High Yield Spectrum Strategy

The PIMCO High Yield Spectrum strategy deploys PIMCO’s proven, bottom-up security selection across the entire range of global high yield debt – including securities of all speculative rating levels, all regions and non-U.S.-dollar-denominated high yield corporate bonds – to seek enhanced returns and meaningful portfolio diversification. The strategy’s emphasis on active security selection via thorough, independent credit research and analysis is vital to targeting compelling opportunities across all economic and market environments, while attempting to minimize the downside risk associated with a downgrade or default.

The principal reasons for investing in a broad opportunity set of high yield bonds are diversification and the potential for superior risk-adjusted returns over a full market cycle. High yield bonds have typically had a low correlation with most other fixed income sectors, which may enhance the risk/return profile of a broader core fixed income portfolio over the long term. Additionally, high yield bonds have a similar return profile to equities but generally significantly lower volatility.

PIMCO’s philosophy and approach to the high yield market is consistent with our conservative, yet innovative, approach toward the fixed income markets in general. Specifically, our High Yield Spectrum global fixed income philosophy embodies five key principles:

1. Bottom-up credit research incorporating top-down economic framework
   
   
2. Total return approach, not just yield focused
   
   
3. Focus on credits with best risk/return profile
   
   
4. Seek to limit risk through issuer and industry diversification
   
   
5. Global credit opportunity set resulting from expertise in many regions and credit sectors

PIMCO started using high yield bonds as a key component in our sector rotation process in the 1980s. We introduced our first high yield commingled vehicle in 1992, which focused on the upper quality tiers of high yield. In 1998 we began managing portfolios across the full high yield quality spectrum. We have an experienced team of high yield portfolio managers and credit analysts, each of whom focuses on credit analysis for certain industries. The team’s disciplined and dynamic credit selection process emphasizes each security’s fundamentals, while also incorporating insights from PIMCO’s long-term macroeconomic outlook.

Credit Research

PIMCO’s experienced team of credit analysts, located around the globe, is responsible for evaluating and rating every corporate credit in our portfolios. Independent analysis is critical when evaluating corporate credits and we never rely on rating agencies alone. Our research is focused on issues 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 we feel have strong underlying businesses and competitive positions.

Default and spread widening risk are the dominant potential risks in purchasing high yield corporate debt. Our focus on the comprehensive evaluation of credits, both at purchase and on an ongoing basis, focused on reducing the risk of downgrade or default

Country Analysis

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 external economic conditions and technical conditions of each country. Corporate credits are then analyzed within the framework of the country analysis, to help identify and capture differences in the business cycles across countries.

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 will affect 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 the ratings spectrum, providing for the identification of relative value opportunities within industries. For each company, the analysts assign a rating to identify the level of intrinsic credit risk, based on the company’s financial condition, the feasibility of its strategic plan, the quality of management, as well as other quantitative and qualitative factors.

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.

High yield securities are subject to greater levels of credit and liquidity risk than other securities. High yield bonds are considered predominately speculative with respect to the issuer’s continuing ability to make principal payments. An economic downturn or period of risk aversion could adversely affect the market for high yield debt and reduce an investor’s ability to sell its securities.

In addition to PIMCO’s disciplined approach to fundamental credit research, extensive analytical tools are used to measure and monitor the risk characteristics of the portfolio. PIMCO has invested considerable resources in developing proprietary models and analytical tools that enable a robust approach to risk management. These tools are important in managing credit strategies as their flexibility facilitates analysis at the regional, sector and security level. These models include our Bonds Under Management report, which provides an extensive summary of portfolio holdings and portfolio-level risk characteristics. Additionally, the PIMCO Position Blotter system provides risk and portfolio structure information, allowing for the aggregation of detailed security-level information into a variety of risk matrices including sector and issuer exposure by quality and duration bucket.

Extensive use of analytical tools helps allow us to maximize the value of our investment professionals and provides a dispassionate check on our investment decisions. These systems also augment our understanding of the strategies that have consistently added value to our clients’ portfolios.