Investment Strategies

PIMCO Monthly Income Fund (Canada): Celebrating 10 Years of Meeting the Income Challenge

Alfred Murata, Portfolio Manager, and Stuart Graham, Head of PIMCO Canada, discuss the strong 10-year track record of Monthly Income Fund, and how the fund will navigate the challenges ahead.

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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: 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.

Text on screen: For more information visit pimco.ca

Text on screen: PIMCO, 1971, 50, 2021

Disclosure


Recorded 20 January 2021

No offering is being made by this material. Interested investors should obtain a copy of the prospectus, which is available from your Financial Advisor.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. The indicated rates of return are the historical annual compounded total returns including changes in unit value and reinvestment of all dividends and does not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.

IMPORTANT NOTICE

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

*Please refer to https://www.pimco.ca/investments/mutual-funds/monthly-income-fund-canada for current distribution and performance information related to the PIMCO Montly Income Fund (Canada). The PIMCO Monthly Income Fund (Canada) has issued a distribution for each month since inception. No guarantee is being made that a future distribution will be issued.

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. 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. Mortgage and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and their value may fluctuate in response to the market’s perception of issuer creditworthiness; while generally supported by some form of government or private guarantee there is no assurance that private guarantors will meet their obligations. 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. Equities may decline in value due to both real and perceived general market, economic, and industry conditions. Derivatives may involve certain costs and risks such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested. Management risk is the risk that the investment techniques and risk analyses applied by PIMCO will not produce the desired results, and that certain policies or developments may affect the investment techniques available to PIMCO in connection with managing the strategy. Diversification does not ensure against loss.

The issuers referenced are examples of issuers PIMCO considers to be well known and that may fall into the stated sectors. References to specific issuers are not intended and should not be interpreted as recommendations to purchase, sell or hold securities of those issuers. PIMCO products and strategies may or may not include the securities of the issuers referenced and, if such securities are included, no representation is being made that such securities will continue to be included.

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 long-term, especially during periods of downturn in the market. 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, 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.

It is not possible to invest directly in an unmanaged index.

The products and services provided by PIMCO Canada Corp. may only be available in certain provinces or territories of Canada and only through dealers authorized for that purpose. PIMCO Canada has retained PIMCO LLC as sub-adviser. PIMCO Canada will remain responsible for any loss that arises out of the failure of its sub-adviser.

PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This material contains the current 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. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2021, PIMCO

PIMCO Canada Corp, 199 Bay Street, Suite 2050, Commerce Court Station, P.O. Box 363, Toronto, ON, M5L 1G2, 416-368-3350

CMR2021-0204-1509325

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