PIMCO | Investment Grade Credit Strategy

Investment Grade Credit Strategy

What is Investment-Grade Credit?
PIMCO’s Investment-Grade Credit strategy invests primarily in creditworthy corporate issuers having a debt rating of BBB- or greater by at least one of the recognized credit rating agencies or, if unrated, determined by PIMCO to be of comparable quality. The strategy utilizes a disciplined approach in the credit selection process, as issuer and industry decisions will contribute meaningfully to the performance of the product. In addition to corporate bonds, the credit universe includes investment-grade sovereign bonds, as well as supranational issuers. While macroeconomic strategies that influence sector and industry decisions are important, bottom-up security selection will most likely be the primary driver of long-term performance.

Applications for PIMCO’s Investment-Grade Credit Strategy

The Investment-Grade Credit strategy is designed for investors who desire a high credit quality fixed income alternative that is well positioned to benefit from improving global economic conditions. This strategy allows investors to make the strategic decision to invest in investment-grade credit while placing the tactical sector, industry and issuer decisions with PIMCO, thereby optimizing exposure amid changing economic and market environments. This product differs from many typical fixed income strategies where returns tend to be driven mainly by changes in interest rates within one country or region.

PIMCO’s Investment-Grade Credit Experience

Global fixed income markets provide a rich opportunity set to an experienced manager capable of identifying and implementing both top-down and bottom-up investment strategies. PIMCO is a leader in global credit markets, having used investment-grade corporate bonds as a key component of our investment strategy for core fixed income portfolios since 1971. We have an experienced team of investment-grade credit portfolio managers and industry focused credit analysts.

Credit Portfolio Management / Research Platform Drives Security Selection

PIMCO’s global organizational structure is uniquely positioned to capture the broad set of investment opportunities within the global credit markets. The portfolio management team structure is organized by region to capture opportunities among issuers domiciled in North America, Europe and Asia. The credit research function is organized by region and industry, rather than credit quality rating. This structure allows PIMCO to focus an analyst’s experience and expertise within a small set of industries.

PIMCO’s Top-Down Investment Process Anchors Relative Value Assessment

PIMCO’s proven investment process takes a disciplined approach to evaluating global macroeconomic developments and prospective trends in interest rates and relative sector performance. This process is anchored by PIMCO’s secular and cyclical forum process, where all of the firm’s investment professionals from around the globe come together to develop a medium- to long-term outlook for the global economy. This process provides the framework for the regional and sector analyses that are integral to the investment decisions within the global Investment-Grade Credit strategy.

PIMCO’s Credit Philosophy

PIMCO’s credit strategy focuses on adding value through a disciplined approach to credit selection combined with top-down macroeconomic forecasts for region and sector rotation. PIMCO’s philosophy and approach to global credit markets is consistent with our conservative, yet innovative, approach toward fixed income markets.

Specifically, the philosophy for investing in corporate and sovereign credit markets embodies three key principles:

1) Major shifts in portfolio strategy are driven by longer-term or secular trends as opposed to short-term aberrations in market conditions

2) An emphasis is placed on adding value through combining bottom-up fundamental credit research with top-down macroeconomic analysis

3) Consistent investment performance is pursued by emphasizing independent research and prudent diversification with respect to industries and issuers. The strategy is managed in the context of the PIMCO outlook for the global economy and markets, but investment decisions and value-added opportunities come primarily from traditional bottom-up credit analysis.

Sources of Added Value

Credit Research
PIMCO’s experienced team of credit analysts, located around the globe, is responsible for evaluating corporate credit. We place a great deal of importance on independent analysis when evaluating corporate 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 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 with strong underlying businesses and competitive positions.

Our credit research framework focuses on business and financial risk at the issuer level, as well as security specific risk with the structure of the issue. With respect to business risk, we evaluate the overall industry dynamics, the company’s competitive position within the industry, the quality of the business plan and the quality of management and their ability to execute on the business plan. In terms of financial risk, we evaluate a variety of financial ratios measuring leverage, cash flow, interest coverage and liquidity.

Default and spread widening risk are the dominant potential risks in purchasing corporate debt securities. Our focus on higher quality corporates, combined with our comprehensive evaluation of credits, both at purchase and on an ongoing basis, reduces the risk of downgrade or default.

There are four common criteria that each analyst will focus on: 1) business model 2) cash flow 3) balance sheet, and 4) security structure. The specific metrics and financial ratios will vary based on the industry and as a result the format of reporting the analysis will also vary. In addition, emphasis on the four factors listed above will also depend on the industry, however the general criteria applied to the analysis is consistent across our Global Credit Research team.

Macroeconomic Focus

PIMCO’s robust, top-down macroeconomic analysis of the world’s major economies sets the tone for the structure of our 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.

Risk Management / Controls

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.

How To Invest

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. Corporate debt securities are subject to the risk of the issuer’s inability to meet principal and interest payments on the obligation and may also be subject to price volatility due to factors such as interest rate sensitivity, market perception of the creditworthiness of the issuer and general market liquidity. 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 or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. The credit quality of a particular security or group of securities does not ensure the stability or safety of the overall portfolio.Diversification does not insure 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.

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