PIMCO Income strategy
PIMCO Income strategy
Video transcript below:
Alfred Murata, Portfolio Manager, Monthly Income Fund (Canada)
Alfred Murata: The key objectives of the income strategy are to generate consistent attractive income for investors and also the stability of the Net Asset Value.
PURSUING CONSISTENT MONTHLY INCOME AND STABLE NAV
Positioning and protecting the portfolio
Alfred Murata: This strategy is appropriate for investors that are looking to generate consistent income in their portfolios, but also want to focus on downside protection. The goal here is not to generate as high yield as possible, the main thing here is generating responsible yield for investors while maintaining stability of the Net Asset Value.
Recently we have been a bit more optimistic on our views on economic growth going forward. Now we expect economic growth in the U.S. in 2014 to be in the 2 1/2 to 3% area. Nevertheless we still think there will be substantial variation from country to country around the world. Around the world we think the emerging markets will have the strongest growth, followed by US and Canada and next bringing up the rear will be Europe and Japan.
In this environment, we think it’s important to invest in asset classes that could benefit from stronger than expected growth, but it’s also important to focus on the downside in the event that economic growth ends being weaker than anticipated.
Capturing positive growth
Alfred Murata: What we are doing is investing one portion of the portfolio in higher yielding assets that will benefit from a pick up in economic growth. One example of this would be investing in non-agency mortgage backed securities. These are bonds that are backed by mortgage loans in the US. We are able to buy these bonds at a substantial discount from par and we are not anticipating getting par back, but if economic conditions end up stronger than anticipated, we get more principal back on these bonds than we previously anticipated. If economic growth is weaker than anticipated, then we are also investing in another portion of the portfolio that’s certified downside protection. One example of this type of asset class would be Australian Interest Rate duration which would benefit if economic growth is weaker than anticipated and interest rates in Australia decline.
Protecting against rising rates
Alfred Murata: So we have three ways to protect the portfolio against rising rates. First is the flexibility to adjust interest rate duration within zero to a year duration band. Second is the ability to deploy the interest rate duration around the world. Just because interest rates in US may increase doesn’t necessarily mean that interest rates in for example Brazil will increase. Brazil right now has real yields of close to 7%. Third is the capability to invest in asset classes that can actually benefit from stronger economic growth such as investing in non-agency mortgage backed securities. So although it is possible for interest rates to rise, it doesn’t necessarily mean that it will be negative for the portfolio.