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Strategy OverviewWhile emerging market currencies have not been immune to the current bout of global risk aversion, the fundamental improvements undertaken by emerging nations over the past decade have enabled them to weather the current tumult with far greater market confidence than in the past. Local currency denominated investments in these countries allow investors to capture high real local interest rates and attractive interest rate differentials as compared to U.S. dollar interest rates. In addition, as the emerging economies remain well-positioned for further fundamental improvements, investors in this strategy may benefit from an appreciation of these currencies, especially in an environment of increasing secular pressure on the U.S. dollar. Currency exposure can also provide important portfolio diversification benefits due to low correlations with other asset classes.
PIMCO’s Emerging Markets Currency Strategy invests primarily in the currencies of, and fixed income instruments denominated in the currencies of, developing markets. PIMCO considers a developing market to be any non-U.S. country, excluding those countries that have been classified by the World Bank as high-income OECD economies (the current per capita Gross National Income (GNI) cut off level is defined by the World Bank as $11,906. In addition, PIMCO may consider additional countries as emerging market countries, based on a broader assessment on their development stage).
As part of PIMCO’s Emerging Market practice, the Emerging Markets Currency strategy benefits from the team’s considerable experience, market presence, and expertise.
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. We have long been active in local markets investing as well, both on a strategic and tactical basis. 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. With over 14 years of average industry experience as a team, 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.
Fundamental to the process of risk control are the analytical tools, which are available to measure and monitor exposures in the portfolio. PIMCO has invested considerable resources in developing its own proprietary models to help in this analysis. Extensive use of analytical models allows us to leverage our investment professionals and provides a dispassionate check on our investment decisions.
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 produce monthly and quarterly notes that address these issues within larger trends and detail the investment themes resulting from our analysis and frequent country visits.
Naturally, the process feeds into PIMCO’s quarterly economic and secular forums where developing economies are 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.
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. Currency rates may fluctuate significantly over short periods of time and may reduce the returns of a portfolio. 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 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.
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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