PIMCO’s convertible bond investment philosophy focuses on attempting to add value through in-depth fundamental credit research and analytical modeling of equity options and warrants, within the context of PIMCO’s macro-economic forecasting process. We seek to provide consistent returns by employing many strategies and reducing dependence on any one source of value-added.
Balanced Risk Profile – We maintain a balanced risk/reward profile, emphasizing modest participation with rising equity prices yet providing a shield against significant declines.
Total Return Orientation – PIMCO emphasizes issues with capital appreciation potential and good credit fundamentals.
Broad Industry Focus – We diversify risk across multiple industries and sectors.
Quality Focus – PIMCO’s higher quality orientation typically results in portfolios with a higher average credit rating than that of the overall convertibles market.
Duration – We use an effective, option-adjusted duration, which will typically not exceed three years.
Equity Exposure (Delta) – The portfolio’s weighted average delta (a measure of the portfolio’s sensitivity to changing equity values) will generally not exceed 70 percent.
The valuation of convertibles is complex, requiring sophisticated option modeling as well as disciplined company/credit analysis. Successful analysis of convertibles involves several considerations:
Market Outlook – Portfolio risk management is guided by PIMCO’s long-term secular outlook that considers trends in demographics, political factors, and structural changes in the global economy. This annual outlook is refined with quarterly business-cycle economic forecasts that focus on near-term trends in inflation, GDP, and corporate profits. Results of our secular and cyclical forecasts influence the formulation of strategies for the convertible bond product.
Fundamental Analysis – In-depth analysis seeks to identify companies with stable or improving credit fundamentals and prospects for improving equity prices. PIMCO’s experienced in-house credit team evaluates the strength and predictability of each company’s cash flow, the quality of assets, the strength of the management team, the company’s competitive stance and financial flexibility, and the covenants of the convertible security.
Options Analysis – The analysis of the convertible’s attached equity option or warrant is performed in conjunction with PIMCO’s highly skilled team of financial engineers. The team is experienced in modeling and evaluating very complex financial processes, including the assessment of warrants associated with convertible securities. Our financial engineers are also skilled in reverse-engineering deal structures and in measuring and modeling volatility. |