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What is PIMCO’s Emerging Markets Corporate Bond Investment Approach?Investment opportunities in emerging markets (EM) corporate bonds have expanded dramatically in recent years. Governments across the developing world have sought to shift their economies to a higher growth plane by facilitating increased investment in key sectors, allowing private investments in formerly state-owned companies and supporting the growth of privately held companies. As a result, the EM corporates market has deepened in size and attracted more investor interest, and is now offering investment opportunities in many sectors like energy, metals and mining, transportation, telecommunications, social housing and banking, among others. The PIMCO Emerging Markets Corporate Bond Strategy aims to benefit from this development.
PIMCO’s process for investing in emerging markets corporate bonds takes place within the context of our robust emerging market investment framework. Sovereign research forms the foundation for this framework and, consistent with the firm’s overall investment philosophy, our approach begins with a secular analysis of the global economy. We then employ a multi-step process for analyzing sovereigns. 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). Second, we 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 market to identify both the upside and the imbalances that could potentially lead to market dislocations in a given country.
Within those countries favored by our sovereign research process, we leverage PIMCO’s credit research capabilities. This entails industry analysis wherein credit analysts and portfolio managers work together to identify those sectors which are likely to benefit from either explicit or implicit sovereign support or where there is an important and identified structural shortage which will be fulfilled by the sector. Individual issuer and issue analysis complement the industry assessment. Fundamental, entity specific analysis is one of the most critical components of our corporate bond investment approach and entails evaluation of the company or project’s viability; management’s capability; potential operational and financing challenges; and other technical risks. Issue specific factors such as guarantees, concessions, and covenants are likewise taken into account.
This disciplined multifaceted framework provides the basis for our country, industry, and issuers’ weightings, duration, curve, currency and instrument selection decisions, as well as relative value assessments. By emphasizing high quality countries and sectors strongly positioned for growth, often of systemic importance for the government, it helps us in our effort to optimize the set of strategies for a given investment environment while seeking to limit downside risk.
PIMCO’s traditional and successful team approach is evident in our emerging market efforts. With over 14 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 we rely in our efforts to anticipate where opportunities will emerge in this market.
The Emerging Markets Corporate Bond strategy is designed for investors seeking to capitalize on the secular factors which favor a strategic allocation to emerging markets more generally: their rising contribution to global economic activity and a trend improvement in creditworthiness. Continued growth--a high priority--will require investment, particularly in infrastructure. In addition, as emerging country governments seek to utilize the fiscal credibility they have built over the past decade to preserve growth amidst a global recession, their fiscal stimulus measures have been largely directed at infrastructure. This suggests that the strategy may benefit further from cyclical forces currently at work in emerging markets.
Emerging markets infrastructure bonds, used tactically, seek to increase performance within both core total return type bond portfolios and dedicated emerging markets accounts. Strategically, the characteristics of emerging markets infrastructure bonds complement traditional asset classes in terms of alpha generation, while providing the additional benefit of diversification.
Three-Pronged Approach to sovereign analysis – Our disciplined approach guides both strategic and tactical decisions. All conditions are necessary – none is sufficient on its own.
PIMCO’s emerging markets portfolio management style typically involves greater emphasis on high quality holdings. By emphasizing such issuers and those infrastructure names of systemic importance for the government, we look to retain upside potential while minimizing exposure to “big accidents,” thereby aiming to consistently outperform over a typical emerging markets cycle.
TacticalIn connection with a core bond portfolio, the addition of emerging markets infrastructure offers investors compelling opportunity. Low correlation with other asset classes and strong or improving fundamentals coupled with either explicit state ownership or implicit government support advance the case for emerging markets infrastructure 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.
StrategicPIMCO has been monitoring emerging economies since the late 1980s. We began investing tactically in this sector in the early 1990s. In 1997 we began to concentrate on emerging markets as a separate asset class, launching an emerging markets institutional mutual fund and, subsequently, separately managed portfolios. As the asset class evolves and investment opportunities in infrastructure continue to expand, the Emerging Markets Corporate Bond strategy encompasses the evolution of the opportunity set. The strategy is managed against the JPMorgan Corporate Emerging Markets Bond Index Diversified (CEMBI Diversified).
One of the unique structural decisions made by the founders of PIMCO many years ago was to separate the process of managing money into three distinct functions: investment, trade processing, and client service. Each function is performed by a separate group within the firm. Investment decisions ranging from strategy initiation through trade execution are performed by the Portfolio Management Group. Trade processing falls within the purview of the Investment Operations Department. All client servicing requirements are met by the Account Management Group.
This structure has served PIMCO well in many ways, the most important of which is that it provides a system of checks and balances by placing compliance issues within the purview of each of the three groups. Portfolio Management, Investment Operations, and Account Management are all responsible for checking and/or monitoring client guidelines. Multiple layers of responsibilities for compliance issues make it difficult for any individual to act significantly outside of the guidelines established by the client without detection.
To monitor and/or check guidelines in the most efficient way possible, PIMCO has devoted considerable effort over the years to developing a network of integrated computer programs that provide information key to this process. It has also developed analytical tools that include variables overlooked by traditional fixed income risk measures.
In the emerging markets area, in addition to the measures referenced above, we closely monitor economic, political, and other developments that impact various domestic and external markets of the economies. This process, which reflects a disciplined recognition of the fluidity of the asset class, is “formalized” in a daily note that assesses, on a timely basis, developments vis-à-vis our existing investment strategy. We also conduct less frequent more detailed analysis that addresses these issues within larger trends and details the investment themes resulting from our analysis and country visits.
Naturally, the process feeds into PIMCO’s quarterly economic and secular forums where the emerging market asset class is also discussed in the context of broader global developments. It also provides a real time opportunity for exchanges of views with other PIMCO investment professionals, thereby maximizing the scope for cross-fertilization and relative valuation assessments.
* PIMCO considers an emerging market to be any country defined as an emerging or developing economy by the World Bank (or its related organizations) or the United Nations (or its authorities).
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. Infrastructure entities are involved in the construction, operation, ownership or maintenance of physical structures, networks and other infrastructure assets that provide public services; infrastructure entities, projects and assets may be sensitive to adverse economic, regulatory, political or other developments and may be subject to a variety of events that adversely affect their business or operations. Sovereign securities are generally backed by the issuing government, obligations of U.S. Government agencies and authorities are supported by varying degrees but are generally not backed by the full faith of the U.S. Government; portfolios that invest in such securities are not guaranteed and will fluctuate in value. 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 Corporate Emerging Markets Bond Index (JPM CEMBI) is a global, liquid corporate emerging markets benchmark that tracks U.S.-denominated corporate bonds issued by emerging markets entities. 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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