Investment Strategies

Positioning PIMCO Models for 2022

Get a brief overview of how we’re positioning PIMCO’s Model Portfolios for the new year with Emmanuel Sharef, portfolio manager, asset allocation.

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Text on screen: PIMCO

Text on screen: PIMCO provides services only to qualified institutions and investors. This is not an offer to any person in any jurisdiction where unlawful or unauthorized.

Text on screen: Emmanuel S. Sharef, Portfolio Manager, Asset Allocation and Residential Real Estate

Emmanuel Sharef: PIMCO’s recently published the 2022 asset allocation outlook, which contains our key views and portfolio positioning themes, that’s also the background that drives how PIMCO model portfolios are positioned. Just as a reminder, PIMCO offers model portfolios of mutual funds and ETFs to meet a variety of objectives for clients, and clients can also use them as a guide for how we would size and allocate to meet those objectives.

Text on screen: TITLE – Fixed income models:, BULLETS – Capital preservation, SUB-BULLETS - Higher return potential than traditional cash investments, BULLETS – Enhanced core, SUB-BULLETS: Higher yield potential with less duration, BULLETS – Income focus, SUB-BULLETS – Seek attractive yield in a diversified manner

For example within the fixed income models, we have, first, capital preservation models that are designed to offer a higher return potential than traditional cash investments with only a modest increase in risk; second, we have enhanced core models that look to improve upon passive core by offering higher yields without as much duration, while still acting as diversifiers for clients who hold them against an equity position. And third, we offer income focus models that try to seek attractive yield in a diversified manner.

So let me talk about the market environment for a moment. 2021 has of course been a challenging year for fixed income.

Text on screen: Rising inflation led to bouts of rising yields

Images on screen: New York Stock Exchange

Inflation has been coming in well above market expectations, and this has led to bouts of rising yields; we saw the 10Yr climb above 1.7 in Q1, then that was punctuated by delta variant worries over the summer,

Images on screen: The Federal Reserve

and more recently markets have been pricing in more than two hikes in 2022 at the front-end. Meanwhile credit spreads started the year quite tight and haven't been much of a tailwind to broader fixed income, and also EM credit has been very challenged.

Looking forward, it's likely that we’ll see continued volatility in fixed income markets, as we're entering the beginning of a hiking cycle, a period of slower growth in the economy, and probably a period with more noise in the inflation numbers.

Our base case for 2022 on inflation is that inflation likely peaks in the first quarter, and then decelerates back towards 2% by year-end.

Text on screen: TITLE – PIMCO’s 2022 base case:, LIST - Supply chain bottleneck easing, GDP should remain strong, Potential Fed hike, Rates should continue to rise, Credit markets should be well-supported

Likely there'll be some easing in the supply chain bottlenecks and GDP will probably remain quite strong around 4.5%. So we're still in an economic expansion, and we should expect for there to be room for the Fed to hike, possibly even at the end of 2022. That also means that rates should continue to rise from here, although the terminal rate could be lower than in previous cycles. And as long as the economy is recovering, corporate earnings and credit markets should be well-supported.

There are risks, of course, in both directions: on the one hand, persistent inflation could become entrenched, or conversely there could be a hawkish policy mistake by central bankers overreacting to transitory factors; we could also see slowdowns from continued delays to the reopening; and the ever-present geopolitical risk includes risks arising in China.

Given this outlook we want to be cautious on duration overall, but as yields have risen, we’re mindful that it's back to being a decent diversifier in multi-asset portfolios. It also makes sense to have some exposure to funds that can move tactically and adjust curve and duration exposure quickly as the data change. Credit is for the most part fully valued, but there are a few select opportunities in Covid-affected names, both in IG and HY, and of course in securitized credit, including non-agency mortgages that benefit from strong consumer balance sheets and rising house prices. EM and especially EM FX is an area that hasn’t been able to recover as swiftly and screens cheap, but there are also structural headwinds so we want to keep our exposure controlled there.

Text on screen: TITLE – Model positioning given our asset allocation outlook:, LIST – Focus on active opportunities, Tactical positioning in duration and credit, Bottom up security and sector selection

Overall we think this is a time to focus on active opportunities, tactical positioning in duration and credit, and bottoms up security and sector selection and that’s what we’re trying to do in our Models portfolio as well.

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

Text on screen: PIMCO 50 1971-2021

Recorded 30 November 2021

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.

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. ENCOURAGE YOUR CLIENTS TO READ THEM CAREFULLY.

Different fund types (e.g. ETFs, open-ended investment companies) and fund share classes are subject to different fees and expenses (which may affect performance). They may also have different minimum investment requirements and be entitled to different services.

The PIMCO Models described in this material are available exclusively through investment professionals.

PIMCO Models are created based on what Pacific Investment Management Company LLC (together with its affiliates, “PIMCO”) believes to be generally accepted investment theory. In adjusting PIMCO models PIMCO considers, among other things, the results of quantitative modeling. Such quantitative modeling is designed to optimize each Model’s allocation and align with the Model’s investment objective, and takes into account various factors or “inputs”, determined by PIMCO, including third party data, to generate a suggested allocation for the PIMCO Models. PIMCO’s investment team then reviews the quantitative output and adjusts the output to reflect variables, which may include, among other things, the anticipated trade size, target total expense ratio for the Model, and qualitative investment insights. PIMCO Model allocations are ultimately subject to the discretion of PIMCO’s investment team. PIMCO Models are for illustrative purposes only and may not be appropriate for all investors. PIMCO Models are not based on any particularized financial situation, or need, and are not intended to be, and should not be construed as, a forecast, research, investment advice or a recommendation for any specific PIMCO or other strategy, product or service. Individuals should consult with their own financial advisors to determine the most appropriate allocations for their financial situation, including their investment objectives, time frame, risk tolerance, savings and other investments. Volatility is historical and is likely to change over time. PIMCO has not undertaken, and will not undertake, any analysis to determine any specific models’ suitability for specific investors.

The risks of a PIMCO Model’s allocations will be based on the risks of the PIMCO mutual funds (each, a “Fund”) included in the PIMCO Model’s allocation (“Underlying Fund”). The PIMCO Model’s allocations are subject to the risk that the Underlying Funds and the allocations and reallocation (or “rebalancing”) of the PIMCO Model among the various Underlying Funds may not produce the desired result. The PIMCO Model allocations to Underlying Funds have changed over time and are expected to change in the future. As described above. the selection and weighting process across Underlying Funds is informed based on return estimates driven by PIMCO’s quantitative models and forecasts for key risk factor inputs and forward looking view and risk estimates informed by PIMCO’s analytic infrastructure (“Systems”). These Systems rely heavily on the use of proprietary and nonproprietary data, software, hardware, and intellectual property, including data, software and hardware that may be licensed or otherwise obtained from third parties. The use of such Systems has inherent limitations and risks. Although we take reasonable steps to develop and use Systems appropriately and effectively, there can be no assurance that we will successfully do so. Errors may occur in the design, writing, testing, monitoring, and/or implementation of Systems, including in the manner in which Systems function together. The effectiveness of Systems may diminish over time, including as a result of market changes and changes in the behavior of market participants. The quality of the resulting analysis, including the PIMCO Model allocations depends on a number of factors including the accuracy and quality of data inputs into the Systems, the mathematical and analytical assumptions and underpinnings of the Systems’ coding, the accuracy in translating those analytics into program code or interpreting the output of a System by another System in order to facilitate a change in market conditions, the successful integration of the various Systems into the portfolio selection and trading process and whether actual market events correspond to one or more assumptions underlying the Systems. Management risk is the risk that the investment techniques and risk analyses applied by PIMCO will not produce the desired results, and that certain policies or developments may affect the investment techniques available to PIMCO in connection with managing the strategy.

PIMCO Model allocations are licensed or otherwise made available to investment professionals. PIMCO Models’ allocations are updated on a defined production cycle. The Underlying Funds are available by prospectus only. Implementing investment professionals may or may not implement the PIMCO Model’s allocation as provided, and actual allocations to Underlying Funds may vary. There are expenses associated with the Underlying Funds in addition to any fees charged by implementing investment professionals. Additionally, the implementing investment professional may include cash allocations, which are not reflected herein.

A word about risk: 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. 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. Treasury Inflation-Protected Securities (TIPS) are ILBs issued by the U.S. government. Equities may decline in value due to both real and perceived general market, economic and industry conditions. 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. 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. REITs are subject to risk, such as poor performance by the manager, adverse changes to tax laws or failure to qualify for tax-free pass-through of income. 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. Commodities contain heightened risk, including market, political, regulatory and natural conditions, and may not be appropriate for all investors. Floating rate loans are not traded on an exchange and are subject to significant credit, valuation and liquidity risk. Income from municipal bonds may be subject to state and local taxes and at times the alternative minimum tax. 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. Diversification does not ensure against loss.

For risks associated with a particular Fund, please refer to the Fund’s prospectus.

Forecasts, estimates and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. There is no guarantee that results will be achieved.

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.

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.

PIMCO does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax or legal questions and concerns. The discussion herein is general in nature and is provided for informational purposes only. There is no guarantee as to its accuracy or completeness. Any tax statements contained herein are not intended or written to be used, and cannot be relied upon or used for the purpose of avoiding penalties imposed by the Internal Revenue Service or state and local tax authorities. Individuals should consult their own legal and tax counsel as to matters discussed herein and before entering into any estate planning, trust, investment, retirement, or insurance arrangement.

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 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. 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.

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

For financial professionals: The implementation of, or reliance on, a model portfolio allocation is left to your discretion. PIMCO is not responsible for determining the securities to be purchased, held and sold for a client's account(s), nor is PIMCO responsible for determining the suitability or appropriateness of a model portfolio allocation or any securities included therein for any of your clients. PIMCO does not place trade orders for any of the your clients' account(s). Information and other marketing materials provided to you by PIMCO concerning a model portfolio allocation -including holdings, performance and other characteristics -may not be indicative of a client's actual experience from an account managed in accordance with the model portfolio allocation.

For Investment Professional use only. Not to be shown or distributed to any other parties.

CMR2021-1208-1951355

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