PIMCO | Moderate Duration Strategy

Moderate Duration Strategy

What is Moderate Duration?
PIMCO’s Moderate Duration strategy portfolios are best described as intermediate core portfolios that seek maximum total return through both current income and price appreciation, consistent with the preservation of capital and prudent risk taking. With our intermediate core bond assignments, we utilize all major sectors of the bond market while managing an average portfolio duration ranging between two and five years. In brief, we seek to consistently add value, while maintaining an overall risk level similar to the Barclays Capital Intermediate Government/Credit Index.

PIMCO’s Moderate Duration Experience

PIMCO has been managing assets using the Moderate Duration strategy since 1986. We aim to consistently outperform the market as represented by the Barclays Capital Intermediate Government/Credit Index.

Applications for Moderate Duration

The Moderate Duration strategy offers diversification, and the opportunity for higher investment returns relative to money market instruments under normal market conditions. It searches for value in every sector of the bond market. This diversification seeks to enhance returns and reduce risk. Since there is a relatively low correlation between the equity and fixed income markets, investors seeking to balance equity holdings in an aggressive investment portfolio with a more stable investment option should consider Moderate Duration.

Historically, the intermediate portion of the yield curve has produced some of the highest risk-adjusted returns in fixed income. Many fixed income investors tend to over-allocate assets to money market or short term portfolios and miss the opportunities provided by a moderate duration portfolio. Potential applications for PIMCO’s Moderate Duration strategy include:

Corporate, public, jointly-trusted pension trusts, including stable value funds
Endowment and foundation assets
Long-term working capital
Hospital-funded depreciation accounts
Lower risk “anchor” to core bond portfolio

Investment Philosophy for Moderate Duration

Our Moderate Duration philosophy is founded on the principle of diversification. We believe that no single strategy should dominate returns. Our investment process utilizes both “top-down” and “bottom-up” strategies. Top down strategies focus on duration, yield curve positioning, volatility, and sector rotation. These strategies 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. Implementation in portfolios is effected by selecting securities that achieve these designated objectives. Bottom-up strategies drive our security selection process and facilitate the identification and analysis of undervalued securities. Here, we employ advanced proprietary analytics and expertise in all major fixed income sectors. The objective is to combine perspectives from both the portfolio and security levels to consistently add value over time within acceptable levels of portfolio risk.

Sources of Added Value

PIMCO seeks to add value consistently while maintaining an overall risk level similar to the benchmark index.

Credit Analysis

We place a great deal of importance on independent analysis when evaluating corporate debt issues. PIMCO never relies on credit agencies alone. Our senior portfolio managers work with a team of credit analysts who evaluate individual issues. Each issue is assigned an internal PIMCO rating.
As one of the largest bond managers in the world PIMCO gains many advantages. Our size helps provide access to corporate management and this becomes an integral element in the credit analysis process. We meet with management as often as necessary to remain current on the financial and operating conditions of a company.

Quantitative Research

Due 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 aims to give us a distinct advantage relative to our competitors in evaluating investment decisions.

Cost-Effective Trading

As one of the largest bond managers in the U.S., economies of scale help us to keep transaction costs as low as possible. Transaction costs are factored into all of our analyses to help ensure that the opportunity cost of each trade is outweighed by the benefit.

Issue Selection

We have developed expertise across a variety of fixed income sectors via specialists who focus in each major fixed income arena. By understanding the relative value between individual securities, we can strive to capture value for our clients.

Avoiding Extreme Durations

Duration, or the sensitivity of a bond to a change in interest rates, is extremely important in structuring a portfolio. To meet our goal of consistent results, we avoid extreme duration shifts. We believe operating within a moderate duration range – typically between two and five years – increases the opportunity of achieving above-market returns while limiting the portfolio’s exposure to market swings.

Risk Management /Controls

PIMCO has focused on risk management since our founding 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.

We feel risk manifests itself in two main forms – investment and operational. Effective investment risk management begins with the identification of client objectives and their 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 as important as investment risk. Operational risk deals with problems or errors that may arise during day-to-day operations of the firm. Our organizational structure is designed to cope with this organizational risk. This is accomplished by segregating responsibilities for portfolio management, account management, and investment support monitored by an independent compliance group. At PIMCO, we have embraced this methodology from our inception and we believe 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.

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. Mortgage and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and while generally supported by a government, government-agency or private guarantor there is no assurance that the guarantor will meet its obligations. 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 mo 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.

The Barclays Capital Intermediate Government/Credit Index is an unmanaged index of U.S. Government or investment grade credit securities having a maturity of at least one year and less than 10 years. 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.

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