Strategy Spotlight

PIMCO Balanced Income Fund Canada: Targeting Maximum Income and Long‑Term Capital Appreciation

The strategy combines PIMCO’s investment process and resources to find the best income ideas across the global fixed income markets, while leveraging Research Affiliates’ systematic equity approach.

PIMCO’s Balanced Income Strategy is an income-focused approach that combines the higher capital appreciation and dividend-paying potential of equities with the expected lower volatility and attractive income potential of fixed income. The strategy is co-managed by PIMCO’s Group CIO Dan Ivascyn and Alfred Murata, who co-manage the PIMCO Income Strategy, and Research Affiliates’ Rob Arnott and Chris Brightman.

In the following interview, Murata, Arnott and Brightman discuss the key benefits of the strategy, the investment process and how the strategy may fit within an investor’s asset allocation in a variety of yield environments.

Q: What is the PIMCO Balanced Income Strategy?

Murata: The PIMCO Balanced Income Strategy has two objectives: to generate consistent income and long-term capital appreciation. To achieve these goals, the strategy integrates PIMCO’s time-tested fixed income investment process and Research Affiliates’ innovative equity strategy into one global solution that invests in dividend-paying equities and fixed income securities around the world.

Q: How is this different from other balanced strategies in Canada?

Murata: Unlike other balanced strategies that focus on active stock-picking and passive Canadian fixed income, we utilize a systematic active equity strategy and an actively managed global fixed income opportunity set to achieve our objectives.

The strategy’s broad investment guidelines allow us to express PIMCO’s secular thinking and core investment themes across the capital structure. In addition, owning both stocks and bonds in an income strategy offers the potential benefits of diversification that can come with owning typically uncorrelated asset classes.

Q: Can you describe your investment process?

Arnott: The equity component of the strategy is a systematic active approach to managing a portfolio of higher-yielding stocks. The investment process begins with selecting companies from global developed equity markets based on their yield and financial health. Our yield measures consider not just a company’s current dividend yield but also the cash flow and earnings yield required to sustain income over time. We find that measures of financial health serve as guardrails, helping us to avoid “value traps” – investments that appear cheap but are permanently impaired – which are common among higher-yielding companies.

Stocks are then weighted according to their economic, or fundamental, size resulting in a highly diversified portfolio with what we deem to be attractive value characteristics relative to the broad market.

Also, by systematically rebalancing stocks back to their fundamental weights, the strategy seeks to capitalize on the market’s tendency to misprice stocks in the short term and then to mean revert to their true fair value over time. By seeking to take advantage of these inefficiencies, we believe this approach provides the opportunity to generate meaningful long-term outperformance.

Murata: On the fixed income side, we use a benchmark-agnostic approach to build a portfolio of our most attractive income-generating ideas across the $100 trillion global fixed income market. Our strategy is very flexible and utilizes PIMCO’s investment process and resources to source ideas around the world and manage duration and sector exposures tactically.

At a high level, the strategy has two fixed income components: The first is composed of higher-yielding assets, which we expect will perform well if economic growth exceeds expectations, and the second is invested in higher-quality assets, which we believe will do well if economic growth disappoints.

Q: Why take exposure to a fundamentally weighted, active global developed equity strategy now?

Brightman: In a lower-return, lower-yielding environment, market beta alone may no longer be enough, and a home market bias may limit the opportunity for both capital appreciation and yield. The strategy’s global perspective, focus on sustainable income, and fundamental stock weights seek to keep it broadly diversified and value-oriented, while adding the potential for excess returns and a regular income stream.

Q: Where does this strategy fit in an asset allocation framework?

Murata: Investors may choose to invest in PIMCO’s Balanced Income Strategy as part of a diversified portfolio. A balanced approach offers the attractive return, higher-risk potential of equities with the income and capital preservation potential of fixed income. This strategy combines PIMCO’s investment process and resources to find the best income ideas across the global fixed income markets, while leveraging Research Affiliates’ systematic equity approach to target sustainable income and capital appreciation in the equity markets.

The Author

Alfred T. Murata

Portfolio Manager, Mortgage Credit

Robert Arnott

Founder and Chairman, Research Affiliates

Christopher J. Brightman

Chief Executive Officer and Chief Investment Officer, Research Affiliates



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