Investors need to meet two key investment objectives in the post-financial crisis era:
- Hedge against future inflation risks, recognizing that potential inflationary pressures are mounting
- Generate an adequate level of portfolio income, recognizing that it will likely provide a critical component of total return.
Traditional allocation responses have historically offered contradictory investment benefits. While Treasury Inflation-Protected Securities (TIPS) provide a contractual link to inflation, the yields on these instruments are historically lower than those of other fixed income securities. Credit markets, such as investment grade corporate bonds, have historically offered investors an incremental yield pick-up relative to comparable-maturity government bonds albeit without the typical benefits associated with government bonds. However, given most credit instruments are issued without a contractual inflation link, their ability to help investors meet liabilities in real terms, after adjusting for inflation, may be limited during periods of high or rising inflation.
PIMCO’s CreditRealReturn strategy provides investors with a simple portfolio structure that helps investors meet dual investment objectives. It seeks to offer a higher yielding alternative for hedging against secular inflationary risks by integrating the inflation-protection of TIPS with the high quality yield premium typically associated with investment grade credit. Thus, PIMCO’s CreditRealReturn is designed to allow investors to hedge future inflation risks and get adequate compensation in the meantime.