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TEXT ON SCREEN: John Cavalieri, Asset Alloocation Strategist

Cavalieri: Hi, I’m John Cavalieri, member of the asset allocation team here at PIMCO, joined by Rob Arnott, founder and chairman of Research Affiliates.

As you look ahead, what do you think are supportive macro or market factors that could support returns in the All Asset style of portfolio?

TEXT ON SCREEN: Rob Arnott, Founder and Chairman, Research Affiliates

Arnott: Well, there’s really three.  

Text on screen: TITLE – Market factors that could support returns, BULLETS – Anchored inflation expectations, Cheap non-US currencies and markets, Value is cheap

One is that inflation expectations are still anchored, even as inflation itself has soared well above historic norms. The second is that non-U.S. currencies and markets are broadly much cheaper than U.S. markets, so international diversification represents a wonderful opportunity. And the third is that value is cheap, by some measures, cheaper than even at the peak of the tech bubble.

Cavalieri: Rob, could you talk about the role that All Asset can play in an investor’s portfolio as a diversifier?

Arnott: Absolutely. Diversification is one of the core tools at our disposal to tamp down the risk of our portfolios while we’re seeking incremental sources of return.

Now, diversifiers behave differently from classic 60-40 balanced investing. Most asset allocators anchor on 60-40.

Text on screen: TITLE – Home markets of All Asset, BULLETS – TIPS, Commodities, REITs, Emerging market stocks and bonds, High yield

All Asset is different. Its home markets are the diversifying markets, things like TIPS, commodities, REITs, emerging market stocks and bonds and high yield.

So instead of trying to predict when it’s going to be needed, we believe the sensible thing is to always have an allocation.

Cavalieri: And do Research Affiliates’ forward looking return expectations support that outlook today?

Arnott: Absolutely. With stocks priced at near record valuation multiples, the forward looking returns are likely to be anemic, perhaps even below the rate of inflation. Diversifiers have the advantage of having been out of favor over the course of the 2010s and currently priced to potentially give you return on a forward looking basis based on our long term return models than domestic stocks or bonds.

Diversifiers tend to respond very well to rising inflation expectations.

The thing that I think is most interesting is no one can predict with confidence which way inflation’s going to go, but if you’re paid in improved returns for buying an inflation hedge, why on earth wouldn’t you do it?

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Disclosure

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.

Past performance is not a guarantee or a reliable indicator of future results.

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.

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. The Fund is non-diversified, which means that it may invest its assets in a smaller number of issuers than a diversified fund

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.

It is not possible to invest in an unmanaged index.

Diversifier: The average return across TIPS, Commodities, REITs, HY, EM local bonds and EM equities. This serves as a simple and investable “home base” market proxy for All Asset.

60/40 balanced portfolio: A portfolio blend of 60% U.S. equities and 40% U.S. bonds, representative of a traditional, mainstream balanced portfolio structure.

Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be interpreted as investment advice, as an offer or solicitation, nor as the purchase or sale of any financial instrument. Forecasts and estimates have certain inherent limitations, and unlike an actual performance record, do not reflect actual trading, liquidity constraints, fees, and/or other costs. In addition, references to future results should not be construed as an estimate or promise of results that a client portfolio may achieve.

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.

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. ©2021, PIMCO.

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