What differentiates active fixed income investing in today’s markets? In this Q&A, Mohit Mittal, CIO of Core Strategies, discusses how PIMCO approaches portfolio construction and risk management as it seeks to generate outperformance, or alpha. Accompanying videos highlight current opportunities across credit, global markets, and mortgages.
Q: Investors have many ways to capture today’s higher bond yields, including passive index-tracking funds and building ladders out of individual bonds. Why consider actively managed bond funds?
A: Today’s attractive starting yields have restored bonds’ role as a potential source of income and return in a portfolio. But yield is only the starting point. An active manager can seek to add value through individual security selection, positioning across maturities, sector allocation, and relative-value decisions across markets.
Bond market structure can enhance active opportunities. For example, while equity indexes are often based on market capitalization, fixed income indexes generally assign greater weight to issuers with the most debt outstanding, so a passive approach may be exposed to the most indebted borrowers.
Certain bond market participants, including central banks, insurers, and pension funds, may have constraints and objectives beyond maximizing risk-adjusted returns. Their activity can create gaps between price and fundamental value that an active manager can seek to exploit, unlike a passive index or a mechanically constructed bond ladder.
Q: What is “alpha,” and how does PIMCO seek to generate it consistently?
A: Alpha is the excess return a manager seeks to generate above a relevant market benchmark. At PIMCO, our goal is for that excess return to be consistent, diversified, and repeatable. PIMCO organizes potential sources of alpha into three broad layers:
- Structural opportunities: Persistent inefficiencies arising from market structure, index construction, investor constraints, liquidity needs, and access to transactions.
- Thematic positioning: Views informed by macroeconomic, sector, and bottom-up research, expressed across interest rates, credit, mortgages, currencies, emerging markets, and other areas.
- Opportunistic expressions: Positions taken when volatility, market events, or forced selling create temporary price dislocations.
Valuation is the common thread. We ask where investors are being adequately compensated for the risks, rather than beginning with a predetermined sector allocation.
Q: Where are you seeing opportunities to generate alpha today?
A: Today’s fixed income markets may offer attractive opportunities across several key areas.
Credit
An active approach does not require a broadly bullish or bearish view on credit. Dispersion across issuers, sectors, structures, and individual transactions can matter more than the overall market average.
In this video, Mohit Mittal and Sonali Pier discuss how bottom-up research, selectivity, discipline, and scenario analysis may help identify opportunities and risks amid the surge in AI-related investment.
Global opportunities
Market volatility and the broad repricing of yields across countries and maturities have created opportunities. For example, recent fiscal developments in France have started to create opportunities in European sovereign and credit markets.
In the accompanying video, Sachin Gupta and Pramol Dhawan discuss how global diversification may contribute both to alpha generation and portfolio resilience across developed and emerging markets.
Mortgages
Mortgages are a large and unique part of the high-quality fixed income universe. Their performance can vary materially by coupon, structure, prepayment behavior, and interest-rate scenario. That complexity creates room for active security selection and relative-value analysis that an index-level allocation may not capture.
In the accompanying video, Daniel Hyman discusses how PIMCO’s views on mortgages and securitized markets contribute to the pursuit of alpha.
Not every position will work. The aim is to diversify the sources of alpha, size positions deliberately, and prepare in advance for a wide range of outcomes.
Q: How does PIMCO turn research and market views into actual portfolio decisions?
A: Alpha generation starts with a team-based approach and scenario analysis. We consider how each position may behave both under the base case and under materially different economic and market outcomes.
Firmwide views are debated through the Investment Committee. Specialists bring sector-specific opportunities and market perspectives to the Investment Committee and CIOs. The process combines top-down macroeconomic and policy analysis, bottom-up security and issuer research, input from specialist portfolio managers and traders closest to individual markets, and a portfolio construction process that determines which ideas to use, how large they should be, and how they may interact with the rest of the portfolio.
Risk review is continuous, including formal monthly reviews and scenario analysis around potential tail outcomes outside the baseline. Liquidity is also a key part of portfolio construction. Maintaining liquidity may allow our team to provide liquidity when other investors are forced to sell.
Q: What should investors ultimately expect an active fixed income manager to deliver?
A: An active manager can build on the foundation of market conditions, including a competitive starting yield, and seek to generate incremental excess return from multiple, diversified sources.
An active fixed income manager can build a portfolio to navigate a range of outcomes, with disciplined risk management that considers downside scenarios and may preserve the flexibility to respond when markets move. An active manager can offer access to structural, thematic, and opportunistic ideas across sectors, countries, currencies, and public and private markets. An active approach treats volatility and dispersion as potential sources of relative value.
Active management is not about making one bold forecast. It is about repeatedly finding well-compensated risks, combining them thoughtfully, and building a portfolio that may remain resilient when economic and market conditions develop differently than expected.
