The first and most important step in our process is to get the long run right. We believe that analyzing secular economic and political influences is fundamental to sound portfolio decisions. Holding a firm long-term view helps guard against becoming caught up in periodic bouts of euphoria and depression that often characterize financial markets. We are much more optimistic about our skill in identifying long-run value through fundamental economic and credit analysis than our ability to time short-term market movements.
Secular Outlook – We consider secular analysis so important that we devote one week each year to what we call our secular forum, at which we formulate our outlook for global bond markets over the next three to five years. Selected members of the investment staff are assigned secular topics to monitor, including monetary and fiscal policy, inflation, demographics, technology, productivity trends, global trade, etc. Secular researchers tackle their subjects on a global basis and approach them over a multi-year horizon. At the secular forum, our secular researchers summarize their findings for all the firm’s investment professionals. In addition, we invite analysts and scholars from outside the firm to share their expertise with us on financial and economic issues that are germane to the outlook. These external presentations combined with our internal research serve as background for further discussion and debate by the group.
Cyclical Outlook – The next step in our process is the analysis of cyclical or business cycle trends. PIMCO investment professionals meet quarterly in economic forums to evaluate growth and inflation over the near term business cycle. We evaluate the research and economic data presented by four regional research teams staffed by PIMCO investment professionals. These teams cover North America, Europe, Asia and the emerging markets. These presentations are followed by discussion and debate, the purpose of which is to decide whether GDP growth and inflation in each of the four regions will exceed or fall short of the market’s consensus views. Our conclusions help refine and update our forecasts for shorter-term economic trends.
Investment Committee – Following our secular and cyclical economic forums, the Investment Committee, comprising senior portfolio managers, works on a consensus basis to develop major strategies that serve as a model for all portfolios. The Investment Committee makes use of the top-down outlook provided by the forums as well as bottom-up input from specialists who focus on various fixed income sectors. Portfolio characteristics for which the Investment Committee sets targets include duration, yield curve exposure, convexity, sector concentration and credit quality.
Ongoing Review – While our views and portfolio construction are refreshed at least quarterly, our decision-making process is dynamic in nature. The Investment Committee meets at least four times a week to review various aspects of the current strategy in light of changing market conditions. Specialist groups are also invited to review existing recommendations or to present new ideas on a regular basis.
Portfolio Construction – Relative to a money market index, which includes strategies that have maturities restricted to an average of 60 days, provide daily liquidity, are almost always rated at the highest credit level and have very stable prices, the excess return of PIMCO’s Euro Liquidity strategy derives from four main sources:
The term premium (upward slope in the shape of the yield curve)
The transactional liquidity premium (yield which compensates an investor for holding bonds with wider bid/ask spreads)
The credit premium
The volatility premium
An expanded investment opportunity set, and more specifically these four risk premiums, add up to a wide variety of opportunities to add value given our broad fixed-income market expertise and the longer term holding periods of our investors. |