By Gordon Harding
After a difficult period for bonds the new economic backdrop has created a more favourable outlook for the asset class. Inflation and subsequently rates have been significant drivers of fixed income returns, but how can investors potentially benefit from today’s higher yields while being mindful of the risk remaining in the market? Gordon Harding, Vice President, Fixed Income Strategist at PIMCO, explains how PIMCO’s flagship GIS Income fund has grown in popularity and why it is well-positioned for today’s market.[1]
In light of recent market volatility PIMCO’s flagship GIS Income fund has been a very popular choice for investors. Why?
PIMCO has strong expertise in fixed income and the PIMCO GIS Income fund is one of the leading bond funds in the strategic bond sector. It’s been a really popular choice for investors looking for an actively managed, flexible fixed income portfolio that can form a core part of a client’s bond allocation over the long term.
As the name suggests, the fund’s main objective is to generate an attractive and a stable income for clients, but it does this in a prudent way, without taking excessive risk in any one sector of the market. At the same time, we have flexibility in managing the fund’s interest rate risk and flexibility to alter exposures to the different bond sectors depending on where we see the best opportunities, which also allows us to aim for capital appreciation over the long term.
What makes the fund different?
Our balanced approach to portfolio construction and global diversification gives investors access to many different bond sectors in one fund. The balanced approach means that we’ll invest selectively in higher yielding sectors to achieve our income objective, but we diversify those positions with exposure to high quality sectors that provide resiliency whenever there’s a flight to quality or when risk assets are selling off.
The aim here is to provide more consistent returns over time than would be the case by investing in just one or two sectors. The fund’s flexibility means that in more difficult markets we can focus on being defensive and preserving capital and then shift to a more offensive position to take advantage of opportunities when we see value emerge.[2]
What’s your view on how the GIS Income fund is positioned for today’s market?
We see attractive value in the fixed income markets now, both in an absolute sense and relative to other asset classes. Historically, starting yields have been a reasonable proxy for forward-looking returns and yields have increased meaningfully over the past 18 months or so. Also, with much higher interest rates central banks have room to cut if the economy does falter, which means bonds can again play their traditional role of a diversifier in client portfolios as well as offering attractive return potential because yields are higher. We’ve actually been positioning the Income Fund quite cautiously in recent months.
With higher rates and potentially slower growth in the future, we’ve increased our interest rate exposure but remain slightly defensive compared to typical benchmarks. We prefer shorter maturity, higher quality bonds right now, which offer higher yields than we’ve seen in more than a decade and the potential for capital gains if interest rates come down. On the credit side we’re also quite defensive, focusing on higher quality bonds where we can earn attractive yields without taking too much risk. We’re sticking with our philosophy of being balanced and diversified, and the great thing is that right now we can tilt the portfolio to the higher quality end of the bond market to reduce risk and do this without sacrificing much yield. We end up with a portfolio that is quite cautious compared to where it’s been historically but also with an attractive yield and more attractive returns potential.
Investors today have multiple options, including sitting in cash. Why should they potentially consider bonds?
We recognize cash currently provides attractive levels of yield, but cash may only allow you to lock in that rate over very short time periods. Longer-maturity fixed income assets have the ability to lock in an attractive yield for longer and offer the potential for price appreciation, particularly if the economy weakens and central banks begin easing. Multi-sector strategies, like the Income Strategy, also have the flexibility to invest across a range of sectors, geographies, credit qualities, and maturities so can take advantage of opportunities wherever they come up across the entire bond market. Right now the strategy is positioned quite cautiously, but we’ve built up the liquidity to be able to go on the offensive when we think the time is right.
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[1] This does not constitute an offer or a recommendation to invest. All investments involve risk including the potential loss of capital
[2] There is no guarantee that any forecasts, projections or targets as outlined herein will be achieved. PIMCO does not provide legal, tax or accounting advice and investors should first consult with their investment professional before choosing to invest
Share value can go up as well as down and any capital invested in the Fund may be at risk. The Fund may use derivatives for hedging or as part of its investment strategy which may involve certain costs and risks. For more details on the fund’s potential risks, please read the Key Investor Information Document/Key Information Document.
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BENCHMARK
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CORRELATION
As outlined under “Benchmark”, where disclosed herein and referenced in the prospectus and relevant key investor information document / Key Information Document, a benchmark may be used as part of the active management of the Fund. In such instances, certain of the Fund’s securities may be components of and may have similar weightings to the benchmark and the Fund may from time to time show a high degree of correlation with the performance of any such benchmark. However the benchmark is not used to define the portfolio composition of the Fund and the Fund may be wholly invested in securities which are not constituents of the benchmark.
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DIVERSIFICATION
Diversification does not guarantee a profit or protect against losses.
FORECASTS
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GIS FUNDS
PIMCO Funds: Global Investors Series plc is an umbrella type open-ended investment company with variable capital and is incorporated with limited liability under the laws of Ireland with registered number 276928. The information is not for use within any country or with respect to any person(s) where such use could constitute a violation of the applicable law. The information contained in this communication is intended to supplement information contained in the prospectus for this Fund and must be read in conjunction therewith. Investors should consider the investment objectives, risks, charges and expenses of these Funds carefully before investing. This and other information is contained in the Fund’s prospectus. Please read the prospectus carefully before you invest or send money. Past performance is not a guarantee or a reliable indicator of future results and no guarantee is being made that similar returns will be achieved in the future. Returns are net of fees and other expenses and include reinvestment of dividends. The performance data represents past performance and investment return and principal value will fluctuate so that the PIMCO GIS Funds shares, when redeemed, may be worth more or less than the original cost. Potential differences in performance figures are due to rounding. The Fund may invest in non-U.S. or non-Eurozone securities which involves potentially higher risks including non-U.S. or non-Euro currency fluctuations and political or economic uncertainty. For informational purposes only. Please note that not all Funds are registered for sale in every jurisdiction. Please contact PIMCO for more information. For additional information and/or a copy of the Fund’s prospectus, please contact the Administrator: State Street Fund Services (Ireland) Limited, Telephone +353-1-776-0142, Fax +353-1-562-5517. ©2023.
INVESTMENT STRATEGY
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OUTLOOK
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PORTFOLIO STRUCTURE
Portfolio structure is subject to change without notice and may not be representative of current or future allocations.
Risks:
Credit and Default Risk
A decline in the financial health of an issuer of a fixed income security can lead to an inability or unwillingness to repay a loan or meet a contractual obligation. This could cause the value of its bonds to fall or become worthless. Funds with high exposures to non-investment grade securities have a higher exposure to this risk.
Currency Risk
Changes in exchange rates may cause the value of investments to decrease or increase.
Derivatives and Counterparty Risk
The use of certain derivatives could result in the fund having a greater or more volatile exposure to the underlying assets and an increased exposure to counterparty risk. This may expose the fund to larger gains or losses associated with market movements or in relation to a trade counterparty being unable to meet its obligations.
Emerging Markets Risk
Emerging markets, and especially frontier markets, generally carry greater political, legal, counterparty and operational risk. Investments in these markets may expose the fund to larger gains or losses.
Liquidity Risk
Difficult market conditions could result in certain securities becoming hard to sell at a desired time and price.
Interest Rate Risk
Changes in interest rates will usually result in the values of bond and other debt instruments moving in the opposite direction (e.g. a rise in interest rates likely leads to fall in bond prices).
Mortgage Related and Other Asset Backed Securities Risks
Mortgage or asset backed securities are subject to similar risks as other fixed income securities, and may also be subject to prepayment risk and higher levels of credit and liquidity risk.
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