Morningstar Warns of Pimco Fund Unit

In more fallout from the mutual fund trading scandal, fund rating firm Morningstar Inc. said Thursday that it was recommending investors consider selling stock funds managed by a firm owned by the same parent as renowned bond manager Pimco Asset Management Co.

But Morningstar said it would keep its favorable opinion of Pimco, the Newport Beach-based unit of German insurer Allianz that is run by Bill Gross, a legend in the bond market.

Morningstar’s recommendation against New York-based PEA Capital, whose name was recently changed from Pimco Equity Advisors, stems from a complaint alleging improper trading that was filed last month by New Jersey regulators.

Eric Jacobson, a Morningstar analyst, said the allegations against stock funds run by PEA and the evidence provided in the New Jersey complaint were “extremely troublesome.� Regulators said PEA allowed a favored investor, Canary Capital Partners, to engage in market-timing trades in its funds to the disadvantage of other investors.

Morningstar took issue with PEA’s assertion that it was duped by Canary, the hedge fund also at the center of New York Atty. Gen. Eliot Spitzer’s probe that spawned the scandal over improper trading in funds.

Morningstar said it believed that Kenneth Corba, PEA’s chief investment officer and a portfolio manager, put the interests of his company ahead of investors.

“Until the firm takes steps to dispel the doubts that this episode has cast over PEA’s commitment to shareholders, investors are better off taking their business elsewhere,� Morningstar said.

Before selling, however, Morningstar encouraged investors to read the New Jersey suit, weigh tax costs and decide if, on selling, they would lose access to an important asset class.

Two Pimco bond funds also were named in the suit, which alleged that Canary was allowed to do market timing in those funds as well. But Morningstar said the case regulators made against Pimco appeared less compelling, and that its editors and analysts did not believe that the charges were nearly as conclusive as those made against PEA.

Pimco’s Gross last week said the firm would fight the New Jersey suit. But he also distanced himself and Pimco from PEA, saying in an interview with The Times that PEA wasn’t a “sister� company but was more a “brother-in-law,� and that he would seek to have Allianz agree to remove the Pimco name from PEA and other subsidiary funds.

Morningstar said that if it doesn’t see significant changes in Pimco ties with other Allianz fund units, or the removal of the executives accused of involvement in improper trading, it would reconsider its stance on Pimco’s bond funds.