The Mortgage LIBOR Plus strategy aims to generate consistent excess returns over a LIBOR benchmark with limited volatility through active cash management and relative value strategies in mortgages, governments and derivative instruments. The strategy seeks to capture relative value through long/short strategies by opportunistically extracting value from structural and tactical market mispricings. These pricing anomalies stem from supply/demand imbalances, expectations in the interest rate environment and prepayment expectations.
PIMCO believes that actively managed exposure to Agency pass-throughs offers the lowest-volatility way to seek outperformance in a mortgage portfolio. As a result, PIMCO demands substantial yield premiums for illiquid securities and for securities that have significant modeling risk (we frequently demand more compensation than the market affords). Despite an emphasis on Agency pass-throughs, PIMCO’s mortgage investment process still looks to all segments of the vast mortgage-backed securities (MBS) market to add value. However, given the opportunity to generate alpha with the preferred liquidity and quality of the Agency pass-through market, we will not purchase non-index related securities in a portfolio unless we are confident in their potential for outperformance.