PIMCO recently elected Dan Ivascyn to serve as Group Chief Investment Officer (CIO). In this role, Dan will work closely with the CIO team, the Investment Committee and other senior portfolio managers to continue developing portfolio investment strategies that can deliver consistent long-term returns. Importantly, Dan will continue to oversee the firm’s alternatives, structured credit and income strategies.
In the following Q&A, Dan and portfolio manager Alfred Murata, recently named Morningstar’s 2013 Fixed Income Fund Managers of the Year* (U.S.), discuss how this will affect the PIMCO Income Strategy and what they expect in the year ahead.
Q: Dan, how will your elevation to Group CIO affect the Income Strategy?
Dan Ivascyn: Let me clarify my specific role. As part of this leadership transition, I won’t be taking on any additional primary portfolio management responsibilities. I am very pleased with the areas that I currently focus on, and it is important for me to continue to maintain that focus in the very high standard that clients expect. So I will continue to be the co-manager of our suite of income strategies.
As with all of PIMCO’s chief investment officers, I am first and foremost an investor. Accordingly, managing portfolios, including the Income Strategy, will continue to be a key part of my responsibilities. Importantly, I was already a member of PIMCO’s Executive Committee and Investment Committee, and have had senior management responsibilities within the portfolio management group for several years. So while this change will formalize my role within the firm’s leadership, I will continue to be focused on delivering returns for clients in our income strategies.
Alfred and I work very closely together, but we have always emphasized a team approach when managing income strategies globally, and we will continue to do so. Since the Income Strategy’s inception, we have relied heavily on input from PIMCO’s more than 250 portfolio managers around the world. This allows us to capitalize on the full breadth and depth of PIMCO’s global fixed income expertise with the goal of delivering attractive and consistent income and positive risk-adjusted returns.
Q: Will there be any changes to the portfolio’s objectives and value proposition?
Alfred Murata: Absolutely not. The investment process underpinning the success of our income strategies has not changed. It is important to note that these strategies rely on PIMCO’s time-tested top-down macroeconomic process and bottom-up credit selection. In that respect, our income strategies will continue to benefit from a collaborative approach that incorporates ideas and resources from across the firm, the expertise of our regional portfolio committees and macro input from the Investment Committee.
For investors looking for income, we strongly believe that the Income Strategy’s flexibility and broad opportunity set allow us to continue sourcing the best investment ideas across the firm while successfully navigating a range of market conditions. Our focus on income generation and capital preservation means that we won’t stretch for yield by sacrificing downside protection – something that differentiates us from strategies that simply aim for the highest yield.
Q: Given that a change in management structure can sometimes lead to short-term outflows, some clients are asking how we would manage the strategy’s liquidity if such outflows were to occur. How would you answer that question?
Ivascyn: Liquidity management has always been one of our top priorities. We continually monitor liquidity based on numerous factors. These include investment guidelines, market activity, shareholder activity and other portfolio requirements. Further, PIMCO utilizes comprehensive risk modeling and testing procedures stressing different risk metrics, including liquidity. We continually monitor the results of such testing and are constantly adjusting the portfolio’s holdings.
Given the Income Strategy’s dual objectives of delivering attractive returns while preserving capital in a wide variety of scenarios, we have always maintained a portion of the portfolio in high quality, liquid securities to protect the portfolio in the event of an economic slowdown and to provide daily liquidity to our investors. Given our current portfolio positioning, we are confident that we will be able to handle client redemptions even if they are significantly higher than our base case expectations.
Q: How is the Income Strategy positioned for the environment ahead?
Murata: Given the uncertainty in today’s financial markets, and the dual objectives of the Income Strategy, we have divided the portfolio into two components from a big-picture perspective. The first component consists of higher yielding assets that we expect to perform well if economic conditions turn out better than anticipated. These investments are in sectors such as non-agency mortgage-backed securities, senior secured bank loans, corporate high yield, investment grade corporates and emerging market bonds. The second component of the portfolio consists of higher quality assets that we expect to provide downside protection in the event that economic conditions turn out weaker than anticipated. These include investments in sectors such as Australian interest rate duration, government-guaranteed agency mortgage-backed securities and U.S. Treasuries.
Our belief in The New Neutral continues to anchor our views and guide our portfolio construction process. We believe liquidity in the global markets is likely to remain ample for some time, supporting many spread sectors. Also, since not all central banks are moving in the same direction, the future is likely to hold many cross-market opportunities. One key macro theme that is driving opportunity is deleveraging in the global banking industry. This sector is facing significant re-regulation and political scrutiny, which is causing financial institutions to delever and sell assets at very attractive prices. Over the next three to five years, we expect European banks to sell approximately $1 trillion in non-core assets, which could provide an attractive opportunity. Another opportunity is linked to securities tied to the U.S. housing market. PIMCO’s team of over 100 mortgage portfolio managers and analysts is involved in identifying the best risk-adjusted income opportunities in what we believe will be an appreciating market.
Q: Any additional thoughts?
Ivascyn: We realize that income is an important goal for many investors, and Alfred and I greatly value the trust that clients have placed in us through our suite of income strategies. Moving forward, we will look to maintain or improve performance across all the portfolios we manage. That’s always been the mission at PIMCO and it’s what we will continue to do.