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Investment Strategies

Three Layers of Active Portfolio Construction

Mohit Mittal, PIMCO's CIO of Core Strategies, discusses the value that active fixed income brings to portfolios, particularly in taking advantage of structural inefficiencies in global markets.

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Skov: Mohit, how are you?

Mittal: Very good Kimble, nice to see you.

Skov: Good, thank you for your time, I really appreciate it.

Mittal: My pleasure.

Skov: So, as you know, the core strategies at PIMCO are extremely important for our clients. And before we get into the burning question as to why bonds now,

Text on screen: Kimble Skov, Senior Vice President, Account Manager

I thought you could help us by telling us a little bit about your background here at PIMCO prior to becoming CIO of our core strategies. I think our viewers would find that interesting.

Mittal: Certainly. Yeah. I've been at the firm now 17 years.

Text on screen: Mohit Mittal, CIO Core Strategies

Over the last 17 years I've been here I've had the tremendous pleasure of working with some of the most talented individuals in this industry. I've worked across our rates products, treasuries, across our corporate credit area quite significantly.

I've been a permanent member of our investment committee for seven years, and then over the last 10 years, I've worked on our total return strategies.  

Skov: Perfect. And we're definitely going to capitalize on that expertise. So, thanks again for helping us out here today. So with that, let's grab a seat in our conference center.

Mittal: Of Course.

Images on screen: PIMCO Conference center

Skov: Mohit, this is a very special room for PIMCO here at our conference center. The design, the circular table, the stadium seating, it almost facilitates debate amongst its participants. Do you mind telling us a little bit about this conference center?

Mittal: Yeah. This conference center is indeed very unique for us. I still remember my very first presentation at the PIMCO forum in 2008 when I was presenting, and Dr. Allen Greenspan who was then the advisor, asked me a question about decoupling between different central banks. Over the last 18 years and then going back to our history over the last 40 years, we have maintained that same level of intellectual rigor as we discuss macroeconomics in this forum.

We look to bring our specialists, all our investment professionals and actively seek their ideas. So this conference room is certainly designed to bring out all the perspectives across our global investment teams.

Skov: Excellent. So forums happen quarterly and provide the guardrails for longer term views. Let's talk about portfolio construction or more to the point why active management for fixed income?

Mittal: Yeah, I think fixed income provides a very healthy opportunity set to be able to add value through active management.

Full page graphic: Adding value through active management

Image on screen: The graphic shows Mohit speaking on the right and  triangle on the left: the triangle has four buckets with callouts on the right side; the smallest, top bucket is called Opportunistic Expressions; the second, slightly larger bucket is called “Thematic Views”; the third larger bucket is called “Structural Opportunities“; and the fourth and largest bucket is called  “Passive Benchmark”. 

Through active management, investors can achieve potential returns that are above what might be achievable in a passive context. There are a few main reasons for that. First is the structural inefficiencies in the fixed income markets.

We believe there are structural inefficiencies across the rates market in the treasury spline curve, across the mortgage market between different coupons and then across the credit market based upon ratings, as well as balance sheet related concerns. So these structural inefficiencies provide that first source of excess return or alpha in fixed income.

The second is through what we would call thematic views. This is where we would bring in all of our macroeconomic expertise, our robust bottom-up analysis, as well as our valuation frameworks to take active views that are somewhat different from the market and thereby add additional potential excess return or alpha on top of that is what is provided by structural opportunities.

And the third is what we would categorize as opportunistic expressions. Opportunistic expressions more recently include global relative value. So that opportunistic expression around rates, as well as currencies can be that additional source of excess return, thereby, allowing investors to capture a meaningfully higher return potential relative to what is offered by passive indices.

Skov: Okay. So along those lines, the hallmark of the PIMCO strategy really is an active, well diversified core portfolio, the ballast, if you will, in a client's overall asset allocation. Mohit, thank you so much for joining us today.

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Disclosures


Past performance is not a guarantee or a reliable indicator of future results.

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. Diversification does not ensure against loss. Management risk is the risk that the investment techniques and risk analyses applied by an investment manager will not produce the desired results, and that certain policies or developments may affect the investment techniques available to the manager in connection with managing the strategy.

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.

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