In an evolving, multi-speed world, there is potential for higher future inflation over the secular horizon relative to what has been the case over the last 30 years. PIMCO believes that investors should always be prepared for the risk of rising inflation, and inflation-related investments, such as inflation-linked bonds, commodities and real estate, offer real, or inflation-adjusted, returns as well as potential diversification benefits relative to typical portfolios without strategic allocations to such assets. While many investors are looking to hedge against this risk, some are contemplating how best to take advantage of an inflationary economic scenario.
PIMCO is able to deliver solutions which are designed to provide a comprehensive portfolio solution for investors seeking diversified exposure to the broad opportunity set of inflation-related investments, including assets that respond to different types of inflation. These include inflation-linked bonds (ILBs), commodities, emerging market (EM) currencies, real estate investment trusts (REITs) and gold.
PIMCO’s investment process
The investment process for PIMCO’s Inflation Strategies builds off the forward-looking views produced by PIMCO’s secular and cyclical investment process. This process begins with PIMCO’s three- to five-year secular outlook, which identifies key longer-term trends, risks and opportunities across the global economy. It is supplemented by PIMCO’s cyclical outlook, which specifies a near-term forecast by assessing drivers and risks to economic growth and inflation in key regions globally. PIMCO’s Investment Committee then combines these top-down macro views with bottom-up inputs from the firm’s sector and regional specialist portfolio management teams. The result is a series of forward-looking investment views regarding the attractiveness of key global risk factors. PIMCO’s Asset Allocation Committee distills these views into risk factor weightings, which can be expressed across and within a range of asset classes.
PIMCO is one of the largest active global fixed income managers in the world today with close to three decades of experience in investing in global and emerging fixed income markets. As of 30 June 2011, PIMCO managed over US$53.4bn billion in dedicated global inflation-linked bond portfolios.
PIMCO was an early leader in analyzing global inflation-linked bonds. In 1997, PIMCO worked with the U.S. Treasury Department to advise on the launch of its Treasury Inflation-Protected Securities (TIPS) program. PIMCO’s first Real Return mutual fund was launched to coincide with this start of the U.S. TIPS market. Currently PIMCO’s ILB management experience extends to local and globally oriented mutual funds and separate accounts with ILB benchmarks as well as tactical allocations to client accounts with conventional benchmarks.
We have committed substantial analytical resources to valuing global ILBs and to assessing relative values between ILBs and conventional debt. In our efforts to achieve value-added results, we actively apply the following strategies:
- Real and conventional debt durations
- Real and conventional yield curve structure
- Inflation-related strategies, such as “break-even” and “inflation capture”
- Country rotation across ILB issuers in an effort to capture cyclical relative value
- Tactical use of non-real return debt sectors, such as mortgage-backed securities, corporate, agency or sovereign issues
- Security selection among real return issues based on relative value factors