Text on screen: PIMCO
Text on screen: Prerna Gupta, Fixed Income Strategist
Gupta: Dan, in an environment where resilience may matter more than reaching for additional risk, how are you positioning the portfolio from a high level perspective to deliver attractive income while helping investors navigate uncertainty?
Text on screen: Dan Ivascyn, Group Chief Investment Officer
Ivascyn: So overall duration positioning has increased alongside interest rate increases the last few months. I would simply say that this is not about a Fed bet. It's simply acknowledgement that there's much better value in the bond market.
We have some of the highest overall interest rates in the higher quality bond market that we've seen in about 20 years.
So we start with this idea that you don't need to predict the future in a narrow sense to generate attractive returns. We can take advantage of a diversified, attractive global opportunity set to try to generate incremental return above and beyond passive alternatives.
Gupta: Where across global markets within emerging markets are you seeing the most interesting opportunities?
Ivascyn: We think global diversification, whether it's small amounts of currency exposure, emerging markets global, are gonna lead to more resiliency at the portfolio level, and in many cases, incremental and attractive yield pickup relative to just a overweight to corporate credit, given just how tight spreads are and how complacent segments of that market continue to be.
The other area that's looking increasingly attractive are opportunities to take advantage of some of the strain, stress and liquidity needs within the direct lending or the private credit space. We're seeing much more deal flow now that many private credit managers are increasingly on the sidelines or not able to support deals like they did just a few quarters ago. Some of these would be higher quality investments within the CLO space.
So, I 'd categorize, our structured credit positions as continuing to be attractive, the ballast of the portfolio should be stable from a credit performance perspective, but other things around them have begun to cheapen up and in some cases cheapen up quite significantly.
Gupta: Today's bond market looks very different than it did just a few years ago. How should investors think about the role of fixed income in portfolios today, and what return and risk characteristics could high quality bonds offer going forward?
Ivascyn: Today when you look at value in the bond market, whether you look at nominal yields or absolute yields, or you factor out inflation, and you look at what's left, which is known as the real yield, we're at some of the most exciting and attractive levels we've seen in several years, attractive in an absolute sense, attractive versus cash attractive, in fact, very attractive versus equity valuations.
For the longest time people, became accustomed to this idea that your starting yield is what you could expect to earn.
We think that that's more of a floor concept, and we think with good, prudent, thoughtful, creative asset allocation within the more liquid segments of the market, this is again, a very exciting time for return generation.
But if you step back and think about the attractive income that could be generated today, the type of returns you can generate with a high quality flexible opportunity set. You can be patient, have a patient mindset, and just sit back and let the yield do the heavy lifting across portfolios.
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Text on screen: PIMCO
Disclosure
The discussion and content provided herein has been extracted from a webcast and is intended for informational purposes and may not be appropriate for all investors. The information included herein is not based on any particularized financial situation, or need, and is not intended to be, and should not be construed as, a forecast, research, investment advice or a recommendation for any specific PIMCO or other security, strategy, product or service. Fixed income is only one possible portion of an investor’s portfolio, which can also include equities and other products. Past performance is not a guarantee of future results. All investments contain risk and may lose value. Investors should speak to their financial advisors regarding the investment mix that may be right for them based on their financial situation and investment objective.
Past performance is not a guarantee or a reliable indicator of future results.
A word about risk: All investments contain risk and may lose value. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. 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. Currency rates may fluctuate significantly over short periods of time and may reduce the returns of a portfolio. Mortgage and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and their value may fluctuate in response to the market’s perception of issuer creditworthiness; while generally supported by some form of government or private guarantee there is no assurance that private guarantors will meet their obligations. U.S. agency mortgage-backed securities issued by Ginnie Mae (GNMA) are backed by the full faith and credit of the United States government. Securities issued by Freddie Mac (FHLMC) and Fannie Mae (FNMA) provide an agency guarantee of timely repayment of principal and interest but are not backed by the full faith and credit of the U.S. government. Collateralized Loan Obligations (CLOs) involve a high degree of risk and are intended for sale to qualified investors only. The amount of distributions, if any, on CLOs will be affected by, among other things, the timing of purchases of loans, rates of repayment of or distributions on the underlying assets, the timing of reinvestment in substitute underlying assets and the interest rates available at the time of reinvestment. Investments in subordinated tranches of CLOs often represent highly leveraged investments in the underlying assets, and may lose all or a significant portion of their value, even if other tranches of the CLO do not. CLOs are typically illiquid, and holders may not be able to sell these securities at an attractive time or price, or at all. CLOs are also exposed to risks such as credit, default, liquidity, management, volatility, interest rate and credit risk. 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. Equities may decline in value due to both real and perceived general market, economic, and industry conditions. Derivatives 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. Management risk is the risk that the investment techniques and risk analyses applied by an investment manager will not produce the desired results, and that certain policies or developments may affect the investment techniques available to the manager in connection with managing the strategy. Diversification does not ensure against loss.
References to liquidity are based on normal market conditions and are subject to change.
The terms “cheap” and “rich” as used herein generally refer to a security or asset class that is deemed to be substantially under- or overpriced compared to both its historical average as well as to the investment manager’s future expectations. There is no guarantee of future results or that a security’s valuation will ensure a profit or protect against a loss. The credit quality of a particular security or group of securities does not ensure the stability or safety of an overall portfolio. The quality ratings of individual issues/issuers are provided to indicate the credit-worthiness of such issues/issuer and generally range from AAA, Aaa, or AAA (highest) to D, C, or D (lowest) for S&P, Moody’s, and Fitch respectively.
Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice.
This material contains the 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. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.
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