As with all PIMCO’s fixed income product offerings, we take a moderate approach with respect to risk in our bank loan portfolios. Our philosophy is characterized by three key principles: 1) higher-quality focus; 2) diversification and 3) focus on improving credits.
Quality Focus – One of the most distinctive elements of PIMCO’s style is our focus on the upper-quality tiers of the bank loan market. While the strategy may only invest in securities that are rated at least Caa by Moody’s, or equivalently rated by S&P or Fitch or another NRSRO, or if unrated determined by PIMCO to be of comparable quality, we generally restrict our holdings to issuers rated B−/B3 and above and typically maintain a BB average quality. We feel the best risk-adjusted returns are offered by B+ and BB− bank loans. The strategy will maintain a minimum average credit quality of B. This approach distinguishes us from bank loan managers who venture into CCC and defaulted issuers, and often maintain a lower average quality. Another manifestation of our higher quality orientation is our focus on asset coverage. We favor credits where loans constitute a relatively small percentage of the capital structure relative to the assets owned by the company.
We believe that our higher-quality focus serves to benefit our clients, especially in a market environment characterized by both deteriorating fundamental credit quality and indiscriminate selling in the marketplace.
Diversify Exposure – PIMCO takes a disciplined approach to diversification of bank loan portfolios. We generally limit exposure in individual issuers to less than 3% and industry concentration to 15%. Although we may feel higher exposures could enhance relative performance from time to time.
Focus on Identifying both Weakening and Improving Credits – PIMCO’s first priority is to avoid the downside scenarios in credit. We believe by identifying and avoiding credits with weakening fundamentals, we can best protect our clients’ principal. At the same time, we use our forward-looking investment process to identify credits with improving fundamentals. The end goal of our process is to maximize total return, or the combination of current yield and price change, by focusing on issuers that we believe have good prospects for price appreciation due to improving credit fundamentals. Identifying these issues combines credit research, industry analysis and macroeconomic forecasting. In our global business cycle forecasting process, we formulate strategies for average portfolio quality and cyclical vs. non-cyclical industries. We then launch intensive industry-specific research in an attempt to identify industries whose ability to generate profits and cash flow are improving.
Our loan selection process finishes with thorough, traditional, fundamental credit research on companies within the industries we find attractive. All companies considered for purchase are visited by one of our analysts. In addition to discussing financial matters, longer-term strategic plans, asset valuation and ultimate liquidity of collateral, we also focus on character of management.
Individual issue selection is also enhanced by an analysis of structural features and covenants. It is PIMCO’s experience that a loan’s position within the corporate structure of a company has a substantial effect on the value of that loan. For example, a loan to a holding company can often be less desirable than a loan to a subsidiary with collateral assets such as machinery or property. |