The economic shock of Covid-19 has left the world's largest economies grappling with rising inflation on the one hand and lower-for-longer interest rates on the other, as governments strive to control high levels of debt. At the same time, monetary and fiscal support during the pandemic has left many traditional income-generating assets with high valuations, making it harder for investors to find reliable income sources at a reasonable price.
According to Alfred Murata, managing director and portfolio manager at PIMCO, fixed income investors today find themselves in a more difficult position than during the spring of 2020, when credit valuations were at attractive levels. In contrast, the current environment requires a delicate balancing act between achieving an attractive level of yield and going too far up the risk spectrum.
"The more generic, plain vanilla assets have seen a lot of support from central banks over the past year, so the valuations of these assets are not as compelling today," explains Murata. "You have to work harder to generate attractive returns in this environment."
A flexible approach is therefore key to be able to take advantage of any potential dislocations in the market. However, this must be coupled with strong risk mitigation tactics to protect the portfolio on the downsidein a market where the risk of rising volatility looms large.
The ‘bend but not break' approach
PIMCO's GIS Income fund, managed by a team led by Dan Ivascyn, Alfred Murata, and Josh Anderson, employs a flexible approach that allows it to take advantage of the global opportunity set in the entire $123trn fixed income market.*
The fund's aim is to deliver an attractive level of income while protecting investors against the downside. That means looking beyond interest rate duration and credit risk, to try to construct a portfolio that can weather a range of economic backdrops. Murata calls this process the "bend but not break" approach.
"Income generation is important in this environment, but it is critically important to focus on risk management as well," he explains. The fund pursues this through a robust risk diversification process. This involves making investments in a wide range of eligible sectors and securities, with the aim of helping the fund to achieve its objectives even if some investments don't perform well during a particular year.
*Source: SIFMA Global Fact Book, p.48. End of 2020.
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