Sonali Pier, Portfolio Manager, Multi-sector credit: Dispersion in credit has led to alpha opportunities through credit selection. Following the rally in bond yields, valuations and technicals have moved in different directions. 

On valuations, the decline in yield has led to a reduced potential range of future outcomes, as well as a lower cushion that yields can provide against future defaults. With respect to technical investors have been searching for income due to the increase of low-yielding and negative-yielding assets. This dynamic creates both pitfalls and opportunities for U.S. high yield investors.

This chart shows the high level of dispersion within and across sectors in high-yield in 2019.

Chart: The barbell chart depicts the broad yield dispersion within and across high yield sectors: high yield sector bottom quartile yield, high yield sector median yield and high yield sector top quartile yield.

For sectors with high dispersion levels, such as energy and healthcare, this shows sector-specific risks, as well as issuers across the ratings spectrum. And by contrast, sectors with higher-quality issuers and stronger fundamentals, such as gaming, have lower dispersion and lower yields.

In light of these dispersion trends, and generally low yields, investors need to be both cautious and selective when investing in high-yield.  As an example, energy is both the largest and worst-performing sector within US-high yield. The dispersion of returns across different energy subsectors has been significant as well, with areas like midstream up over 10 percent, and while others such as exploration and production are delivering negative total returns.

All this in a year when US high-yield is up over 12 percent. The key takeaways here are that passive investors should exercise caution and be aware that they are taking market risk across the entire benchmark of issuers, as well as their associated downside risks. Investing with an active manager can help one: avoid credit pitfalls, and two: see through temporary dislocations, identifying credits that may recover, which is key to potentially unlocking alpha in 2020.

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Disclosure

Past performance is not a guarantee or a reliable indicator of future results.

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. 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. 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.

There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.

Alpha is a measure of performance on a risk-adjusted basis calculated by comparing the volatility (price risk) of a portfolio vs. its risk-adjusted performance to a benchmark index; the excess return relative to the benchmark is alpha.

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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