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StocksPLUS Long Duration uses equity index derivatives, typically futures and sometimes swaps, to achieve non-leveraged passive stock market exposure. Because equity index ownership using futures and swaps typically only requires a very modest initial cash outlay, PIMCO invests the remaining cash in an actively managed bond portfolio which references the Barclays Capital Long-Term Government/Credit Bond Index. The goal is to provide equity market returns plus excess returns relative to the equity market which are highly correlated with interest rate sensitive liabilities. Equity exposure is managed with a focus on minimizing the cost associated with equity index futures and swap ownership, typically a money market-based cost. If the actively managed long duration bond portfolio outperforms money market rates, in most cases the StocksPLUS Long Duration strategy should deliver excess returns relative to the equity index.
Long DurationFixed IncomeBLGC +/-2 Years
We offer a variety of domestic, regional and international equity indexes in most developed markets as depicted below. Other indexes, such as emerging markets are currently available. Please feel free to inquire.
Provide exposure to the typically higher yields of high quality, long duration bonds vs. money market instruments.
Long-Term FocusMajor shifts in portfolio strategy are driven by longer-term trends. Strategies are deployed with a macro view of the portfolio driven by 1) our secular outlook of the forces likely to influence the economy and financial markets over the next three to five years and 2) our cyclical views of one- to four-quarter trends. Through PIMCO’s annual secular forum, we forecast the global financial and economic outlook over the next three to five years, and assess their impact on the fixed income markets. Our investment process utilizes both “top-down” and “bottom-up” strategies. Top-down strategies focus on duration, yield curve positioning, volatility, and sector rotation. 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. By combining perspectives from both the portfolio and security levels, we attempt to consistently add value over time. Our fundamental objective is to maintain levels of risk that are tailored to the needs of our clients. This objective is to achieve a profile that has both acceptable levels of portfolio risk and risk that is consistent with that of portfolio benchmarks.
Active ManagementThe Long Duration portfolio construction process is focused on adding value utilizing PIMCO’s core strengths. These include duration, yield curve positioning and sector allocation with a particular focus on spread product. The strategy formulation process also takes advantage of specific security liquidity issues, the firm’s view on volatility, and expertise in issue selection throughout the broad spectrum of fixed income asset classes.
Our basic approach is to actively manage duration and curve positioning strategies in an effort to maximize total return. Yield curve management is crucial to achieving strong relative returns for long duration portfolios as yield curve shape may change markedly and its impact on Long Duration portfolios is magnified. Sophisticated proprietary software assists in the evaluation of sector opportunities and in the valuation of specific securities. Determining portfolio price sensitivities to curve twists and rotations, which do not involve simple parallel yield shifts, requires sophisticated management tools which can address how specific curve changes influence relative values across fixed income sectors.
Sources of Value AddedWe approach individual security analyses from a “bottom-up” perspective. Proprietary modeling, internal credit research and cost-effective trading can add value to our client portfolios. Where permitted, PIMCO utilizes all sectors of the fixed income market, including governments, mortgages, corporates, real return, derivative, and hedged international fixed income in an effort to derive above-benchmark performance. Our proprietary modeling assists in dissecting the price and return behavior of securities under various interest rate scenarios. Credit research focuses on factors, such as company fundamentals, capital structures and industry economics, to anticipate potential credit ratings actions. Cost-effective trading is important in brokered markets where bid-ask spreads and other transaction costs can vary widely.
InnovationPIMCO believes in continuous innovation and conservative execution. Our drive for innovation has resulted in the development of advanced proprietary analytics that have enhanced our understanding of security values and portfolio structure under a variety of interest rate and credit scenarios.
Specific to long duration and liability-driven accounts, we have developed a proprietary tool, the PIMCO Optimizer,™ that improves our understanding of the risk characteristics of our clients’ liability profiles. The PIMCO Optimizer™ enables us to develop and tailor customized benchmarks that reflect specific liability cash flow profiles and client objectives. This allows PIMCO to manage a portfolio more closely to a specific liability profile instead of a market-based index where necessitated by client requirements.
The equity exposure in the StocksPLUS Long Duration strategy may provide a better match to the equity index than passive index strategies because index futures and swaps provide exposure to all of the stocks in the index in their exact index weights which may or may not be the case with stock-based strategies. Therefore, non-benchmark equity market risk is generally avoided in StocksPLUS Long Duration as we seek excess return from the bond collateral portfolio. Stock selection strategies rely on individual stock risk to assemble a portfolio that will outperform the index.
Risk management within our bond investment process is regulated both by guidelines and sophisticated analytics. Average credit quality in long duration portfolios may vary within a limited range, depending upon our outlook for the economy, interest rates and credit quality spreads. We believe that there are substantial opportunities for excess returns without exposing long duration portfolios to substantial credit risk as many of these portfolios seek to maximize return while preserving principal.
To measure interest rate exposure, simple dollar duration does not fully encompass the various price sensitivities emanating from changing prepayment speeds, credit spreads and yield curve shifts. PIMCO has developed extensive internal modeling which addresses duration in its many forms: bull and bear durations (rate shifts of given amounts); total curve durations (changing yield curve shapes); credit spread durations; and mortgage spread and prepayment durations.
PIMCO also has extensive policies and procedures for managing derivatives and counterparty risk exposures. As these can be useful tools when allowed by client guidelines for long duration portfolios, a solid platform for derivatives portfolio and risk management is essential. PIMCO has dedicated legal, operational, trading and risk management personnel with decades of combined experience on both the buy and sell side to oversee these important areas.
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. 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. 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. 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. Real return investments are Inflation-linked bonds (ILBs) which are issued by a government and 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. 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. Swaps are a type of derivative; while some swaps trade through a clearinghouse there is generally no central exchange or market for swap transactions and therefore they tend to be less liquid than exchange-traded instruments. 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 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. Diversification does not ensure against loss.The Barclays Capital Long-Term Government/Credit Bond Index is generally representative of long-term government and investment grade corporate debt securities, or fixed rate, non-convertible, investment grade U.S. dollar denominated bonds having maturities of greater than ten years. It is not possible to invest directly in an unmanaged index.
The Barclays Capital Long-Term Government/Credit Bond Index is generally representative of long-term government and investment grade corporate debt securities, or fixed rate, non-convertible, investment grade U.S. dollar denominated bonds having maturities of greater than ten 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.
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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