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It potentially can satisfy the demands of an income-oriented investor who wants to invest in a diversified portfolio of multi-sector fixed-income portfolio. The strategy combines the PIMCO total-return active management style with techniques that seek to maximize distributable income.
PIMCO Income Strategy intends to offer a high level of current income in an effort to meet the needs of investors for whom income is the primary goal. The strategy seeks to surpass other income-generating investments like Treasury ladders by targeting a more competitive distribution yield and monthly dividends with a focus on assuming only a minimal increase in risk.
PIMCO is recognized as a leading institutional money manager with a significant balance of its assets under management in core bond portfolios that utilize multiple sources of additional value with a focus on risk management.. Though PIMCO Income Strategy utilizes this time-tested total-return approach, the strategy focuses on income first and capital appreciation second.
The strategy employs many of the same investment strategies used in other PIMCO strategies, such as the Total Return Strategy, and reflects the macroeconomic and asset-allocation views of the PIMCO investment committee. However, the Income Strategy also uses unique investment strategies in an effort to maximize income.
Managed to pursue efficient income generation, the Income Strategy also focuses on PIMCO total-return ideas in an effort to maximize capital appreciation and risk-adjusted returns relative to its peers. Although the strategy has an income orientation that produces sector allocations that may be slightly more concentrated than the Total Return Strategy, the Income Strategy reflects the central asset-allocation views of the PIMCO investment committee.
The strategy is considered a core bond strategy, benchmarked against the Barclays Capital U.S. Aggregate Index, and utilizes the full range of bond sectors available, including U.S. Treasuries, federal agencies, commercial paper, banker’s acceptances, certificates of deposits, short-term corporate debt, and variable- and floating-rate debt, and is managed opportunistically using sector rotation, yield-curve positioning and duration.
The strategy capitalizes on PIMCO strengths:
Because the strategy’s multi-sector approach gives it the flexibility to adapt to changing economic conditions, it may be well suited for a long-term income allocation and should be considered a complement to an investor’s core bond holdings.
Consistent with the PIMCO process and philosophy used for more than 35 years across all our strategies, the Income Strategy is founded on the principle of diversification. It is a multi-sector strategy, in which no single sector or strategy should dominate. By relying on multiple sources of value that arise from a diversified portfolio, we seek to generate a solid, consistent track record. This process utilizes both “top-down” and “bottom-up” strategies.
Top-down strategies focus on duration, yield-curve positioning, volatility, and sector rotation with the potential to maximize current income. They are deployed from a macro view of the portfolio driven by our secular outlook of the forces likely to influence the economy and financial markets over the next three to five years and our cyclical views of two- to four-quarter trends. We implement it within Income Strategy portfolios by selecting securities that achieve the designated objectives.
Bottom-up strategies drive our security-selection process and help identify and analyze undervalued securities and securities that pay high income. Here, we employ advanced proprietary analytics and expertise in all major fixed-income sectors. By combining perspectives from both the portfolio and security levels, we attempt to add value consistently over time within acceptable levels of portfolio risk.
PIMCO portfolio managers work as a team. Generalist portfolio managers receive input from specialists in each market sector. Sector specialists relay information, ideas and trading strategies, and assist with trade execution. PIMCO seeks to generate high, consistent income and add value while maintaining overall risk characteristics similar to the benchmark index. These techniques seek to produce a record of high, consistent income and above-market returns:
Credit analysisWhen evaluating corporate-debt issues, we place a great deal of importance on independent analysis. PIMCO never relies on credit agencies alone. Our senior portfolio managers work with a team of credit analysts who evaluate individual issues. Our size helps give us access to management and this is an integral part of the credit-analysis process. We meet with a company’s managers as often as necessary to remain current on the firm’s financial and operating conditions. Each security is assigned an internal PIMCO rating.Quantitative researchDue to the complexities of the fixed-income markets, PIMCO has developed a set of proprietary quantitative tools designed to assess how securities will react to changes in interest rates and market conditions. This may give us a distinct advantage relative to our competitors in evaluating investment decisions.Cost-effective tradingAs one of the largest bond managers in the world, economies of scale allow us to keep transaction costs very low. Transaction costs are factored into all of our analyses to ensure that each trade’s benefit outweighs its opportunity cost.
Issue selectionSpecialists in a wide variety of fixed-income sectors focus on evaluating the relative value between individual securities within each sector. By understanding and exploiting these differences, we seek to capture value for our clients.Avoiding extreme durationsDuration, or the sensitivity of a bond to a change in interest rates, is extremely important in structuring a portfolio. By actively managing our portfolios and maintaining a broad market focus, we strive to provide consistent income and total returns with minimal risk.
Risk management has been a major emphasis at PIMCO since our inception in 1971. As new technologies and financial instruments develop, we strive to ensure that our risk management procedures remain effective and that we stay ahead of our competition. We dedicate significant financial and intellectual resources to address risk management.
Risk manifests itself in two main forms – investment and operational. Effective investment-risk management begins by identifying client objectives and the level of risk aversion. From there, we develop a set of appropriate investment guidelines and effective risk measures. Advanced proprietary analytics allow us to model securities under a multitude of scenarios including best and worst cases. We believe the decision to hold a security is just as important as the decision to buy. As a result, we price and re-evaluate portfolio holdings on a regular basis.
Operational risk is equally important. Operational risk deals with problems or errors that may arise during day-to-day operations of the firm. Because we segregate responsibilities for portfolio management, account management, and investment support, and an independent compliance group monitors investment activity, our organizational structure is designed to address this risk. At PIMCO, we have embraced this methodology from our inception and it has benefited both our clients and the organization as a whole. Our system has clearly defined checks and balances to provide reasonable assurance that all risk exposures are handled in an appropriate manner.
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. 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. 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. 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.
Barclays Capital U.S. Aggregate Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. These major sectors are subdivided into more specific indices that are calculated and reported on a regular basis. 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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