Investment Strategies

All Asset Strategy Update with Rob Arnott

The Founder and Chairman of Research Affiliates talks about the market environment, the opportunities ahead and how his team is positioning the All Asset strategies.

For more information, read the latest All Asset All Access.

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Photograph of Robert Arnott, Founder and Chairman, Research Affiliates

Rob Arnott: What we've seen is a take no prisoners market crash. Anything with a whiff of risk cratered in February and March. Anything with a whiff of illiquidity cratered. And really the only thing that went up materially was long treasury bonds. A classic flight to safety. Have we ever seen anything like that before? September to November of 2008.

The All Asset funds, both All Asset and All Authority were in a moderate overall risk position. We'd been increasing our defensive allocations as our models indicated generally full valuations, and increasing probabilities of an economic slowdown.

Now Covid-19 had an element of surprise, but we were cognizant of downside risks emphasizing diversification with a strong value orientation.

To the extent that we were having any risk on posture, that was focused in emerging market stocks and local currency emerging markets debt and to a much smaller extent in international developed equities.

And when we saw a take no prisoners crash in 2008, it was followed by a sorting out process in which the market then looked around at the carnage and asked the question, what got hit to implausibly cheap levels.

There are opportunities in volatility. Look for the alpha associated with a drawdown when you have illiquidity driven fear to snap back and give you a potential positive gain.

Volatility can be our friend, if you're willing to look past the volatility and ask which markets are savaged beyond recognition, and which markets are even post-crash still not cheap. You can actively reposition the portfolio.

There's three things that can help us, on top of the already substantial yield of the assets that we're invested in. What if inflation expectations recover? Do we really think they're going to stay low for a prolonged period over the coming decade? What about foreign currency as a flight to safety has been superb for US assets and for the dollar relative to foreign currencies. And what about the cheapness of value. What about the potential added alpha associated with the RAE strategies and their current deep value tilts.

We think the time to buy is when you're at peak fear. And my observation on March 17 was we're in a period of peak fear. This is a time to begin averaging in to buying, to begin averaging in to moving a little bit more risk into the portfolio.

So the opportunity for a value snapback, for a snapback in foreign currencies, for a snapback in breakeven inflation rates, in inflation expectations, each of these could give us a handsome tailwind even if the other two don't kick in. If all three of them happen, then you have three tailwinds at once.

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IMPORTANT NOTICE

Please note that the following contains the opinions of the manager as of the date noted, and may not have been updated to reflect real time market developments. All opinions are subject to change without notice.

Investors should consider the investment objectives, risks, charges and expenses of the funds carefully before investing. This and other information are contained in the fund’s prospectus and summary prospectus, if available, which may be obtained by contacting your investment professional or PIMCO representative or by visiting www.pimco.com. Please read them carefully before you invest or send money.

Investments made by a Fund and the results achieved by a Fund are not expected to be the same as those made by any other PIMCO-advised Fund, including those with a similar name, investment objective or policies.  A new or smaller Fund’s performance may not represent how the Fund is expected to or may perform in the long-term.  New Funds have limited operating histories for investors to evaluate and new and smaller Funds may not attract sufficient assets to achieve investment and trading efficiencies.  A Fund may be forced to sell a comparatively large portion of its portfolio to meet significant shareholder redemptions for cash, or hold a comparatively large portion of its portfolio in cash due to significant share purchases for cash, in each case when the Fund otherwise would not seek to do so, which may adversely affect performance.

Differences in the Fund’s performance versus the index and related attribution information with respect to particular categories of securities or individual positions may be attributable, in part, to differences in the pricing methodologies used by the Fund and the index.

There is no assurance that any fund, including any fund that has experienced high or unusual performance for one or more periods, will experience similar levels of performance in the future. High performance is defined as a significant increase in either 1) a fund’s total return in excess of that of the fund’s benchmark between reporting periods or 2) a fund’s total return in excess of the fund’s historical returns between reporting periods. Unusual performance is defined as a significant change in a fund’s performance as compared to one or more previous reporting periods.

A Word about risk:  The fund invests in other PIMCO funds and performance is subject to underlying investment weightings which will vary. 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. Commodities contain heightened risk including market, political, regulatory, and natural conditions, and may not be suitable for all investors.  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. 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. Investing in securities of smaller companies tends to be more volatile and less liquid than securities of larger companies.  Inflation-linked bonds (ILBs) issued by a government 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. Equities may decline in value due to both real and perceived general market, economic, and industry conditions. Derivatives and commodity-linked 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. Commodity-linked derivative instruments may involve additional costs and risks such as changes in commodity index volatility or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Investing in derivatives could lose more than the amount invested.  The cost of investing in the Fund will generally be higher than the cost of investing in a fund that invests directly in individual stocks and bonds.  Diversification does not ensure against loss.

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.

Alpha is a measure of performance on a risk-adjusted basis calculated by comparing the volatility (price risk) of a portfolio vs. its risk-adjusted performance to a benchmark index; the excess return relative to the benchmark is alpha.

Covid-19 is represented by the significant market downturn which occurred during February and March 2020, due to the Covid-19 pandemic. Current market movements may not be reflective of this time period, as the Covid-19 pandemic is ongoing.  

PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. 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.  Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2020, PIMCO

PIMCO Investments LLC, distributor, 1633 Broadway, New York, NY 10019, is a company of PIMCO.

CMR2020-0602-1204412

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