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Text on screen: Esteban Burbano, Fixed Income Strategist
Esteban Burbano: Hello, everyone. I'm Esteban Burbano and I'm a fixed income strategist here at PIMCO. Today I'm joined by Alfred Murata, managing director and one of the lead portfolio managers of PIMCO's low duration income strategy.
A low duration income strategy is our flexible global multisector strategy that focuses on delivering consistent income while also maintaining a structurally lower exposure to interest rate risk. Alfred, thank you for joining us.
Alfred Murata: Thank you. Thanks for having me.
Esteban Burbano: perhaps let's start with a brief overview of the strategy, its main objectives, and how it's currently positioned given the low interest rate environment that we're currently facing.
Text on screen: Alfred T. Murata, Portfolio Manager, Mortgage Credit
Alfred Murata: So in terms of the strategy, what we're trying to do is generate an attractive level of income while trying to
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potentially protect against the downside. To do this we're taking advantage of the best ideas in the global opportunity set, which is more than 100 trillion in size, using the resources at PIMCO with more than 200 portfolio managers around the world, come up with ideas to include in the portfolio.
Something that we're not focusing on is trying to outperform a benchmark.
Esteban Burbano: And how do you think about the strategy's position in the current environment where we're seeing yields to be very low, and also the potential for interest rates to be volatile or even potentially move up given the changes in Fed stance?
Alfred Murata: Given the relatively low levels of interest rates, we don't believe that investors in many cases are compensated for the interest rate risk today that they may be taking in portfolios.
Text on screen: The Low Duration Income strategy may be a good fit for investors concerned about interest rates
Images on screen: The Federal Reserve and US Capitol
So the low duration income strategy we think can be a good complement or a good fit for investors that are concerned about rising interest rates.
In addition, we've had significant fiscal and monetary stimulus so far. And that could be removed, particularly the monetary stimulus could be removed. There can be an overreaction and interest rates may be increasing over time.
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Having a low duration focus may potentially protect investors during more challenging or turbulent period in fixed income markets.
Esteban Burbano: And what about the positioning across the credit markets?
Alfred Murata: So in general central banks have done a great job at supporting the valuation of these more plain vanilla, more generic assets. So as you mentioned, credit spreads are on the tighter end. That doesn't mean that there aren't some attractive opportunities in the global fixed income universe which is more than 100 trillion in size.
Text on screen: TITLE – Current areas of opportunity:, BULLETS – Non-agency MBS, Select corporate credit, SUB-BULLETS – Financials, BULLETS – COVID- impacted sectors, SUB-BULLETS - Airlines
So one area that we continue to find attractive to invest in are non-agency mortgage backed securities. This asset class wasn't included in say the Fed purchase program. And that's an asset class that's trading at wider levels than before the Covid crisis. Whereas corporate credit in general is trading at tighter levels. And in terms of fundamentals, fundamentals they have actually been very strong over the past couple of years. We had significant increase in housing prices, which has led to significant deleveraging of the asset class. Whereas in the corporate credit space, many companies have been adding more leverage over the past couple of years. What we like is the combination of strong fundamentals and also attractive valuations.
Corporate credit in general I'd say is on the tighter end. But there are some attractive opportunities within the corporate credit space. One of them is in financials. Financials have had significant changes in financial regulations since the great financial crisis. Many banks now have tier one capital ratios, and are focused on safer business lines such as wealth management rather than proprietary trading. So that's one area that we like the fundamentals.
We also see some opportunities in some of the sectors that have been more negatively impacted by Covid, particularly the airlines. But they are focusing on bonds that are senior secured in the capital structure, such as in the airline space, bonds that are backed by either pools of planes, or gates and routes that the airline might need to maintain its operations, its frequent flyer program.
Esteban Burbano: Great. And what about in emerging markets? Is that also an area where we are finding some opportunities today?
Alfred Murata: Yeah. So we think that emerging markets are going to be the center of growth over the — say the secular horizon. That being said, over the past year since the Covid crisis began, emerging markets in general haven't had the financial flexibility to provide significant fiscal stimulus. So I think that's been much more positive for growth in the developed markets compared to the emerging markets so far.
Text on screen: We remain selective in emerging markets
Images on screen: Emerging market countries
But I think that it's important to be very selective and find the opportunities that are going to be more resilient in the event that say the Covid crisis takes longer than anticipated. But I think that we're very well-positioned within the strategy using the resources of PIMCO to capitalize on these opportunities.
Esteban Burbano: Great. And let's finally just touch a little bit about our overall strategy, and how do we manage for the structurally lower duration exposure or interest rate risk exposure versus some of our more flexible strategies?
Alfred Murata: So with respect to the low duration income strategy, this is a lower interest rate risk strategy similar to many of the other strategies that we have at PIMCO.
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But I think the big difference is the focus on generating attractive level of income while trying to potentially protect against the downside, compared to so many of the other strategies where the objective is to try to outperform a benchmark.
The strategy is a member of the PIMCO income suite. And we're using the same investment process, the same portfolio management team, and trying to take advantage of the best ideas in the global opportunity set to try to achieve the objectives of the consistent income and stability of the net asset value.
Esteban Burbano: Thank you. And of course we have decades of experience managing for income strategies. So this is a great addition and something that we see many of our clients focusing on.
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Recorded 13 October 2021
Please note that the following contains the opinions of the manager as of the date noted, and may not have been updated to reflect real time market developments. All opinions are subject to change without notice.
Past performance is not a guarantee or a reliable indicator of future results.
A word about risk: 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.
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