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Text on screen: Jerome Schneider, Portfolio Manager, Short-Term Portfolio Manager
JEROME: Equities anchor long-term growth, but investors often ask if there's a way to do a bit more without changing that core. Portable alpha is one approach.
Text on screen: The investor problem
Investors need equity for growth on their portfolio.
They also need to think about income, but slim opportunities exist for excess returns in that equity platform.
Full page graphic: Share of funds that outperformed their benchmark net of fees: 2016-2026.
Stacked bar chart comparing active equity and fixed income funds from 2016 to 2026. Seventeen percent of active equity funds outperformed their benchmark net of fees, while 83% underperformed. Ninety-five percent of active fixed income funds outperformed, while 5% underperformed.
In fact, only about 15% of equity managers outperform their specific indices over long periods of time. Opportunities, however, exist for excess return within fixed income and other asset classes, but they don't necessarily want to sacrifice that equity exposure.
Text on screen: Portable Alpha – what it is and how it works
JEROME: The solution for equity investors might be a portable alpha approach.
Images on screen: PIMCO trade floor
Portable alpha allows an investor to keep the market exposure they want, such as in the S&P 500 or another large cap index, while porting over the additional strategy on top of it that aims to contribute the structural or excess returns over periods of time. That strategy might in fact come from a completely different asset class, and that's where we find the opportunity to derive those structural returns that alpha from fixed income actively managed strategies.
In order to capture this opportunity, portfolio managers separate the source of alpha, which is returns, from the source of beta, market risk, and then allow the alpha to be monetized or ported over into different asset classes using a beta overlay. This allows the alpha to be reused across asset classes without being tied to the original market exposure.
Let's use a mock portfolio to illustrate this concept.
Images on screen: Pie chart showing a portfolio allocation of 90% fixed income strategy plus equity investment and 10% actively managed bond ETFs
Say your portfolio consists of 90% US large cap stocks and 10% actively managed bond ETFs. When you're allocating 10% of the portfolio away from those large cap funds, you're missing out on 10% of returns over the time.
With a portable alpha approach, the fixed income strategy, the actively managed fixed income strategy, is ported over onto the equity investment. Investing in both within one strategy allows you to achieve the beta of the market return for the equities in addition to the alpha achieved through the actively managed skill-based approach for fixed income.
Text on screen: Implementation is critical
JEROME: While portable alpha might be a straightforward concept, implementation is critical in making sure that we don't have additional risk within the portfolio that can potentially erode returns over time. Portable alpha strategies involve evaluating the market in its entirety, including use of derivatives as well as evaluating financing costs.
Text on screen: Why implementation matters: Precision in execution
Images on screen: PIMCO trade floor
Second thing, precision and execution. You want to make sure that you're managing not only risks, but also focusing on what the cost of managing those risks are over time.
Text on screen: Why implementation matters: Cost control
Images on screen: PIMCO trade floor
Cost controls in terms of evaluating funding costs are another mechanic that is important to bring into the equation here as we look to understand the financing costs of the equity beta portfolio at hand.
PIMCO's not new to this. We pioneered the portable alpha concept back in 1986 and have been doing it for almost four decades at this point in time. We've been industry leaders in this and really have put together a variety of structures across our stocks plus franchise, which accentuate this bringing together a beta with alpha potential within the fixed income universe.
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Disclosure
Investors should consider the investment objectives, risks, charges and expenses of the funds carefully before investing. This and other information are contained in the fund’s prospectus and summary prospectus, if available, which may be obtained by contacting your investment professional or PIMCO representative or by visiting www.pimco.com. Please read them carefully before you invest or send money.
A word about risk: 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. Equities may decline in value due to both real and perceived general market, economic, and industry conditions. Derivatives may involve certain costs and risks such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested. 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. Diversification does not ensure against loss.
Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest for the long term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision. Outlook and strategies are subject to change without notice.
Alpha is a measure of performance on a risk-adjusted basis calculated by comparing the volatility (price risk) of a portfolio vs. its risk-adjusted performance to a benchmark index; the excess return relative to the benchmark is alpha. Beta is a measure of price sensitivity to market movements. Market beta is 1.
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