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.
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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.
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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.
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