View from the Investment Committee

Volatility Has a Silver Lining

To take advantage of increasing market volatility, investors need to be patient, defensive and flexible. Group CIO Dan Ivascyn explains.

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Fisher: Hi. I'm David Fisher, and I'm here once again with PIMCO's Group CIO Dan Ivascyn to talk about some of the recent discussions taking place in PIMCO's Investment Committee, or IC.

So, markets have been interesting lately. We've seen a bit of reversal in the first quarter of some of the moves that we saw in the fourth quarter. Where does that leave the IC in terms of finding valuation in markets? So, for instance, what do we think of emerging markets or corporate bonds or bank loans?

Ivascyn: Well, we have seen a lot of volatility during the end of 2018, and the first quarter has been very much about recovery across most of the higher-risk segments of the fixed-income market. And looking at valuations today, we wouldn't be surprised if we continue to see some tightening across the credit sectors more broadly.

Central banks have been much more dovish in their rhetoric of late, and there's the likelihood of some type of near-term resolution regarding certain issues that are causing some concern in the marketplace, trade being one. Brexit could very well be another.

Across the sectors right now we think it makes sense to operate in a more diversified fashion.

We remain most concerned about fundamentals within the corporate credit universe. Bank loans are an area where we are being particularly defensive, also cautious, however, in segments in the investment grade credit and even the high-yield credit universe as well.

Our favorite sector continues to be within the housing-related segment of the credit markets. We think the pace of housing development will continue to slow, but this is a segment of the market that we believe, will be resilient if the economy were to weaken further.

Then emerging markets is worthy of a few comments. Emerging markets, we think, represents a sector where there are good diversification opportunities. However, it's critically important to note that after all the volatility in emerging markets early in 2018, most segments of the emerging market asset class have somewhat quietly outperformed, and did exceptionally well during the second half of the year when other, more traditional segments of the corporate credit market were underperforming.

So today we still like emerging markets on a tactical basis. We are operating within the sector across a broad set of strategies, but I do think it's important to note that this asset class has come a long way. In some respects, we think the easier money has been made, and even in that space we do think it makes some sense to take a little bit risk off the table, to the extent you are adding exposure during the middle part of last year when emerging markets was at the localized lows.

Fisher: So, you mentioned volatility a couple of times. That's been one of the things that the IC has been focused on for quite some time. I know you've been predicting there will be volatility in markets, but of course predicting volatility is a little bit different than helping investors handle that volatility.

What advice do you have for investors who are trying to make their own portfolios resilient to this volatility that we expect to continue in markets?

Ivascyn: This is an environment where, as an active asset manager, you want to be patient, you want to be defensive, and you want to be flexible.

We rely on a team of over 250 portfolio managers to share their collective views on value across sectors.

What's attractive about the outlook for markets over the next few years is that we think that this volatility will lead to overshooting. We do think this is an environment where clients, investors will benefit from flexible mandates, that doesn't mean wild swings across sectors. It doesn't mean a highly unpredictable approach, but the ability, to target periods where there is volatility and overshooting in value, and then to fine-tune portfolios or to shift your asset allocation in response to that volatility or in response to other market participants needing liquidity.

Fisher: So putting it another way, dynamic doesn't necessarily mean unpredictable.

Ivascyn: That's absolutely correct. It's critically important to PIMCO that our clients understand our philosophy, understand the range of potential outcomes across portfolios, but at this stage in the cycle—and again, we do think its later cycle—we value that flexibility. And we believe with that flexibility we can help achieve client goals and objectives.

Fisher: So that brings me to one last question. When it comes to a portfolio manager's ability to access opportunities, one of the things that we often say is that vehicle structure plays an important role. So what's your perspective on this?

Ivascyn: Vehicle structure is absolutely critical in the current market environment. In a more traditional vehicle where our clients can enter and exit a fund later on that day, liquidity management is critically important. In other strategies that have more permanent capital or longer locked-up capital, liquidity is less important. And we can be much more flexible, much more creative in taking on investments that may be more complex, that may have a little bit less transactional liquidity, but offer better relative value than more liquid, easier-to-own alternatives.

So, again, in this type of environment from the perspective of a portfolio manager, like myself and other members on the team, having more permanent forms of capital allow us the potential to uncover significant value for the end client.

Fisher: Great. Well, thanks very much for your time today, and thanks to you for joining us as well.


PIMCO employee staffing data as of 31 December 2018, unless otherwise specified.

There is no guarantee that PIMCO will be successful in helping clients achieve goals and objectives.

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

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 the current low interest rate environment increases this risk. Current 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. Investments in illiquid securities may reduce the returns of a portfolio because it may be not be able to sell the securities at an advantageous time or price. Diversification does not ensure against loss.

There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.

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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