STRATEGY SPOTLIGHT
February 2016
AUTHORS
Marc Seidner
CIO Non-traditional Strategies
PIMCO Global Libor Plus
Bond Strategy Seeks to Provide
Sustainable Absolute Returns
and Preserve Capital
Interest rates are low globally, markets are volatile and
investors are looking for alternatives to near-zero, or
actually negative (in real terms), money market yields.
To meet the needs of investors in this environment,
PIMCO is launching the Global Libor Plus Bond
Strategy. In the following interview, Portfolio Managers
and Managing Directors Mike Amey, Mohit Mittal and
Marc Seidner discuss their investment approach and its
potential benefits.
Q: What is the Global Libor Plus Bond Strategy and why are you launching it now?
Mike Amey
Managing Director
Portfolio Manager
Mohit Mittal
Managing Director
Portfolio Manager
A: This is a new absolute-return-oriented bond strategy targeting Libor +2%-2.5% with an
annualized volatility of 2%-4%. We will manage the strategy to seek consistent
outperformance over money market interest rates, with a focus on preserving capital over
rolling 12-month periods. As a truly flexible and global bond strategy, the strategy will benefit
from PIMCO’s rigorous and time-tested investment process and reflect our full suite of active
investment views across the global fixed income markets.
We developed this strategy in response to client concerns about a protracted period of low,
and in some cases even negative, interest rates. The strategy will seek to generate sustainable
positive absolute returns and offer broader investment flexibility than traditional fixed
income strategies. We believe investors can use the strategy in conjunction with, or as a
substitute for, traditional money market and fixed income solutions.
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Q: What are the key investment
focuses of the strategy?
A: The strategy will invest the
majority of its assets in high quality
investment grade bonds. It will
seek to diversify across sectors and
risk premiums such as credit,
interest rate, currency and
volatility. A core component of the
portfolio will be low-duration
investment grade securities (up to
5 years in maturity), such as
government, corporate and assetbacked bonds. This part of the
portfolio, carefully selected based
on PIMCO’s credit research
process, is designed to be the
backbone and a stable source of
income over time. In addition to
this core allocation, the portfolio
will employ PIMCO’s active alpha
generation strategies focused on
global interest rates, credit sectors,
currency and volatility strategies.
In terms of expected contribution,
high quality credit and global
interest rate exposures will provide
the bulk of the strategy’s returns
over time. The credit component of
the portfolio will comprise mainly
outright sector views (investing in
sectors we deem attractive) as well
as relative value (long/short)
strategies across sectors and
individual issues. The interest rate
component will also be managed
dynamically and have a relative
value tilt across various markets
and interest rate curves. On
average, we expect the strategy to
have a low positive duration
posture over time, which will be
February 2016 Strategy Spotlight
both a source of returns and a
diversifying anchor to credit risk in
the portfolio. Whilst there is
flexibility to invest in higher risk
sectors such as currencies, high
yield and emerging markets, the
strategy’s allocations to these types
of strategies will be modest and
opportunistic, given the primary
focus on capital preservation.
Q: How does this strategy differ
from other absolute return
oriented liquid strategies?
A: Based on a comparison of
return and risk objectives, the
Global Libor Plus Bond Strategy
fits between traditional money
market investments and the
category of so-called “liquid
alternative” or “unconstrained”
bond strategies.
Relative to traditional money
market strategies, it is managed to
a moderately higher risk and
return profile. As such, the strategy
invests across a wider range of
fixed income securities than
money market strategies. It may be
more exposed to risks such as
interest rates and credit; however,
the strategy will focus on providing
daily liquidity and preserving
capital over rolling annual periods,
features that are common with
traditional money market
strategies. In that sense, investors
may view the new strategy as
being one step out from money
market instruments on the risk
and return spectrum.
Conversely, the strategy has a more
moderate risk/return objective
than “liquid alternatives” or
“unconstrained bond” categories.
In practice, on average the Global
Libor Plus Strategy tilts toward the
higher quality part of global fixed
income markets. With a focus on
capital preservation, it is designed
to provide lower overall volatility
and a higher propensity to
withstand market shocks. The
similarity, of course, is that the
strategy will be managed
dynamically and flexibly and will
benefit from a global investment
opportunity set.
Q: What is the portfolio
management team’s expertise in
this particular strategy?
A: The strategy is managed by a
highly seasoned and proven team
of fixed income portfolio
managers: Marc Seidner, CIO for
non-traditional strategies and a
member of the Investment
Committee; Mike Amey, head of
sterling portfolios and a member
of the European Portfolio
Committee; and Mohit Mittal, a
senior portfolio manager for
investment grade credit, total
return and unconstrained bond
portfolios and a member of the
American Portfolio Committee.
Collectively, they have almost 60
years of investment experience.
February 2016 Strategy Spotlight
This wealth of experience gives the
team two key advantages. First, it
makes for a powerful combination
of global, sector and bottom-up
expertise. Being based in London,
New York and Newport Beach,
they provide a global perspective
to the strategy and the flexibility to
take advantage of investment
opportunities across a broad range
of fixed income markets. Second,
this breadth and experience is key
to portfolio construction in terms
of overall risk management, sizing
and scaling key investment
positions. Even if we get most of
our views correct, it is imperative
that we size our positions and
manage the overall risk of the
portfolio appropriately so the
strategy can potentially achieve its
dual objectives of absolute returns
and capital preservation over
rolling annual periods. Having
been through many market cycles
and macro regimes, the group is
particularly attuned to this integral
component of the strategy.
All of the managers contribute to
and benefit from the time-tested
PIMCO investment process and
participate regularly in the regional
and global investment committees.
In addition, there is ongoing daily
dialogue specific to this strategy
and a formal weekly call to discuss
market opportunities, portfolio
construction and positioning.
Q: As you look to 2016, what are
the expected investment
opportunities for this strategy?
A: In terms of portfolio
positioning, we expect to maintain
positive portfolio duration but
towards the lower end of the
permitted range. This view reflects
current tight valuations, potential
for some upward pressure in
U.S. and global interest rates on
expectations the Fed continues
to tighten monetary policy and
generally low term premia across
the interest rate curves in the U.S.
and other developed markets. We
find U.S. Treasury InflationProtected Securities (TIPS)
attractive because this segment
offers reasonable real yields
coupled with low inflation
expectations, despite strong
underlying U.S. core
inflation dynamics.
In a world of fair-to-expensive
interest rate valuations, the credit
risk premium looks reasonably
attractive. Outside of the energy
sectors, credit fundamentals are
solid. We see opportunities across
short-dated investment grade, high
yield and senior bank debt in the
U.S. and in bank capital in Europe.
As the year progresses, we will
stand ready to add to ex energy
credit risk to take advantage of any
periods of market weakness. On
currencies, we see the potential for
3
the U.S. dollar to continue to
appreciate, particularly versus a
basket of Asian emerging market
currencies. We expect further
policy divergence as the Fed
tightens, and we believe there is a
good probability that China’s
currency depreciates more than
forward markets have priced in.
Over the cyclical horizon, we
expect to maintain an overall
cautious stance on emerging
markets interest rate and credit
risk. However, we will look for
select opportunities and may
make modest opportunistic
allocations if we see any significant
market dislocations.
For professional use only.
Past performance is not a guarantee or a reliable indicator of future results.
RETURN TARGETS
Return targets are net of fees (institutional share class). The return target presented is current and may be subject
to change. The target is not a prediction or a projection of return and is based on a three year horizon. There can
be no assurance that the strategy will be successful in meeting its proposed target.
RISK
Investing in the bond market is subject to certain risks including market, interest-rate, issuer, credit, and inflation risk; investments
may be worth more or less than the original cost when redeemed.
The strategy may invest all of its assets in high-yield, lower-rated, securities which involve greater risk than higher-rated securities;
portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. 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. Income from municipal bonds may be subject to state and local taxes
and at times the alternative minimum tax. Mortgage and assetbacked securities may be sensitive to changes in interest rates, subject
to early repayment risk, and their value may fluctuate in response to the market’s perception of issuer creditworthiness; while
generally supported by some form of government or private guarantee there is no assurance that private guarantors will meet their
obligations. High-yield, lower-rated, securities involve greater risk than higher-rated securities; portfolios that invest in them may be
subject to greater levels of credit and liquidity risk than portfolios that do not. Equities may decline in value due to both real and
perceived general market, economic, and industry conditions. Credit default swap (CDS) is an over-the-counter (OTC) agreement
between two parties to transfer the credit exposure of fixed income securities; CDS is the most widely used credit derivative
instrument. Swaps are a type of privately negotiated derivative; there is no central exchange or market for swap transactions and
therefore they are less liquid than exchange-traded instruments. Derivatives may involve certain costs and risks such as liquidity,
interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Investing in
derivatives could lose more than the amount invested. Diversification does not insure against loss.
This presentation contains the current opinions of the manager and such opinions are subject to change without notice. This
presentation has been distributed for informational purposes only and should not be considered as investment advice or a
recommendation of any particular security, strategy or investment product.
Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this
presentation may be reproduced in any form, or referred to in any other publication, without express written permission.
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