Winters: Hello, my name is Kevin Winters, and I’m an alternative and private credit strategist at PIMCO. Today I’m joined by Dan Ivascyn to discuss the PIMCO Flexible Credit Income Fund, also known as PFLEX.

As many of you know, Dan is the group chief investment officer at PIMCO. He also leads our efforts across the income landscape, as well as one of the key architects in our alternatives business and one of the lead portfolio managers on PFLEX.

Dan, we appreciate the time today. Let’s jump in. Can you please provide a brief overview of PFLEX?

Ivascyn: Sure. Thank you, Kevin. PFLEX is a global opportunistic credit vehicle. The structure is an interval fund. We seek attractive risk adjusted returns with a focus on current income. It’s a flexible mandate. We have the ability to take advantage of a global opportunity set.

The focus areas at the moment for the strategy are primarily in the mortgage related segments of the market. We’re focused on opportunities across the residential mortgage credit space, both legacy assets as well as select new originations.

We’re also looking at the opportunity set across the commercial real estate spectrum as well, a combination of more defensive investments, but investments that provide attractive opportunities within this COVID related stress environment as well as more aggressive, higher returning areas of the commercial real estate market as well.

The third area of focus for us is corporate credit, including emerging market opportunities. Currently, we have investments across the financial subsector of the corporate market as well as a lot of other thematic plays looking to take advantage of, again, an anticipated COVID related recovery later this year.

And then the final category relates to other asset backed type risk, opportunities within specialty finance, opportunities across other receivables, automobiles, student loans, other consumer assets. It will take advantage across all of these particular areas of the opportunity set within both the public and the private segment of the opportunity set as well.

Given the fact that this is a vehicle where liquidity is less of a focus, we have the ability not only to allocate across the public opportunity set but also leverage and take advantage of opportunities within the private space as well.

Winters: And Dan, you mentioned in your earlier comments, interval fund. What is an interval fund?

Ivascyn: Sure, so technically speaking, an interval fund is a registered closed end fund vehicle. What’s different than a typical closed end fund is that this is a vehicle that doesn’t trade on an exchange, and because it doesn’t trade on an exchange, purchases and sales take place at net asset value.

The only other difference there is that given that this is a locked up vehicle, redemption opportunities occur on a quarterly basis, and in fact, they’re capped at 5%. So this creates a dynamic where investors can pool their capital together, give up some liquidity relative to an open end fund type structure, generate attractive distributions – and the distributions accrue on a daily basis.

They’re paid out quarterly. You receive a similar 1099 tax reporting form as you would in an open end type structure. But because you’re giving up some liquidity relative to an open end fund, you can take advantage of investments that are a bit more complex, investments that are a bit less liquid, and in the process achieve typically higher distribution rates than you would in a more traditional open end type vehicle.

Winters: Very helpful, Dan. Final question that we receive from advisors is where does PFLEX fit in the broader portfolio context?

Ivascyn: Again, this isn't my area of focus, but when we’re talking to clients regarding PFLEX and where it may fit over the course of the last few years, we do see a few key things.

One, because this is a more aggressive form of investing within the fixed income arena, because we’re offering a fairly high dividend yield, a lot of clients are looking at this type of investment as an alternative to equities in their portfolio.

And when you compare this strategy to equities, it can be viewed as a form of derisking, where you’re getting a higher current dividend yield and therefore reducing your reliance on price appreciation as a source of returns.

Also, in the context of a fixed income allocation, this is a reasonable alternative versus traditional high yield public investments or other lower rated investments. It does represent a higher risk profile than investment grade credit, but also there will be less interest rate sensitivity from our perspective as well.

So we think within a segment of a fixed income allocation and the higher risk bucket, you’re able to maximize yield, take advantage of complexity and liquidity risk to generate increased return without piling on a lot more credit beta or a lot more interest rate exposure.

Then the final point would be relative to an investor’s alternatives allocation. What we’re trying to do here within the PFLEX structure is bring to bear a lot of the strategies and a lot of the themes that we typically reserve for segments of our alternatives book.

So I think people, in summary, at times look at it as an alternative to equities, perhaps a lower risk alternative to equities, a higher risk but higher yielding alternative to a more traditional fixed income allocation, or a way to diversify an already existing alternatives set of investments as well.

Winters: Thank you, Dan. We appreciate the time today and appreciate the opportunity to discuss with you the flexible credit income fund, also known as PFLEX, which is currently available for purchase on your custodial platform. Thank you for joining.

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The fund is an unlisted closed-end “interval fund.” Limited liquidity is provided to shareholders only through the fund’s quarterly offers to repurchase between 5% to 25% of its outstanding shares at net asset value (subject to applicable law and approval of the Board of Trustees, the Fund currently expects to offer to repurchase 5% of outstanding shares per quarter). Although interval funds provide limited liquidity to investors by offering to repurchase a limited amount of shares on a periodic basis, investors should consider shares of the Fund to be an illiquid investment. 

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