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PIMCO’s Actively Managed Credit Absolute Return StrategyThe PIMCO Credit Absolute Return Strategy uses a global approach to credit selection with a focus on generating attractive absolute returns without the constraint of a benchmark. In an effort to achieve this goal, the strategy’s portfolio is constructed from PIMCO’s best bottom-up corporate credit ideas across investment grade, high yield, bank loans and other corporate securities.
While the strategy is designed to adhere to PIMCO’s investment philosophy and risk management process, it will have significant flexibility to increase and reduce its sensitivity to credit markets in an effort to achieve its absolute return objective in various market environments.
In periods when credit offers attractive relative value, for example, the strategy will likely have a greater exposure to the credit markets. In periods where credit spreads are likely to widen, the strategy would likely significantly reduce its sensitivity to credit markets through various hedging strategies and focus more on relative value between sectors in an effort to achieve its absolute return objective.
PIMCO’s credit philosophy is defined by our disciplined approach to credit selection coupled with our top-down macroeconomic framework. This philosophy is consistent with the firm’s broader but unique approach to the fixed income markets.
Our credit selection process employs three filtering screens:
The valuation test accomplishes two things. First, it answers the question of where we want to be in the capital structure. Second, it serves as an overall guide to allocation. When we arrive at the third test we are essentially comparing securities across the globe, deciding which have the highest relative value, whether it is a floating-rate loan issued by Company A or a fixed-rate bond issued by Company B. Our allocations of loans vs. bonds vs. other instruments will result from the sum of these relative value comparisons. In terms of scaling our overall risk, our largest allocations will be our highest conviction ideas that pass these screens.
The PIMCO Credit Absolute Return Strategy seeks to meet its return objectives by:
Credit ResearchPIMCO’s experienced team of global credit analysts places a great deal of importance on independent analysis when evaluating corporate and sovereign credit. Consequently, we never solely rely on rating agencies as our analysts rate each credit we hold.
Our credit research framework focuses on business and financial risk at the issuer and security level. To examine business risk, we evaluate overall industry dynamics, the company’s competitive position within the industry, the soundness of the business plan and the quality and execution capabilities of the management team. We evaluate financial risk by measuring leverage, cash flow, interest coverage and liquidity metrics.
Each analyst will focus on four common criteria:
While this criteria is consistent across our Global Credit Research Team, our emphasis on each factor will vary based on industry.
Macroeconomic FocusPIMCO’s robust, top-down macroeconomic analysis of the global economy sets the tone for the structure of our global credit portfolios. Our assessment of the direction of global economic growth and interest rates provides the framework for selecting the optimal portfolio structure and sector allocation within the strategy.
Absolute Return ObjectiveThe objective of the PIMCO Credit Absolute Return Strategy is to meet an absolute return target throughout a wide variety of market conditions and challenges, unencumbered by the constraints of a benchmark. Specifically, we aim to generate global credit exposure, offer diversification from traditional long-only strategies and provide a degree of downside protection and liquidity. We leverage our strength as a global leader in disciplined bottom-up credit selection and experience in top-down forecasting to pursue this objective.
In addition to PIMCO’s disciplined approach to fundamental credit research, we use extensive analytical tools to measure and monitor the risk characteristics of portfolios. PIMCO has invested considerable time and resources in developing proprietary models and analytical tools that facilitate a robust approach to risk management. These tools are important in managing credit strategies because their flexibility facilitates analysis at the regional, sector and security level. The PIMCO Position Blotter system provides risk and portfolio structure information, allowing for the aggregation of detailed security-level information into risk matrices.
Extensive use of analytical tools allows us to maximize the value of our investment professionals and provides a dispassionate check on our investment decisions. These systems augment our understanding of the strategies through which we have consistently sought to add value to our client portfolios.
Past performance is not a guarantee or a reliable indicator of future results. Investing in the bond market is subject to certain risks including market, interest-rate, issuer, credit, and inflation risk; investments may be worth more or less than the original cost when redeemed. High-yield, lower-rated, securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. Bank loans are often less liquid than other types of debt instruments and general market and financial conditions may affect the prepayment of bank loans, as such the prepayments cannot be predicted with accuracy. There is no assurance that the liquidation of any collateral from a secured bank loan would satisfy the borrower’s obligation, or that such collateral could be liquidated. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. The use of leverage may cause a portfolio to liquidate positions when it may not be advantageous to do so to satisfy its obligations or to meet segregation requirements. Leverage, including borrowing, may cause a portfolio to be more volatile than if the portfolio had not been leveraged. PIMCO strategies utilize derivatives which may involve certain costs and risks such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested. There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Diversification does not ensure against loss.
This material contains the current opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Pacific Investment Management Company LLC, 840 Newport Center Drive, Newport Beach, CA 92660, 800-387-4626. ©2014, PIMCO.
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