Economic and Market Commentary

The Bolstering Effect of Fixed Income

Fixed income continues to play a crucial role in portfolios, diversifying equity risk—and active management across the array of fixed income assets can help maximize returns in a low-yield environment.

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Text on screen: PIMCO

Text on screen: PIMCO provides services only to qualified institutions and investors. This is not an offer to any person in any jurisdiction where unlawful or unauthorized

Text on screen: Erin Browne, Portfolio Manager, Asset Allocation

Erin Browne: I think that fixed income still plays a key critical role within portfolios for two main reasons.

One, correlation over the long-term horizon still remains negative between equities and bonds.

Secondarily, this was tried and tested during the first quarter of this year, even during an environment where interest rates globally were exceptionally low.

Text on screen: Fixed income protected 60/40 portfolios well during the downturn.

Image of PIMCO trade floor

Fixed income did very well in protecting 60/40 portfolios – or asset allocation portfolios, broadly – during the downturn in the first quarter, even despite the fact that the starting points for yields going into the crisis were at low levels

So, just because the starting point of valuations are low for fixed income, it doesn't mean that fixed income can't rally.

Text on screen: Enhancing fixed income portfolio returns, BULLETS – Active management to drive alpha, Diversify with a range of fixed income assets

We're always thinking about how can we enhance returns across our fixed income portfolios, and there's two key ways that we're focused on doing so. The first is really focused on active management, and we think that increasingly in a low-yield environment active management is going to play an increasingly important role in terms of driving alpha within portfolios.

Secondarily we also think that a well-diversified and risk-mitigating fixed income strategy should also be complemented with assets outside of traditional fixed income.

Text on screen: Geraldine Sundstrom, Portfolio Manager, Asset Allocation

Geraldine Sundstrom: Fixed income is not only AAA or very highly graded fixed income government bonds; there's a whole array of fixed income assets, going from high-grade corporate financials, CLOs, securitized, emerging market debt, high-yield. There's, like, a really big family, and you can even talk about multi-asset within fixed income. And therefore, for those who think that safe government and core fixed income might not be attractive enough – even though we think it still will be a robust diversifier in a multi-asset portfolio – there's a whole array of things to go about and discover.

Images of Erin Browne and Geraldine Sundstrom

Erin Browne: By complementing active management with a more diversified toolkit you can drive alpha within fixed income portfolios.

Text on screen: For more insights and information, visit pimco.com 

Text on screen: PIMCO

Disclaimer


IMPORTANT NOTICE

Please note that the following contains the opinions of the manager as of the date noted, and may not have been updated to reflect real time market developments. All opinions are subject to change without notice.

Past performance is not a guarantee or 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.

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.

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All investments contain risk and may lose value. 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. Sovereign securities are generally backed by the issuing government. Obligations of U.S. government agencies and authorities are supported by varying degrees, but are generally not backed by the full faith of the U.S. government. Portfolios that invest in such securities are not guaranteed and will fluctuate in value. 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. Income from municipal bonds is exempt from federal income tax and may be subject to state and local taxes and at times the alternative minimum tax.  Equities may decline in value due to both real and perceived general market, economic and industry conditions. Mortgage- and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and while generally supported by a government, government-agency or private guarantor, there is no assurance that the guarantor will meet its obligations. REITs are subject to risk, such as poor performance by the manager, adverse changes to tax laws or failure to qualify for tax-free pass-through of income. Collateralized Loan Obligations (CLOs) may involve a high degree of risk and are intended for sale to qualified investors only. Investors may lose some or all of the investment and there may be periods where no cash flow distributions are received. CLOs are exposed to risks such as credit, default, liquidity, management, volatility, interest rate and credit risk. 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. 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. Currency rates may fluctuate significantly over short periods of time and may reduce the returns of a portfolio. Commodities contain heightened risk, including market, political, regulatory and natural conditions, and may not be suitable for all investors.  Diversification does not ensure against loss.

This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been 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.

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CMR2020-0722-1251689

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