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Marc P. Seidner, CIO Non-traditional strategies: Some of the more important investment implications for the coming environment can be concern about valuation in an environment of greater uncertainty.
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In many elements of markets, we think that there is some evidence of over valuation.
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It’s an environment akin to summer of 2016 when we were in a bond market environment of significant negative nominal interest rates in most government bond markets. That’s increasing currently, and therefore one should be cautious and selective about how they position from a government bond perspective.
We are focusing much more on relative value rather than absolute value, focusing much less on directional risk but thinking about best bottom-up security selection, focusing on areas where one can be overweight or underweight or even long or short both in corporate bond markets and government bond markets, and trying to find good yield, high-quality opportunities in a more uncertain environment.
So, in emphasizing flexibility in a world where investors have to increasingly deal with disruption, there’s probably a few reasons that we’d want to focus on flexibility. One is maintaining liquidity. Two would be asking ourselves the simple question: are we getting paid for the risks that we’re taking in the bond market? And how, in a more uncertain environment, can we produce positive results, not just benchmark-oriented, but truly positive returns?
So, liquidity, focusing on getting paid for the risks that one is taking, thinking about repositioning through times of volatility. It’s this concept of grinding, pausing accelerating. Grind out carry, grind out yield as markets are doing okay. Pause, observe during periods of dislocation, disruption, and volatility, and then capitalize on those moments to reposition portfolios.
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One other note to be made in terms of the secular outlook and dealing with disruption is the critical importance of forward-looking risk management.
Portfolio managers and risk managers always work in concert, but this is the type of environment of increasing uncertainty, increasing volatility, increasing disruption where forward-looking risk management in thinking about scenario analysis and stress testing is critically important to managing the downside risk and giving you that chance to grind, pause, and accelerate.
In this environment of growing uncertainty and a period where investors increasingly have to deal with disruption, it’s PIMCO’s strong view that active management and strategies that are actively managed will benefit clients.
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Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. 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 down turn in the market. Investors should consult their investment professional prior to making an investment decision. Outlook and strategies are subject to change without notice
A word about risk: 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. Sovereign securities are generally backed by the issuing government. Obligations of U.S. government agencies and authorities are supported by varying degrees, but are generally not backed by the full faith of the U.S. government. Portfolios that invest in such securities are not guaranteed and will fluctuate in value. Inflation-linked bonds (ILBs) issued by a government are fixed income securities whose principal value is periodically adjusted according to the rate of inflation; ILBs decline in value when real interest rates rise. Treasury Inflation-Protected Securities (TIPS) are ILBs issued by the U.S. government. Corporate debt securities are subject to the risk of the issuer’s inability to meet principal and interest payments on the obligation and may also be subject to price volatility due to factors such as interest rate sensitivity, market perception of the creditworthiness of the issuer and general market liquidity. 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. Currency rates may fluctuate significantly over short periods of time and may reduce the returns of a portfolio. Mortgage- and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and while generally supported by a government, government-agency or private guarantor, there is no assurance that the guarantor will meet its obligations.
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