Dan Ivascyn: So there continues to be tremendous macro uncertainty, but we are at least beginning to see a bounce off of the lows in terms of growth.
And again, this could be a very volatile, very bumpy journey to that point in time when we do finally get back to the growth levels we got used to in late 2019. So that's the fundamental growth outlook.
This is a very, very dangerous environment from the standpoint of risks of capital impairment. So you need to be defensive in your mindset and tread gingerly, especially in some of these markets most exposed to a growth disappointment.
The raw betas themselves, the sector of yields in spreads have come down a lot, making it a bit more challenging in terms of putting together a portfolio that maintains an attractive yield and the type of resiliency that we focus on within the income strategy.
Typically, in a recessionary environment, debt levels come down and you have a cleansing, if you will. This environment thus far you've seen less of that and you've seen actual debt levels increase from already fairly concerning levels.
So this is a situation that could certainly lead to tightening pressure near term due to very strong market technicals and a reach for yield. And one way or another this debt will have to be dealt with in some manner. On the flip side, other sectors that we've talked about now for many years that had relatively strong fundamentals going into this period are going to suffer a little bit of volatility, some cash flow disruption related to this weak economic environment, but where you still see relatively strong fundamentals in the housing markets, so that continues to be a key theme. The household balance sheet looks relatively strong across the US and some other areas of the developed world. So we do think as you've seen spread convergence, they're going to be, a lot of very attractive asset allocation decisions which allow you to maintain yield, even increase yield relative to some of these areas of the market that have rallied more recently but expose the investor to more downside risk if our, what I think is a fairly cautious economic view, ends up being too optimistic.
Unlike many PIMCO strategies, a consistent dividend stream or income stream is the Income strategy’s primary objective, critical secondary objective, almost a dual objective is long term preservation of capital and total return. So we are willing to be aggressive on the total return front when we think our fellow shareholders are getting paid to go on the offense. But it really is consistent dividend, capital preservation, avoidance of permanent capital impairment, which is a good way to accomplish that, but with a very flexible and aggressive mindset during periods of market dislocation. Another is that we do this without looking at benchmark. Instead, we look at the full global opportunity set. I think that's increasingly important in a world where central banks and other policy makers are looking to suppress yields, suppress volatility. We do so in a manner that that we want to be consistent with PIMCO’s top down macroeconomic process. So all too many income oriented funds tend to pile into riskier and lower rated credit. We try to use PIMCO’s macro approach to put together a portfolio in a creative fashion and that sometimes involves targeting non-traditional, income oriented investments that have better credit profiles but perhaps slightly less running yield. So that's the goal of the strategy. It's been the same from day one many, many years ago, back in 07 and that's what we're still trying to accomplish today.
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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. 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. Diversification does not ensure against loss.
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