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What is PIMCO’s Emerging Market Investment Approach?
Consistent with PIMCO’s overall investment philosophy, our approach to emerging market investing begins with a secular analysis of the global economy which is fine-tuned on a cyclical basis. Within this framework we use a multi-step process to guide our emerging markets investment decisions. First, we identify countries with strong, underlying credit fundamentals (including strong fiscal positions, stable/improving political situations, comfortable reserve levels, and debt profiles that can withstand financial shocks, among others). We then consider the impact of our global outlook on these countries, including prospects for demand from advanced economies, commodity prices, interest rate trends and other components of the external environment. Finally, we evaluate the technical conditions of the credit to identify both the upside and the imbalances that could potentially lead to market dislocations.
This disciplined multi-pronged framework provides the basis for our country weighting, duration, curve, currency and instrument selection decisions, as well as relative value assessments. Our high quality emphasis allows us to optimize the set of strategies for a given investment environment while helping to limit downside risk.
PIMCO has been monitoring the development of emerging economies since the late 1980s as part of our economic forum process. We started investing tactically in this sector in the early 1990s. In 1997, we began to concentrate on emerging markets as a distinct asset class with the introduction of an institutional mutual fund and, subsequently, separately managed portfolios. PIMCO is one of the largest participants in the market for emerging market debt. Our size and breadth places us in the forefront of information flows from developing countries, thereby supplementing the robust and timely understanding of the market dynamics so crucial to investing in these markets. An additional benefit of PIMCO’s stature in the market is the access that it provides to key policy makers from various countries, helping us maintain an in-depth policy dialogue. PIMCO’s traditional and successful team approach is evident in our emerging market efforts.
PIMCO’s traditional and successful team approach is evident in our emerging market efforts. With over 12 years of average industry experience, our team applies a great depth of knowledge to our emerging markets strategies. The team-oriented strategy also allows us to stay involved in the market while conducting valuable on-the ground research in the countries that we follow. In addition, specialized resources are added to the team based on PIMCO’s secular views which anticipate where opportunities will emerge in this market.
PIMCO’s emerging markets strategies focus on adding value through an emphasis on the high quality countries which tend to offer the most attractive risk-adjusted-return opportunities over a market cycle. By contrast, we seek to avoid countries which subject investors to the risk of default or credit deterioration. This philosophy embodies the following key principles which guide our disciplined investment process:
Sources of Added Value – The ways in which PIMCO attempts to add value are also consistent across strategies. These decisions include:
While the types of decisions are similar across accounts, the end result will depend upon the specific portfolio objectives and investment guidelines.
Tactical – In connection with a core bond portfolio, the addition of an emerging markets strategy offers investors compelling opportunity. Low correlation with other markets, declining volatility, and improving fundamentals advance the case for emerging market bonds. As is generally the case for any developing bond market, information and other inefficiencies prevail, thereby opening up important, tactical opportunities that PIMCO seeks to exploit through outright and relative value trades.
Strategic – PIMCO has been monitoring emerging economies since the late 1980s. We started investing tactically in this sector in the early 1990s. In 1997 we began to concentrate on emerging markets as a distinct asset class, initiating an emerging market institutional mutual fund and, subsequently, separately managed portfolios. Dedicated emerging markets portfolios are typically managed against either the JPMorgan Emerging Markets Bond Index Global (EMBIG) or a custom index, though several other appropriate benchmarks are utilized. For portfolios managed against the EMBIG, we seek to maintain consistently higher credit quality than the index. Put differently, we seek to achieve superior risk-adjusted returns.
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. 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. The credit quality of a particular security or group of securities does not ensure the stability or safety of the overall portfolio. There is no guarantee that this investment strategy will work under all market conditions and each investor should evaluate their ability to invest for a long term especially during periods of downturn in the market. Diversification does not ensure against loss.
The JPMorgan Emerging Markets Bond Index Global is an unmanaged index which tracks the total return of U.S.-dollar-denominated debt instruments issued by emerging market sovereign and quasi-sovereign entities: Brady Bonds, loans, Eurobonds, and local market instruments. It is not possible to invest directly in an unmanaged index.
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, 650 Newport Center Drive, Newport Beach, CA 92660, 800-387-4626. ©2014, PIMCO.
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