core-plus bond funds fell 14.5% from 2016 to 2020, according to Morningstar Inc., while intermediate core bond funds, which track their benchmarks more closely, dropped 36.4%.
“They are really the Alamo for active management,” Ben Johnson, a research director at Morningstar, said of the fees for intermediate core-plus bond funds.
Harbor Bond has generated an average annual return of 5.79% during the past three years, according to data compiled by Bloomberg.
In its analysis, Harbor Capital compared the average fee that core-plus bond funds charge with a proxy for their returns — the yield to maturity for the Bloomberg U.S Aggregate Bond Index.
Harbor Capital found that the yield generated by the benchmark has fallen faster over time than the average fees charged by core plus managers. As a result, a greater proportion of returns have been steadily going to managers at the expense of investors.
In 2001, core-plus investors got to keep 89% of their yield and paid just 11% in management fees, while they now hand over 31% of their yield and retain just 69%.
“The question becomes whether or not these funds can continue to deliver returns that justify what they are charging,” Johnson said.
(Adds Harbor Bond Fund’s return in 11th paragraph. An earlier version of this story corrected the name of manager in the second paragraph.)
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