Viewpoints

Straight From PIMCO: Core Bonds in Focus

Scott Mather, CIO U.S. Core Strategies, discusses performance differences amid core bond funds, and how a focus on quality, liquidity and diversification has helped PIMCO Total Return provide portfolio ballast in this crisis.

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Text on screen: What’s happened in fixed income markets this year?

Scott A. Mather, CIO U.S. Core Strategies: The Global health crisis has resulted in widespread containment measures worldwide, that, in turn, have led to a dramatic decline in economic activity.

Shots of Wall Street, screens of trading information, and the New York Stock Exchange.

Most markets reacted to the uncertainty by swiftly repricing – with those areas at higher risk of permanent capital impairment suffering the greatest.

Chart: A line graph compares the days it took for the current largest equity drawdown (cumulative return) for the S&P 500 with other large drawdowns (1987, 2008 and others) in the years since 1950.

But the pace of the repricing was really one of the fastest we have ever seen. And even as the crisis began to unfold in financial markets, even high-quality areas of the market came under intense pressure as a liquidity crisis began to unfold.

Text on screen: What has been the impact in the Core Plus bond category?

This environment highlights exactly why a core bond ballast can be beneficial.

The key role of a core total return strategy is to deliver high quality, risk adjusted return in a variety of scenarios, including through crisis periods. And importantly it may act as a diversifier and volatility dampener.

Over the last several years, many managers have relied upon credit to drive returns.

And this works well when the economy’s growing well but as we can see, when we have a shock, that credit beta can turn into equity beta very quickly at the worst of times, as this recent crisis has revealed.

Credit, across the quality spectrum – can, and should at times, be a component of portfolios. But it shouldn’t overwhelm the return profile of a core bond strategy.

At PIMCO, Total Return has shown its resiliency with our time-tested approach:

It's a focus on quality. It's a focus on liquidity, and a focus on intentional diversification. We are not dominated by any particular beta and we take a very balanced approach using all the tools we have at our disposal. And its a process that has served our clients well for decades, through many other crises.

Text on screen: What’s next?

There’s a lot that we don’t know about this particular health crisis and which twists and turns it will take or the policy response and how effective and timely it will be.

But mostly likely we’re at the beginning of a recovery process and some economic healing. But we think it’s going to be uneven and it’s going to present many more challenges than many people seem to be assuming currently. Many sectors of financial markets will think may potentially be tested again.

Investors need to be prepared to weather that test, and a diversified core strategy is at the heart of that approach.

Shots of screens with trading information and PIMCO employees working.

PIMCO’s Total Return strategies work to have the resiliency to serve investors well through periods like this. We have the liquidity and the flexibility in the strategy to take advantage of dislocations in a well-planned and diversified way.

For now, we have focused on maintaining rate sensitivity to the U.S., we’ve emphasized the highest quality Agency MBS, and preferred senior positions over generic credit.

Shots of PIMCO employees working.

We know that not all our investment themes will be working simultaneously for us in the portfolio all of the time. 

But if we're sizing correctly and diversifying appropriately, then we'll have the potential to set ourselves up to deliver the best risk adjusted returns to our clients over the cycle.

For more insights and information visit pimco.com

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, 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. The performance figures presented reflect the total return performance for PIMCO Total Return Instl Class shares (after fees) and reflect changes in share price and reinvestment of dividend and capital gain distributions. All periods longer than one year are annualized. The minimum initial investment for Institutional, I-2, I-3 and Administrative class shares is $1 million; however, it may be modified for certain financial intermediaries who submit trades on behalf of eligible investors.

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: 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. 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. 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. Investing in derivatives could lose more than the amount invested.  Diversification does not ensure against loss.

Past rankings are no guarantee of future rankings. Fund rankings:1Yr. 53 out of 619; 3Yrs. 50 out of 570; 5Yrs. 64 out of 527, and; 10 Yrs. 153 out of 462. Morningstar Ranking for the Morningstar US Fund Intermediate Core Plus category as of 31 March 2020 for the PIMCO Total Return Instl Class Shares; other classes may have different performance characteristics. The Morningstar Rankings are calculated by Morningstar and are based on the total return performance, with distributions reinvested and operating expenses deducted. Morningstar does not take into account sales charges.

© 2020 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.

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.

It is not possible to invest in an unmanaged index.

Beta is a measure of price sensitivity to market movements. Market beta is 1.

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.

 

CMR2020-0430- 1171398 
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