View from the Investment Committee

Finding Value on the Uneven Road to Recovery

Group CIO Dan Ivascyn explains why assets near the center of quality and liquidity may offer value today, and have better potential to recover should the economy falter.

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Photo of David Fisher in PIMCO Lobby

Text on screen: David Fisher, Head of Traditional Product Strategies. PIMCO provides services to qualified institutions, financial intermediaries and institutional investors. This is not an offer to any person in any jurisdiction where unlawful or unauthorized.

David Fisher: Hi. I'm David Fisher, and I'm here once again with PIMCO’s group CIO Dan Ivascyn to talk about some of the recent discussions taking place in PIMCO’s investment committee or I.C., thanks for joining us, Dan.

Dan Ivascyn: Thanks, David.

David Fisher: So we've seen a remarkable recovery in markets since March and that recovery is even more remarkable in the face of a global economy that has seen quite a significant decline. So in the U. S. for instance, the economy lost more jobs in April than it gained in the prior 11 years.

And while we've seen some recovery in the economy, there are also signs that perhaps things are worsening in terms of the virus. So how is the investment committee handling this uncertain investment environment, where there seems to be a disconnect between asset prices and the real economy?

Dan Ivascyn: So in terms of the current investment committee thinking, first of all, we think that the worst is behind us in terms of the economic shock.

Photo of Daniel J. Ivascyn in PIMCO studio

Text on screen: Daniel J. Ivascyn, Group Chief Investment Officer

We think in the base case, at least of the virus impact on economies is waning. But it's waning in a highly uneven manner.

So we're in for a very bumpy ride. We're in for an uneven recovery and a frustratingly slow recovery across most key regions of the world. So this is an environment again to be cautious and be careful, acknowledge the fact that we're well off the lows across most markets,

Photo of trading floor and two traders

Text on screen: Be cautious, focus on bottom up analysis

And it's time to really, really look to leverage large teams, focus a lot more on bottoms up analysis.

If we become a bit more constructive on the recovery picture, if we begin to see signs of more significant virus containment, then we'll put the pedal on the gas, so to speak, look to go on the offense a bit more.

David Fisher: So let's talk a little bit about sectors and asset classes. I know the I.C. focuses on a concept called concentric circles that uses a framework for assessing risk and return across asset classes and sectors. So how is the I.C. applying this framework today? And where is it finding value, finding opportunities for investors?

Dan Ivascyn: Sure, so this is a simple but helpful framework. And in fact, turned out to be an effective framework that we used during the last global financial crisis, back in the 06, 07, 08, 09 period. And what it does is, it lists assets up in a circular fashion starting from the core, which represents the highest quality, most liquid assets.

Bullseye graphic titled “Framing Relative Risk Across Asset Classes – PIMCO’s Concentric Circles” layers asset classes from less risky (center circle) to more risky (outer circle). The order from centermost to outermost circles is: cash, ultra short- and short-term bonds, intermediate- and long-term Treasuries, agency mortgage-backed securities, Treasury inflation-protected securities (TIPS), swaps and Treasury futures, secured loans and AAA asset-backed securities, high-quality emerging market debt, investment grade corporates and municipals, high-quality commercial mortgage0backed securities, high yield corporates, non-agency mortgages and emerging market debt, equities and real estate investment trusts.

As you migrate out the circle up to the outer layers, you get into much more risky segments of the market. Segments of the investment universe that are more complex that have less natural sponsorship.

But in many instances, if priced appropriately, offer the potential for the highest returns.

We have a tendency to want to focus at least early on in the recovery period on some of those assets that are closer to the core. Assets that may provide value because of recent market uncertainty, market volatility, but can recover even if the economy were to surprise on the downside.

David Fisher: So when thinking about then those concentric circles, are there any sectors or asset classes that particularly stand out to you as offering attractive value right now?

Dan Ivascyn: We continue to like these core inner perimeter assets.

Text on screen: TITLE – Sectors that offer value, BULLET – Agency MBS

One of our favorite recent sectors have been agency mortgage backed securities. We think that's an area of the market where you benefit from very high credit quality, very high relative liquidity,

policy support in the base case, and the potential ability to earn attractive, high quality yield in an environment that we think is going to continue to mean relatively range bound interest rates.

Text on screen: TITLE – Sectors that offer value, BULLET – Agency MBS, Select areas of credit, Housing markets

We think the credit sensitive sectors remain attractive, but they're moving back closer to fair value from our perspective. So this is an area where, although we continue to see value, we’re becoming much more selective.

We had talked now for many years about the anticipated resiliency of global and in particular US housing markets in the face of even significant economic weakness. We're certainly not out of the woods yet, but we do see a sector that we expect to remain fairly resilient. So housing related credit type exposure continues to be a key theme for us across the platform, as well.

Text on screen: TITLE – Sectors that offer value, BULLET – Agency MBS, Select areas of credit, Housing markets, Banks/financials

Then finally financials, banks on a global basis are going to struggle from an earnings perspective in the current environment. But again, as bond investors were most focused on earning our coupon and getting our money back, and we think from a capital perspective, most major global banks were in a position where they’re capital positioned, their cautious management approach are leading some to some attractive and fairly defensive opportunities for fixed income investors as well.

So the bottom line is that although we're cautiously optimistic over the intermediate term. We as investors need to accept the fact that they're going to be setbacks.

So we're trying to be very, very careful not to be overconfident, to be careful, particularly in assets that are much more sensitive to this economic recovery and instead looking for areas across the fixed income universe, utilizing a global opportunity set, that provide attractive base case returns, have strong inherent fundamentals, and in some cases, the added benefit of what we anticipate to be ongoing policy support.

And probably the most important comment I could make is that we've talked about how challenging of an environment this is to be an investor. It's obviously a very, very challenging time for all of us, on both a personal and a professional basis. So we really again appreciate the relationships, appreciate the support. We're thinking about all of our clients around the globe. We look forward to continuing this dialogue, and we wish everyone continued safety and a good remainder of the year.

David Fisher: Great. Thanks, Dan. And thanks to all of you for joining us, we'll see you next time.

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Text on screen: PIMCO


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