Investment Strategies

All Asset Strategy Update (Q2 2020) with Rob Arnott & Chris Brightman

The co-PMs discuss tactical repositioning following recent market stress and tailwinds going forward.

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Text on screen: PIMCO

Text on screen: Robert Arnott, Founder and Chairman, Research Affiliates

Rob Arnott: The initial COVID crash, which ran from February 19 all-time high for the market to March 23rd, a 34% drop in just 5 weeks, was a nowhere to hide crash for risk markets. Basically, anything with a whiff of risk crashed roughly proportional to its perceived risk, not in proportion to its perceived vulnerability or valuation levels.

In the first quarter, we saw a sharp drop in equities all over the world. Across core bonds, pretty uninspired first quarter numbers except for long treasuries. And in third pillar, everything except TIPS got savaged. The snapback recovered much of the damage in mainstream stocks, a little under half the damage in core bonds, and a little over half the damage in diversifiers. All Asset & All Asset All Authority performed strongly against those third pillar assets, recovering well over half of the first quarter drop in that second quarter.

Text on screen: Chris Brightman, Chief Investment Officer, Research Affiliates

Chris Brightman: Volatility creates potential opportunity for tactical asset allocation. Our tactical activity is highly correlated with volatility. More vol may mean more opportunity which may lead to more turnover. Over recent months, the unprecedented speed of market movements was matched by an increase in our tactical repositioning.

In our positioning within All Asset, at yearend 2019, we held relatively concentrated positions, pairing 40% in emerging markets stocks and bonds with 40% in investment grade bonds, TIPS and liquid alternatives. Then, in March and April, we moved quickly to a much more risk-on position by adding 20% to developed market equities, REITs and commodities, while pairing back a bit in EM. As stock prices recovered in May and June, we've become more defensive, taking profits and buying long bonds. Given heightened uncertainty and continued policy intervention, we've now deliberately moved to a more diversified portfolio.

Turning to the All Authority, we see a bit more aggressive changes in positions, but directionally the same as All Asset. We started the year with more than 40% in EM stocks and bonds paired with a greater than 20% short to the S&P 500. In March and April, we moved quickly to a much more risk-on position, briefly going net long US stocks in April. We've since taken profits and become more defensive and more diversified.

With highly elevated uncertainty and finding that returns are not being driven by economic fundamentals but by policy intervention in markets, we think that a more diversified portfolio is prudent.

Rob Arnott: I see three tailwinds that could help us tremendously. One is inflation expectations, which crashed during the COVID crash. Central bankers all over the world are determined to introduce a certain measure of inflation and the monetary stimulus we've seen certainly is an aggressive effort in that direction.

The second tailwind is that the dollar has of course soared. What asset classes are likely to do well if the currencies rebound? Emerging markets assets do well if the dollar falters. Commodities do well if the dollar falters. And EAFE also does very well if the dollar falters.

The third tailwind is perhaps the strongest of all. Value has never historically underperformed growth by as wide a margin as today.

That's not to say they can't underperform.

I think we've got very good odds that value is going to snap back handily.

Text on screen: For more insights and information, visit pimco.com

Text on screen: PIMCO

Disclosure


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. 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. 

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 strategy invests in other PIMCO products 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 strategy will generally be higher than the cost of investing in a strategy that invests directly in individual stocks and bonds. 

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.

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.

CMR2020-0727-1254675

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