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Capital-Efficient Strategies: Tackling the Challenges of Low Prospective Returns

A pragmatic implementation of investment leverage seeks to enhance alpha and diversification.
  • Many investors seek ambitious annual return targets – often as high as 7%. Yet with valuations stretched for both equities and bonds, standard portfolio allocations seem unlikely to deliver what’s needed.
  • This has led some investors to reach for more returns by reducing exposure to less risky but lower-returning assets and leaning instead into riskier, higher-returning assets. 
  • Yet shunning diversification and increasing exposure to procyclical assets with embedded leverage is a risky way to tackle the prospect of lower returns. Thus, growing numbers of institutional investors are pursuing an alternative approach that uses capital-efficient strategies. 
  • These entail direct and more efficient uses of leverage to gain exposure to assets that may improve portfolio returns without a material increase in portfolio risk.  

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