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Navigating an “Anti-Goldilocks” Economy

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This is a sponsored article from PIMCO.

It’s a tricky time for income investors. Significant uncertainty clouds the outlook as the global economy confronts a stagflationary supply shock that is negative for growth and will likely spur further inflation. While an “anti-Goldilocks economy” – where inflation gets too hot and growth gets too cold – is not part of our tentative base case forecast, which still calls for above-trend growth in developed market economies overall, the risks of higher inflation and lower growth or even a recession have increased.

History shows, however, that periods of heightened volatility have tended to provide the opportunity to generate not only a consistent and high dividend yield, but total return as well. In our view, such an environment suits an active asset manager that has sufficient flexibility to respond and react to opportunities that may arise.

Positioning for consistent income amid unpredictability

With an uncertain path ahead, a balanced and flexible multi-sector approach may provide an opportunity to earn an attractive yield while managing risk.

The PIMCO Income Strategy invests across the entire global bond market, with active credit selection and the ability to tactically adjust duration. We take a long-term view, but respond actively to opportunities and overshoots created by market volatility.

To balance yield with capital-preservation investment objectives, the strategy allocates to both high-quality and higher-yielding securities, which tend to perform differently in varying growth environments and can help weather the challenges of changing markets. We seek consistent income distribution as a driver of total returns over time.

Risk management and assets that “bend but don’t break” are emphasised to withstand market gyrations. This means focusing on high-quality and senior secured bonds that can offer protection when markets go awry. We also focus on liquidity by investing in assets that can be easily bought and sold, even in times of stress.

Finally, the strategy benefits from PIMCO’s global scale and depth of sector-specific resources to source new opportunities across the global fixed income universe, to negotiate directly with borrowers, and to minimise transaction costs across markets.

Delivering on objectives for over a decade

The track record of the PIMCO Income Strategy’s broad-based approach speaks for itself. For over 10 years across multiple market environments, the strategy has historically provided high, consistent income and attractive long-term total returns.

In 2021, when traditional bond benchmarks faced challenges – the Bloomberg US Aggregate, for example, was down -1.5% – the PIMCO Income Strategy continued to deliver on its objectives. Amid broader volatility in fixed income markets, the strategy nimbly navigated market risks, including duration and credit risks.

We allocated to areas of global bond markets where we saw the best risk-adjusted opportunities. The strategy added value across its spread and currency strategies during the year. As spreads tightened, allocations within both securitised and corporate credit sectors were key contributors. Within investment grade credit, we focused on bottom-up security selection and favoured the financial sector. In high yield, we benefited from idiosyncratic opportunities such as bank capital or rising stars. In securitised debt, returns were driven by our allocation to non-agency mortgage-backed securities. In addition, our key currency positions throughout the year delivered positive results.

Award-winning* Active Bond Management

The success of the PIMCO Income Strategy in 2021 has won us industry accolades – testament to our belief that active management is the responsible way to navigate the complexities of the vast global fixed income universe. Today, we believe it matters more than ever.

In the current environment, we expect to target modest duration underweights and to de-emphasise curve positions. We do not expect to have large positions in risk assets given market vulnerabilities, but we may add to spread risk opportunistically in select investments that we see as having a remote probability of default. US Treasury Inflation-Protected Securities, in our view, can help mitigate upside inflation risks.

As an active manager with a flexible and global opportunity set, the current environment allows us to source attractive risk after a couple of years of tight spreads, but we approach this prudently, looking to preserve capital and remain nimble in this rapidly evolving market.

* The PIMCO GIS Income Fund E USD Acc was awarded the Morningstar Awards for Investing Excellence 2022 in Hong Kong and Singapore in the Best Global and Asian Bond Fund category.

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

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. Outlook and strategies are subject to change without notice.

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. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Mortgage and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and their value may fluctuate in response to the market’s perception of issuer creditworthiness; while generally supported by some form of government or private guarantee there is no assurance that private guarantors will meet their obligations. High-yield, lower-rated, securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. Commodities contain heightened risk, including market, political, regulatory and natural conditions, and may not be appropriate for all investors. Inflation-linked bonds (ILBs) issued by a government are fixed income securities whose principal value is periodically adjusted according to the rate of inflation; ILBs decline in value when real interest rates rise. Treasury Inflation-Protected Securities (TIPS) are ILBs issued by the U.S. government.

This material contains the current opinions of the firm and such opinions are subject to change without notice. This material is 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.

PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This is not an offer to any person in any jurisdiction where unlawful or unauthorised. | PIMCO Asia Pte Ltd (Registration No. 199804652K) is regulated by the Monetary Authority of Singapore as a holder of a capital markets services licence and an exempt financial adviser. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Asia Limited is licensed by the Securities and Futures Commission for Types 1, 4 and 9 regulated activities under the Securities and Futures Ordinance. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | No part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2022, PIMCO.

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This advertisement or publication has not been reviewed by the Securities and Futures Commission in Hong Kong.

This is a sponsored article from PIMCO.

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