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Strategy OverviewInvestors need to meet two key investment objectives in the post-financial crisis era:
Traditional allocation responses have historically offered contradictory investment benefits. While Treasury Inflation-Protected Securities (TIPS) provide a contractual link to inflation, the yields on these instruments are historically lower than those of other fixed income securities. Credit markets, such as investment grade corporate bonds, have historically offered investors an incremental yield pick-up relative to comparable-maturity government bonds albeit without the typical benefits associated with government bonds. However, given most credit instruments are issued without a contractual inflation link, their ability to help investors meet liabilities in real terms, after adjusting for inflation, may be limited during periods of high or rising inflation.
PIMCO’s CreditRealReturn strategy provides investors with a simple portfolio structure that helps investors meet dual investment objectives. It seeks to offer a higher yielding alternative for hedging against secular inflationary risks by integrating the inflation-protection of TIPS with the high quality yield premium typically associated with investment grade credit. Thus, PIMCO’s CreditRealReturn is designed to allow investors to hedge future inflation risks and get adequate compensation in the meantime.
The Portfolio StructureThe simplicity and liquidity of PIMCO’s CreditRealReturn strategy is the primary source of value added for investors. By matching every dollar invested in the TIPS market with the yield spread offered by the investment grade corporate bonds, CreditRealReturn helps provide better capital efficiency than making two separate allocations to TIPS and to investment grade credit.
Overlay ManagementThrough our dedicated resources and our extensive experience in managing both synthetic credit instruments and overlay portfolios, the synthetic credit index overlay component of PIMCO’s CreditRealReturn strategy will benefit from numerous sources of added value, including:
TIPS Collateral ManagementWe have committed substantial analytical resources to valuing global real return bonds and to assessing relative values between real return bonds and conventional debt. In our efforts to achieve value-added results, we actively apply the following strategies:
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 allows 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.
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. Inflation-linked bonds (ILBs) issued by a government are fixed-income securities whose principal value is periodically adjusted according to the rate of inflation; ILBs decline in value when real interest rates rise. Treasury Inflation-Protected Securities (TIPS) are ILBs issued by the U.S. Government. 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 these investment strategies 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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