Bond by Bond

No Shortcuts in Credit Research

Christian Stracke, Global Head of Credit Research, offers an inside look at PIMCO’s intensive credit research process and how it led the firm to invest in pipeline companies as oil reached its 2016 low.

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Christian Stracke: We get in a little before five in the morning. So that’s pretty early.

PIMCO is this invigorating place that is full of very intelligent, challenging individuals, but we demand a lot of each other. It is the kind of thing you wake up excited for every morning and that may sound corny but it is really true. My name is Christian Stracke and I am the head of Credit Research at PIMCO.

Markets are open round the clock and so it makes sense that you need to be at your desk when London and New York are open and that’s the meat, the heart of the fixed income trading time.

Bottom-up credit research has another name which is just called lending and that’s what we do. We lend our client’s money to companies and when you are making that loan you need to be sure that your clients will be paid back. Active investing is going out and saying do I actually believe that I want to lend to this company. And so there is a bond by bond process of going out and finding which company do I want to lend to and also within that company, which of the bonds that it has issued do I want to buy because each one is different. It has a different maturity, it has a different coupon, it has a different risk profile. And that is all very much a bottom up process.

There is a lot of financial modeling that has to happen at your desk and at your computer and that’s a lot of what we do. But, you also have to get out on the road and have to see your companies in action. We have access to management teams in a way that other bond holders simply don’t have and that makes a difference in our ability, not just to go and talk to the CFO and the investor relations team, but to drill down and talk to the head of risk, the head of sales or marketing or other people that really do give you a feel and color around what is it that this company is doing, what risks are they taking, what is their strategy.

A great example is what happened in 2016 when we were actively out there buying the bonds of a number of energy companies when the oil price was at its very low, when everybody was panicking about the energy space. But there were enough companies, particularly in the pipelines - those companies that do the transportation of the energy. Because we have that granular understanding of the individual pipes themselves, where they go, who their customers are, what regions are they servicing, we had the confidence that those pipeline companies would be survivors. And so we were out there buying the bonds of these pipelines in investment grade rates bonds that were yielding ten percent. That was a phenomenal investment opportunity for us. Those things don’t come along very often but when they do you need the scale of resources, the detail orientation to be able to understand just what the risks are that you are taking.

That is a very labor intensive process that requires a team that we have here at PIMCO. We are a team of sector analysts, where analysts cover as few sectors as possible and get to be deep experts in those sectors.

An important part of our process is not just siting her and generating research, and hoping that someone reads it. A very important part of the process is the active engagement that we have with our portfolio managers.

Starting with the weekly analyst and portfolio manager team meeting with Mark Keisel, our CIO for global credit.

We have people dialing in from NY, from Rio de Janeiro, from London, from Munich to go through portfolios and understand exactly what should go into the portfolio and what should come out of the portfolio.

We know that investing our client’s money is an awesome responsibility. For that reason there can be no short-cuts in credit research. At PIMCO what we do is look to deliver the investment returns to our clients while managing risk. Credit research is an absolutely critical part of that and we love that. That is why we love our job and that is why we are so excited to come to work every day.

Disclosures


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 the current low interest rate environment increases this risk. Current 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. Investors should consult their investment professional prior to making an investment decision.

This material contains the 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.

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