PIMCO | Diversified Income Strategy

Diversified Income Strategy

What is Diversified Income?

Diversified Income is a multi-sector strategy that invests across a broad spectrum of credit market sectors including global corporate credit both investment grade and high yield, and emerging market debt. The allocation among each of these markets will vary based on PIMCO’s assessment of global trends and relative valuations. This active and dynamic approach allows for increased responsiveness in asset allocation to changing economic and market conditions while remaining anchored by PIMCO’s investment process and longer-term orientation. The ability to invest globally helps to improve diversification and may allow investors to benefit from differences in business cycles across regions and credit quality trends across credit sectors.

PIMCO’s Diversified Income Experience

Global fixed income markets provide a rich opportunity set to an experienced manager capable of identifying and implementing both top-down and bottom-up investment strategies. PIMCO is a market leader in global credit markets and has over 39 years of experience in making asset allocation decisions across numerous multi-sector bond products including Total Return Strategy.

PIMCO’s Top-Down Investment Process Anchors Relative Value Assessment

PIMCO’s proven investment process takes a disciplined approach to evaluating global macroeconomic developments and prospective trends in interest rates and relative sector performance. This exercise is anchored by PIMCO’s secular and cyclical forum process, where the firm’s investment professionals from around the globe come together to develop a medium- to long-term outlook for the global economy. This process provides the framework for the regional and sector analyses that are integral to the investment decisions within the Diversified Income strategy, and that are executed by specialists based on comprehensive bottom-up analysis.

Sector Specialist Structure Generates Value Added Through Bottom-up Strategies

PIMCO’s generalist/specialist structure is uniquely positioned to take advantage of the broad set of investment opportunities within global credit markets. Generalist portfolio managers are responsible for the top-down asset allocation decisions, consistent with the themes identified through PIMCO’s forum process. Investment grade, high yield and emerging markets specialist portfolio managers are responsible for designing the bottom-up investment strategies. The specialist teams from each global office identify the optimal means of gaining exposure within their sectors and are responsible for efficient local execution.

Applications for PIMCO’s Diversified Income Strategy

The Diversified Income strategy is designed for investors who desire a fixed income alternative with the potential for a superior yield over core bond strategies, and that may benefit from improving global economic conditions. This strategy allows investors to make the strategic decision to invest across the broad spectrum of global credit sectors while placing the tactical sector, country, industry and issuer decisions with PIMCO, thereby optimizing credit market exposure amid changing economic and market environments.

Diversified Income differs from typical fixed income strategies where returns tend to be driven mainly by changes in interest rates within developed markets. Adding a Diversified Income strategy to a traditional fixed income portfolio has the potential to both increase portfolio yield and reduce the overall volatility. As such, this strategy may serve as both a complement to a traditional fixed income portfolio or as a replacement for stand-alone allocations to individual segments of the global credit market.

Investment Philosophy for Diversified Income

PIMCO’s Diversified Income strategy focuses on adding potential value through effective sector rotation and incorporates a disciplined approach to credit selection. PIMCO’s philosophy and approach to global credit markets is consistent with our conservative, yet innovative, approach toward fixed income markets in general.

Specifically, the philosophy for investing in global corporate and sovereign credit markets embodies four key principles:

Employ PIMCO’s expertise in evaluating global relative value across the fixed income market and credit spectrum
Attempt to maximize return while preserving capital by focusing on credits demonstrating solid or improving fundamentals with the potential for capital appreciation through improvements in credit quality
Retain a claim on improving global economic and credit conditions while guarding against credit events through our disciplined, long-term assessment of underlying economic and financial fundamentals with an emphasis on avoiding credit “black holes”
Diversify broadly across regions, industries and issuers as well as through the varied set of sources of value described below

Sources of Added Value

Macroeconomic Focus
PIMCO’s robust, top-down macroeconomic analysis of the world’s major economies sets the tone for the structure of our global credit portfolios. The assessment of the direction of global economic growth and interest rates provides important insight in choosing the optimal portfolio structure and sector allocation within this strategy.

Asset Allocation/Sector Rotation
With the output from PIMCO’s macroeconomic assessment as a backdrop, the Diversified Income portfolio management team determines the appropriate asset allocation for the portfolios among a broad range of global credit sectors and other fixed income sectors. In addition, the sector specialist teams for the Diversified Income strategy (including emerging markets, global high yield corporates, global investment grade corporates, and other spread sectors) conduct bottom-up security selection and relative value assessment within their respective sectors for implementation in the Diversified Income portfolios

Credit Research
PIMCO’s team of corporate credit analysts and team of emerging markets specialists located around the globe are responsible for evaluating corporate and emerging markets credits. We place a great deal of importance on independent analysis when evaluating corporate and emerging market credits. We never rely on rating agencies alone. Our staff of seasoned credit analysts rates every credit that we hold. Our research is focused on issuers with improving credit profiles and prospects for rating upgrades and, therefore, greater capital appreciation potential. A prerequisite to our evaluating an issuer is access to management. We concentrate on issuers with strong underlying businesses and competitive positions.

Further, PIMCO’s size in global credit markets provides some key benefits in terms of access to company management and country officials. In addition to the ability to communicate directly with key decision makers of both corporate and sovereign issuers, PIMCO’s size affords the ability to devote significant resources to each sector within the market, substantially increasing our ability to add value to our clients’ portfolios.

Country Analysis – Country credit decisions begin with an analysis of the country’s underlying credit fundamentals and capacity for long-term economic growth. Those results are augmented with an analysis of the potential impact of the external economic environment and technical conditions on each country. If a country does not meet our credit criteria, then we will avoid it and seek alternative methods to manage tracking error.

Industry Analysis – Industry analysis represents another important aspect of the bond selection process. The credit analysts and portfolio managers work together to identify industries that are undergoing structural or competitive changes that may enhance profits and cash flow.

Company Analysis – Fundamental, company-specific credit analysis forms the most critical stage of our corporate credit research process. The team of credit analysts is organized by industry in order to facilitate company evaluation across regions providing for the identification of relative value opportunities globally. For each company, the analyst assigns a rating based on the company’s financial condition, the feasibility of its strategic plan, and the quality of management.

Issue Analysis – PIMCO portfolio managers and credit analysts further compare all of the available issues for a given issuer to select the security that offers the best value. This analysis focuses on the valuation of each issue relative to its specific features, such as currency of issue, call risk, seniority within the capital structure, and covenants.

Risk Management / Controls

PIMCO uses a matrix approach to managing credit risk that is based on both qualitative and quantitative measures. On the qualitative side, the portfolio management teams and credit analysts within each sector perform regular company and country visits and assign an internal rating to every credit in which PIMCO invests. In addition, the specialist teams follow a rigorous, formalized process of monitoring daily developments and updating those internal ratings as necessary. On the quantitative side, PIMCO has invested considerable resources in developing proprietary analytical risk management systems. These tools are important in managing multi-sector strategies as they allow various types of risks to be analyzed at the portfolio, sector and instrument level. This matrix approach to risk management is designed to identify and avoid “black hole” credit events.

How To Invest

Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. Investing in the bond market is subject to certain risks including market, interest-rate, issuer, credit, and inflation risk. 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. 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. 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.

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