View from the Investment Committee

Focus 2020: Relative Value Opportunities

Group CIO Dan Ivascyn discusses why investors should be focused on relative value, opportunities in less efficient markets and why PIMCO is expanding its global footprint.

More from this section

Read Transcript

David Fisher: Hello, I'm David Fisher, and I’m here once again with PIMCO’s group CIO Dan Ivascyn for an inside look at some of the recent discussions taking place inside PIMCO’s investment committee, or IC. Thanks for joining us, Dan.

So, 2019 was a fairly atypical year for most asset classes. We saw strong returns, really, across the board. 2020 has started off with a little bit more volatility, more two-way markets. How is the IC thinking about markets for 2020?

Dan Ivascyn: Well 2019 was certainly a great year for most financial markets. Somewhat unique in that almost everything went higher in terms of price. So, looking forward into the remainder of 2020, we see valuations as somewhat stretched, looking at valuations across both equity and fixed income markets in historical context, they look fully valued, closer to being expensive rather than cheap. And we see increasing sources of uncertainty. So in looking forward, over the next few years, we see lower expected returns, higher volatility, which of course is a more challenging environment for end investors.

Also, what we’ve noticed, and perhaps not too surprising coming off such a strong year in 2019, is that at least in early January, people were very, very, very optimistic about not only economic fundamentals on a global basis, but also by the prospect for ongoing strong returns across financial assets. The more recent volatility has shaken confidence somewhat, but in general, we see a marketplace where there’s still a decent degree of optimism, a desire to buy dips, and in general, a high level of confidence in terms of the direction of returns.

David Fisher: So another interesting aspect of 2019 was on the flow side, where we saw very strong investor flows into fixed income in particular, and these have continued so far in 2020, despite the fact that yield levels remain quite low. So, what are your thoughts on what is driving investors into fixed income?

Dan Ivascyn: I would characterize the demand for fixed income coming from two categories of investors.

The first, a group of investors that are looking for a steady, consistent income stream, which is increasingly more challenging to obtain, given the low rate environment. And then the second category of investors are investors that are looking for capital preservation in strong relative performance when other financial assets are performing poorly. That’s exactly what bonds are for.

During this more recent period of volatility tied to the coronavirus and the resulting uncertainty, we’ve once again seen the defensive qualities of a higher quality fixed income portfolio.

We still believe that these defensive qualities represent a key attractive aspect of an allocation to fixed income. We still see significant amounts of our investors, both on the retail and the institutional side, looking for that type of protection if we were to get into a much more challenging environment, both from the perspective of economic fundamentals or other sources of risk like we’ve seen more recently.

David Fisher: So, where is the investment committee looking right now for opportunities within the fixed income markets?

Dan Ivascyn: Given the very low level of yields, tighter spreads, stretched equity valuations, investors including PIMCO are going to need to be more creative in going out and sourcing return. One thing we’re doing is expanding our opportunity set.

We’ve made considerable investments, and plan on continuing to make considerable investments in expanding our footprint globally, with a focus on newer markets that have grown considerably over the course of the last few years, markets that tend to be a little bit less efficient than more developed markets, but offer interesting opportunities for investors.

Examples of those would be the emerging markets, an increased focus on Asia across the board, both in the higher quality rate-oriented markets, as well as the credit markets, including even expansion of some of our activities across regions of Europe, Latin America, and elsewhere.

Secondly, we’re focusing on more flexible mandates, at the direct request of our clients. Flexible mandates in the context of more of our traditional strategies, as well as an expansion of activities within the private segments of our business. Looking for ways to generate attractive yield, find ways to add incremental yield to portfolios while maintaining downside resiliency. That’s what we try to do thematically. And again, we’re doing that in expanding the suite of offerings to our end client based on their demand for increased flexibility.

When you look at starting valuations here in early 2020, it’s going to be hard to rely on further compression and spreads just providing beta returns.

So the focus on relative value is going to be increasingly more important. Expressing views in more of a market neutral sense, looking for dislocations associated with volatility, overshooting tied to relative illiquidity in certain segments of the market, ongoing frictions relating to regulations, ongoing frictions and opportunities associated with an increasingly uncertain political environment

David Fisher: So one of the areas that you've talked a lot about in the past is housing related investments, where in general PIMCO has been quite constructive. Has anything changed there?

Dan Ivascyn: No. Actually, in fact today we are even more confident in the relative merits of portfolios with strong emphasis or strong allocation to the housing related sectors. We, have continued to see almost rabid demand for generic, more traditional corporate credit assets. Because of the significant issuance, it’s not surprising that we’ve seen some deterioration, or further deterioration in underwriting quality.

And in the housing market you see fundamentals across the board that remain stable. It shouldn't be surprising, given the significant post-crisis regulation, rating agency and investor conservatism that’s still being expressed towards that sector.

So, in terms of relative value, we find these housing investments today, in early 2020, even more attractive on a relative basis.

A second area that’s worth noting is what’s occurring over on the agency mortgage segment of the opportunity set, partially related to the rally in interest rates recently, we’ve seen a significant cheapening in good old-fashioned agency mortgage-backed securities.

Those are the securities that are guaranteed directly by the US government or one of its agencies. They're attractive alternatives to high quality credit, treasury assets where you’re exchanging a bit more complexity for higher yields.

David Fisher: Great! Well thanks for joining us, Dan. And thanks to you as well. We’ll see you next time.

Disclosure


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.

Bonds tend to pay regular and stable interest absent default. Bonds tend to be less volatile and historically less correlated to equities and other risk assets, making bonds a good diversifier for investment portfolios

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

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. The credit quality of a particular security or group of securities does not ensure the stability or safety of the overall portfolio. Equities may decline in value due to both real and perceived general market, economic and industry conditions. Mortgage- and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and while generally supported by a government, government-agency or private guarantor, there is no assurance that the guarantor will meet its obligations. 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.

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. Investors should consult their investment professional prior to making an investment decision.

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 is not an offer to any person in any jurisdiction where unlawful or unauthorized. | Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660 is regulated by the United States Securities and Exchange Commission. | PIMCO Europe Ltd (Company No. 2604517) and PIMCO Europe Ltd - Italy (Company No. 07533910969) are authorised and regulated by the Financial Conduct Authority (12 Endeavour Square, London E20 1JN) in the UK. The Italy branch is additionally regulated by the Commissione Nazionale per le Società e la Borsa (CONSOB) in accordance with Article 27 of the Italian Consolidated Financial Act. PIMCO Europe Ltd services are available only to professional clients as defined in the Financial Conduct Authority’s Handbook and are not available to individual investors, who should not rely on this communication. | PIMCO Deutschland GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany), PIMCO Deutschland GmbH Italian Branch (Company No. 10005170963) and PIMCO Deutschland GmbH Spanish Branch (N.I.F. W2765338E) are authorised and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie- Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 32 of the German Banking Act (KWG). The Italian Branch and Spanish Branch are additionally supervised by the Commissione Nazionale per le Società e la Borsa (CONSOB) in accordance with Article 27 of the Italian Consolidated Financial Act and the Comisión Nacional del Mercado de Valores (CNMV) in accordance with obligations stipulated in articles 168 and  203  to 224, as well as obligations contained in Tile V, Section I of the Law on the Securities Market (LSM) and in articles 111, 114 and 117 of Royal Decree 217/2008, respectively. The services provided by PIMCO Deutschland GmbH are available only to professional clients as defined in Section 67 para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication. | PIMCO (Schweiz) GmbH (registered in Switzerland, Company No. CH-020.4.038.582-2), Brandschenkestrasse 41, 8002 Zurich, Switzerland, Tel: + 41 44 512 49 10. The services provided by PIMCO (Schweiz) GmbH are not available to individual investors, who should not rely on this communication but contact their financial adviser. | PIMCO Asia Pte Ltd (Registration No. 199804652K) is regulated by the Monetary Authority of Singapore as a holder of a capital markets services licence and an exempt financial adviser. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Asia Limited is licensed by the Securities and Futures Commission for Types 1, 4 and 9 regulated activities under the Securities and Futures Ordinance. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Australia Pty Ltd ABN 54 084 280 508, AFSL 246862. This publication has been prepared without taking into account the objectives, financial situation or needs of investors. Before making an investment decision, investors should obtain professional advice and consider whether the information contained herein is appropriate having regard to their objectives, financial situation and needs. | PIMCO Japan Ltd, Financial Instruments Business Registration Number is Director of Kanto Local Finance Bureau (Financial Instruments Firm) No. 382. PIMCO Japan Ltd is a member of Japan Investment Advisers Association and The Investment Trusts Association, Japan. All investments contain risk. There is no guarantee that the principal amount of the investment will be preserved, or that a certain return will be realized; the investment could suffer a loss. All profits and losses incur to the investor. The amounts, maximum amounts and calculation methodologies of each type of fee and expense and their total amounts will vary depending on the investment strategy, the status of investment performance, period of management and outstanding balance of assets and thus such fees and expenses cannot be set forth herein. | PIMCO Taiwan Limited is managed and operated independently. The reference number of business license of the company approved by the competent authority is (107) FSC SICE Reg. No.001. 40F., No.68, Sec. 5, Zhongxiao E. Rd., Xinyi Dist., Taipei City 110, Taiwan (R.O.C.), Tel: +886 2 8729-5500. | PIMCO Canada Corp. (199 Bay Street, Suite 2050, Commerce Court Station, P.O. Box 363, Toronto, ON, M5L 1G2) services and products may only be available in certain provinces or territories of Canada and only through dealers authorized for that purpose. | PIMCO Latin America Av. Brigadeiro Faria Lima 3477, Torre A, 5° andar São Paulo, Brazil 04538-133. | No part of this publication 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.

CMR2020-0207-437737

Filters: Reset All

Filters

Close Filters Dropdown
  • Topic/Tag

    Tags

    Reset

    Close
  • Category

    Category

    Reset

    Economic and Market Commentary
    Investment Strategies
    Bond by Bond
    Viewpoints
    Careers
    Education
    PIMCO Foundation
    View from the Investment Committee
    Close
  • Order By

    Order By

    Reset

    Alphabetical
    Most Recent
    Close
() filters applied

Multimedia Finder

Filter By:
  • Economic and Market Commentary
  • Investment Strategies
  • Bond by Bond
  • Viewpoints
  • Careers
  • Understanding Investing
  • View from the Investment Committee
  • A
  • B
  • C
  • D
  • F
  • G
  • H
  • I
  • K
  • M
  • N
  • P
  • R
  • S
  • T
  • W
Clear
Tina Adatia
Fixed Income Strategist
Olivia A. Albrecht
Head of ESG Business Strategy
Mike Amey
Robert Arnott
Founder and Chairman, Research Affiliates
Andrew Balls
CIO Global Fixed Income
Rachel Betton
Portfolio Manager, Municipal Bonds
Justin Blesy
Asset Allocation Strategist
David L. Braun
Head of US Financial Institutions Portfolio Management
Erin Browne
Portfolio Manager, Multi-Asset Strategies
Libby Cantrill
Executive Office, Public Policy
John R. Cavalieri
Asset Allocation Strategist
Richard Clarida
Former Global Strategic Advisor, 2006-2018
Anna Dragesic
Head of Global Credit Product Strategies
Joachim Fels
Global Economic Advisor
David Fisher
Head of Traditional Product Strategies
Richard Fulford
Head of U.S. Defined Contribution
Adam Gubner
Portfolio Manager, Distressed Debt
Bill Gurtin
David Hammer
Head of Municipal Bond Portfolio Management
Mary Hoppe
Daniel H. Hyman
Head of Agency MBS Portfolio Management
Daniel J. Ivascyn
Group Chief Investment Officer
Mark R. Kiesel
CIO Global Credit
Naila Makhdumi
Account Manager, Global Wealth Management
Jason Mandinach
Credit Strategist, Mortgage Strategies
Scott A. Mather
CIO U.S. Core Strategies
Sean McCarthy
Head of Municipal Credit Research
Mohit Mittal
Portfolio Manager, Liability Driven Investment and Credit
James Moore
Alfred T. Murata
Portfolio Manager, Mortgage Credit
John Nersesian
Head of Advisor Education
Sonali Pier
Portfolio Manager, Multi-Sector Credit
Emmanuel Roman
Chief Executive Officer
Loren Sageser
Credit Strategist
Steve Sapra
Client Solutions & Analytics
Jerome M. Schneider
Head of Short-Term Portfolio Management
Marc P. Seidner
CIO Non-traditional Strategies
Sapna Shah
Head of Corporate Responsibility
Greg E. Sharenow
Portfolio Manager, Real Assets
Anmol Sinha
Fixed Income Strategist
Kent Smith
Portfolio Manager, Mortgage Credit
Cathy Stahl
Global Head of Marketing
Christian Stracke
Global Head of Credit Research
Geraldine Sundstrom
Portfolio Manager, Asset Allocation
Richard Thaler
Distinguished Service Professor of Economics and Behavioral Science at the University of Chicago's Booth School of Business
Mark Thomas
Account Manager, Global Wealth Management
Jessica K. Tom
Senior Credit Analyst
Eve Tournier
Head of European Credit Portfolio Management
Jamie Weinstein
Portfolio Manager, Head of Corporate Special Situations
Tiffany Wilding
U.S. Economist
Andrew T. Wittkop
Portfolio Manager, Treasuries, Agencies, Rates
Mihir P. Worah
CIO Asset Allocation and Real Return
Chris Brightman
Ryan Murphy
Fixed Income Strategist
PIMCO
  • Alphabetical
  • Most Recent
Section : Date : Experts :
Reset All

Load more results Load {{cCtrl.fetchResults}} more results