US market regulator probes Pimco's flagship ETF managed by Bill Gross

US securities regulators are investigating whether bond fund Pimco inflated returns of its flagship exchange-traded fund managed by star investor Bill Gross.

The US Securities and Exchange Commission’s probe into the $3.6 billion Pimco Total Return Exchange-Traded Fund has been going on for at least a year, but has picked up pace in recent weeks, the Wall Street Journal reported on Tuesday, citing unnamed sources.

The SEC’s probe is looking into how the ETF bought and then valued its investments in bonds and whether that led to inaccurate information about the fund’s actual performance being given to investors, the Journal reported.

Gross, the co-founder and chief investment officer of Pimco, and other executives have been interviewed by the SEC as part of the probe, the report said.

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A spokesman for Pimco confirmed the probe.

“PIMCO has been cooperating with the SEC in this non-public matter, and we take our regulatory obligations and responsibilities to our clients very seriously,” he said.

“We believe our pricing procedures are entirely appropriate and in keeping with industry best-practices.”

The SEC could not be reached for comment outside regular U.S. business hours.

The news of the probe exacerbates what has already been a rough year for Gross and Pimco, a unit of German financial services company Allianz SE. Pimco, which is based in Newport Beach, California, had $1.97 trillion in assets as of June 30.

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Pimco’s flagship Total Return Fund, the world’s largest bond fund, has seen outflows for 16 straight months through August. Analysts have said cash outflows began last year due to weak returns; the fund declined 1.9 percent in 2013, its worst performance in nearly two decades.

A public falling out earlier this year between Gross and his one-time heir-apparent Mohamed El-Erian, who shared the co-chief investment officer title, has only added to investors’ unease.

Investors have pulled almost $70 billion from the fund since May 2013, Morningstar data show. In August alone, the fund saw net outflows of $3.9 billion despite some improvement in performance.

The Total Return Fund had $221.6 billion in assets at the end of August, down from a peak of $292.9 billion in April 2013.

The Pimco Total Return Exchange-Traded Fund, an actively managed ETF designed to mimic the strategy of the flagship mutual fund, however, has been doing better. The fund had net inflows of $87 million in August, its third month of inflows, according to Morningstar.

Although total assets in the fund at the end of August were $3.6 billion, a fraction of the assets in the mutual fund, the ETF ranks at the top of its category.

Reuters