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What is Floating Income?Floating Income is a multi-sector strategy that invests across a broad spectrum of credit market sectors including global corporate credit (investment grade and high yield) and emerging market debt. It seeks to capitalize on attractive investment opportunities offered by these sectors while minimizing interest rate exposure. Investments consist mainly of floating and variable rate securities, short duration securities, or combinations of fixed-rate bonds and derivative instruments, which together create floating income exposure. Accordingly, the strategy focuses on securities whose income tends to rise when interest rates are rising, which helps mitigate one of the primary risks of bond investing – interest rate risk.
The strategy also aims to capitalize on relative value among different credit sectors. Sector allocations will vary based on PIMCO’s assessment of global macroeconomic trends, security specific valuations and technical conditions. This active and dynamic approach is designed to allow 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.
The Floating Income strategy is designed for investors who desire a floating rate alternative with the potential for a yield pick up and the possibility of price appreciation due to improving global economic and credit market conditions. Investors benefit from PIMCO’s expertise with respect to tactical sector and regional decisions, thereby optimizing exposure amid changing economic and market environments.
Adding a Floating Income strategy to a traditional fixed income portfolio may help to decrease exposure to rising interest rates in developed fixed income markets and increase portfolio yield relative to alternative short-term or floating rate strategies. In addition, the increased diversification offered by exposure to the global credit markets may help to reduce overall portfolio volatility. As such, this strategy may serve as both a complement to a traditional fixed income portfolio or as a floating rate alternative to stand-alone allocations to individual segments of the global credit market.
1. Employ PIMCO’s expertise in evaluating global relative value across the fixed income market and credit spectrum.
2. 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.
3. 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.”
4. Diversify broadly across regions, industries, issuers, and asset classes, as well as through a varied set of sources of value.
Macroeconomic FocusPIMCO’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 RotationWith the output from PIMCO’s macroeconomic assessment as a backdrop, the Floating 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 Floating 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 Floating Income portfolios
Credit ResearchPIMCO’s team of corporate credit analysts and team of emerging market 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.
High yield and emerging market securities are subject to greater levels of credit and liquidity risk than other securities. In particular, an economic downturn or other disruptive events could adversely affect the issuer’s continuing ability to make principal payments. To manage these risks, 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.
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 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, 650 Newport Center Drive, Newport Beach, CA 92660, 800-387-4626. ©2014, PIMCO.
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