Text on screen: PIMCO
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Text on screen: Stuart Graham, Head of PIMCO Canada
Stuart Graham: So, Alfred, let's kick it off with the first question. And it's really the question that our account managers are being asked by advisors really across the country. What is a reasonable return expectation for investors in the Monthly Income Fund in 2021?
Text on screen: Alfred Murata, Portfolio Manager, Mortgage, Credit
Alfred Murata: What we're trying to do is generate attractive level of income while trying to protect against the downside. If you look at financial markets today, we've had a big rally in some of these more plain-vanilla, more generic assets in the fixed income marketplace. if you look at for example the Barclays Aggregate Index today, the yield is less than 1.2%. So we think that there is a yield advantage in the Monthly Income Fund relative to the Barclays Aggregate Index. Hopefully, that can also be positive for return generation over the next year. So what we're trying to do is generate enough income to pay out the distributions, hopefully have a little bit of capital appreciations.
Full screen graphic: Investment philosophy
Full screen graphic: Monthly Income Fund – 10 years of meeting the Income Challenge
Stuart Graham: Now, one of the things that we've seen through this sort of COVID period is that many investors are sitting on a lot of cash that's in high interest savings accounts or GICs. What advice would you give to those cash investors as monthly income as an alternative to some of these cash positions?
Alfred Murata: Yes, we think that monthly income could be a good fit for some investors that are looking to have a strategy that generates -- looking to generate attractive level of income while trying to protect against the downside. There's different investment opportunities, but we think that this is a good fit for many clients, and that's something that we've seen over the years in Canada.
Full screen graphic: Investment horizon is important
Stuart Graham: As you think of all the various opportunities that exist for you in the marketplace, what would you say is your highest conviction trade in the strategy today?
Alfred Murata: Our highest conviction trade is investing in nonagency mortgage-backed securities. That's something that many of you may have heard about in the past. And the reason why we still continue to find that to be very attractive is that the fundamentals have been improving over the past decade. Going back to say 2011, at that time many borrowers were underwater in their mortgages, so they owed more money than their property was worth.
Full screen graphic: Non-Agency Mortgages
But over the past decade, we've seen continued improvement from a credit quality perspective. So over the past decade, borrowers have been paying down their mortgages, housing prices have been increasing, and the loan to value ratio for these legacy nonagency mortgaged-backed securities is now below 60%. So a significant improvement from a credit worthiness perspective over the past decade.
Full screen graphic: Corporate leverage keeps increasing while homeowner leverage remains low
On contrast, if you look at some other sectors of the financial markets, so for example if you look at corporate credit, corporate credit fundamentals have moved in the opposite direction. So companies even before last year with the coronavirus, companies were adding leverage to their balance sheets and taking advantage of low levels of interest to borrow more and more money. Leverage in the corporate credit space has actually almost doubled over the past decade. So in contrast of nonagencies where leverage has been declining, leverage has been increasing in the corporate credit space. And that's why we continue to find it attractive to invest in nonagencies.
And then if you look back to 2020, 2020 we saw a big rally in corporate credit. In the second half of the year, we saw a good rally in nonagencies. But we think that the relative value in nonagency is even more attractive today than it was at the end of say 2019. So that's a sector that we continue to find to be our highest conviction trade idea today.
Stuart Graham: You know, Alfred, we also often talk at PIMCO about the size and scale of PIMCO and the privilege to access that provides to us for different deals. And I wonder if you can just sort of share an example where you believe that size and scale of PIMCO has really allowed us to take advantage in markets?
Full screen graphic: Map
Alfred Murata: So we have more than 200 portfolio managers around the world coming up with ideas that we can include in portfolios and some of these ideas would be assets such as the nonagency mortgage backed securities trade that many other firms in Canada aren't looking to take advantage of. So that's one advantage is having the flexibility and capitalizing on this flexibility.
Full screen graphic: Advantages of PIMCO’s size and scale
Another advantage of this larger size is on the sourcing front. That is something that was particularly beneficial in 2020. Many companies had financial difficulty, particularly from a liquidity perspective. They're looking to raise additional capital. They're not looking to raise $10 million or $20 million or $50 million or $100 million or $200 million, they're looking to raise billions of capital. And that's something that with PIMCO, with investment base and assets under management of more than $2 trillion, we can find some attractive opportunities oftentimes investing billions at a time. So that's something that is providing a one stop shop for companies looking to raise significant amounts of capital.
And the third area of our larger size that's advantageous is on the value maximization front. If a company or say a mortgage-backed security experiences financial difficulty, using a legal process to maximize value. And that's something that we think is going to become increasingly important in the years to come with the significant challenges that we're seeing in the economy from the coronavirus.
Stuart Graham: Look, the Fund has delivered amid a very challenging decade for investors. We continue to believe that the objectives of consistent income, capital preservation and a flexible mandate to take advantage of ever-changing global macro environments is very, very important. We believe that these will be the keys to success just as they were the keys to success over the past decade.
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Text on screen: PIMCO, 1971, 50, 2021
Recorded 20 January 2021
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