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Building resilient income in a more fragmented world

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This is a sponsored article from PIMCO.

Resilience means not only navigating challenges in the near-term, but also taking advantage of opportunities over the longer term.

As the world becomes more fragmented, we believe building resilience will be key for investors.

In PIMCO’s 2022 Secular Outlook, we discuss how governments and corporate decision-makers will increasingly focus on searching for safety amid widening geopolitical fractures. For governments, we foresee increased defence spending and investment in energy and food security, while corporates will focus on constructing more diversified supply chains.

These trends may come at the cost of increasing economic inefficiencies, which in turn may increase inflationary pressures. In the face of greater uncertainty regarding macroeconomic and market volatility, as well as central bank support, we believe investors would be wise to reach for resilience in their portfolios.

PIMCO’s Income Strategy has been developed to navigate challenging market conditions and seeks to generate consistent income in a prudent manner. In fact, as market yields have kept rising, we have recently increased the strategy’s monthly distribution – a testament to its value proposition for income-conscious investors.

Income and resilience: A fine balance

The recent market sell-off has presented attractive opportunities for active fixed income investors despite elevated volatility and recession risks. We have fine-tuned our Income portfolio with an emphasis on resilience.

We are targeting higher-quality assets offering attractive spreads that have widened in tandem with more credit-sensitive assets.

Three key positioning themes:

  • Securitised credit: Our allocation remains concentrated in legacy non-agency mortgage positions that have benefited from meaningful equity build-up over many years of rising home prices, and now have low loan-to-value ratios that can help mitigate the risk of a potential decline in home prices.
  • Agency mortgages: In this high liquidity and high quality government agency-guaranteed segment of the market, spreads have widened amid concerns about central banks selling agency mortgages back into the market. We are selectively adding exposure, and also actively trading in the sector while seeking to generate incremental return through selection of securities, coupons, and maturities.
  • Corporate credit: Senior financials remain a core focus, banks in particular. Many banks have historically high levels of capital (required by post-global-financial-crisis regulation), and over the last several months spreads have widened more than we think fundamentals suggest they should.

Made for navigating up and down markets

Since inception, PIMCO’s Income Strategy has managed to deliver on its objectives by:

  1. Staying true to the multi-sector nature of the Strategy and flexibly investing across the global fixed income market. This has allowed the Strategy to not only allocate to PIMCO’s best income ideas, but also to avoid areas of excessive risk.
  2. Allocating not just to higher-yielding parts of the market, but also to higher quality assets, seeking to provide consistent and diversified sources of return. This has allowed the Strategy to generally outperform riskier parts of the market during periods of volatility.
  3. Maintaining a strict risk management focus by selecting credit opportunities that we believe have resilient cash flow profiles, even in volatile and riskier investment environments. We call this our “bend but don’t break” philosophy.

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

Award-winning active bond management

The success of the PIMCO Income Strategy has won us industry accolades1 – 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.

As an active manager with a flexible and global opportunity set, the current environment allows us to source attractive risk, which we do prudently, looking to preserve capital and remaining nimble in this rapidly evolving market.

1 Most recently, 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.

This is a sponsored article from PIMCO.

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