Fixed income is proving to be increasingly attractive to investors, but with so many fixed income solutions on the market, how do you choose the right asset manager for your clients’ portfolios? IFA Magazine Editor, Sue Whitbread, recently caught up with PIMCO‘s Ryan Blute and Terry Oh to get their views on the current market conditions and found them both in a positive mood.
PIMCO is one of the world’s premier fixed income managers, a global leader in active fixed income and a familiar name to advisers. The team at PIMCO has considerable expertise across public and private markets. Their fixed income investment process has also been tested in virtually every market environment, so we thought a conversation with Ryan and Terry was timely to gauge their views on finding value in the sector.
IFA Magazine: Where are you currently seeing the strongest opportunities in fixed income?
Ryan Blute: “We are seeing many exciting opportunities in fixed income at the moment, yields are much more interesting again.
“Financial advisers and their clients have become accustomed to a decade of very low yields. People were earning zero on their deposit accounts and close to zero on their fixed income portfolio. The situation has completely changed in the last 12-18 months.
“Currently, just from an absolute level, you can invest in a diversified bond portfolio that yields 7%. Even gilts are more interesting again. That’s one of the key changes makes us excited about the opportunities ahead in fixed income.
“When rates were very low, you lost a little of the diversification benefits that people look for in fixed income. As an example, if a typical investor might hold 70% in equities and 30% in fixed income, the hope would be that when equities decline in value, your bond portfolio will rise and so you get the protection and the diversification benefit.
“However, when rate were so close to zero, you lost some of that. We saw this happen in 2022, with some painful losses in both the bond market as well as equity markets. Where we are today and looking forward, the good news is that with government bond yields much higher and a diversified bond portfolio yielding even more than that, you get that diversification benefit.
“Within the bond market, which I’d describe as a huge ‘supermarket’ of opportunities as it’s far bigger than all the equity markets combined, we are focusing now on trying to stay a little bit higher in quality as you don’t need to stretch too much to potentially earn a decent return.
“One of the areas of interest for us at the moment is triple-A rated mortgages. These are more US orientated but offer real opportunities. They are government guaranteed mortgages – triple A rated – which are yielding more than they’ve yielded since before the financial crisis. We’ve identified this as a great opportunity where you basically have no credit risk and a yield that’s better than you’ve seen in more than 15 years. This theme is reflected in general PIMCO portfolios at present.
“Then, even within corporate bonds, which are traditionally a big piece of your average UK investor’s portfolio, you can stick to single A-rated, slightly defensive sectors like telecoms, utilities, healthcare or even banks and get a decent yield without taking on much credit risk, downgrade risk or default risk..”
“Another interesting opportunity that we’ve acted upon is inflation protection, which is still fairly cheap. We’re not saying go all in on this but you’re trying to build a diversified portfolio, and if you want to buy inflation-protected securities, you’re not paying a huge premium for that inflation protection today. The market still believes that central banks are going to get inflation down towards their target and then inflation will get back to a level that we’ve been accustomed to for quite some time.
“This is all somewhat counterintuitive. To use an analogy, when you make a claim on your house insurance, the price for your insurance will go up. However, in this case, we’ve had a period of very high inflation but nonetheless, it still is fairly cheap to buy that insurance against inflation surprises in the future. If you look at lots of PIMCO bond portfolios, we do have some modest exposure to such inflation-linked securities given the opportunities we think they present.
“These are just some of the areas where we’re seeing value for us as investors.”
IFA Magazine: How do you gauge the relative value of fixed income today in comparison with equity valuations and typical asset allocation weightings in advisers’ client portfolios?
Ryan Blute: “A typical advisers’ client portfolio is likely to be heavily tilted towards equities. That’s been an effective asset allocation strategy since the financial crisis, you could say it’s been a winning trade.
“But, as an investor, you’re not looking in the rear-view mirror. You’re trying to look ahead. Let’s look at the two axes for investing, of risk and return. In bond markets, the risk typically implies a volatility of 5 to 6% let’s say. In equities, it’s typically 15 to 20% – much higher.
“On the ‘return’ axis, people investing in equities might generally hope to achieve a 7 to 9% annual return over the long term. However, you can currently buy a bond portfolio that yields 7%. The clear benefit here is that you’ve got a 7% return opportunity in fixed income with a half to a third of the expected volatility that you’d get from equities.
“That’s why I think that if you’re advising a client who’s made good returns on their investments over the last 10 to 15 years in equities, it’s a cheap time to take risk off the table. You can shift some exposure out of equities into fixed income whilst dialling down the overall level of volatility. At the same time, you’re not really giving up much in terms of the expected return.
“That’s why on a relative value basis, fixed income hasn’t looked as good as this in a long time.
Terry Oh: Adding to what Ryan just said, in a lot of UK wealth portfolios, we’ve seen volatility in fixed income too – 2022 was a notable example. However, the volatility levels and risks in fixed interest are very different from equities. If an investor invests in a company stock, there is no guarantee that they will get their money back. Should that company’s earnings fall, there would be serious consequences for the value of those shares. However, investing in a bond such as those Ryan was talking about, with little credit risk, as long as the company or the government doesn’t actually go bankrupt, and you hold the security until redemption, you know you will get your money back. It’s a very different psychology and scenario.”
IFA Magazine: Which areas would you highlight where you believe PIMCO offers particularly attractive best-of-breed options within fixed income solutions?
Terry Oh: “As a firm, PIMCO has largely pioneered active management of fixed income. PIMCO was one of the very early entries in that space in the early seventies. Any solution that is actively managed in fixed income, we tend to have some pretty good best-of-breed options available.
If you look at PIMCO’s performance and track record, there are many areas where we have established successful strategies.
“One clear example here is in strategic bonds, where PIMCO’s GIS Income Fund, which is benchmark agnostic, income oriented and has a very flexible global strategy, is managed by our Group CIO, Dan Ivascyn.
“If we look at the top ten funds within the Strategic Bond universe here in the UK, nine out of those top ten posted negative returns over the past three years. PIMCO’s GIS Income Fund managed to earn a fairly modest, but still positive return over that three-year period. That’s a real best-of-breed option – it’s a popular fund capable of delivering a resilient income for clients.”
“Emerging markets is another area where PIMCO really benefits from our strong global resources and our team structure. It’s a considerable advantage for us that we have boots on the ground in so many regions across the world, including in emerging markets. Such resources would be difficult for smaller, boutique firms to be able to do successfully but really make a difference.
“The final area for us is alternatives. Even though many IFAs are not able to move away from daily dealing funds, PIMCO has been investing a lot in areas that are very close to our traditional investment expertise. Those areas have been very popular with clients and we’ve been able to deliver strong returns in that space as well.”
IFA Magazine: How much benefit do you feel that PIMCO has here in the UK from being part of a large global organisation with broad exposure to markets, the history and experience that goes with it?
Terry Oh: “What we’ve seen over the years is that every basis point of alpha has become harder and harder to come by. You’ve really got to fight for it. I believe that as an investment manager, you have a great fighting chance of successful outcomes if you really are well resourced and global. Areas such as credit research, trading technology and infrastructure, do matter when it comes to fixed income.
It is my belief that UK clients can benefit significantly from PIMCO’s global footprint and the various resources that we have as a large manager in active fixed income.
“Firstly, we can genuinely offer a diversified return stream. When we consider what happened with the LDI crisis in the UK last year for example, for those who were more of a ‘gilts plus’ type manager operating in the UK, it was very hard to avoid the volatility and some of the heartaches around that time. For PIMCO’s diversified strategies, it was a much easier period for us to navigate because we can really pivot across by using our global remit.
“It also means that because PIMCO has a large, well-resourced global team, backed up by infrastructure and technology, all of those things help our investors, in a meaningful way, over time.
“Finally, PIMCO’s size and scale, as well as our global presence, really gives us a unique capability to source opportunities that other managers don’t have access to.
It’s a bit like buying a house, for example, where you can go on a website and see what’s available to the whole market. But there will be a lot of houses that are off market that you don’t even see or hear about it, unless you have a relationship with the estate agent.
“I would say it’s similar in fixed interest investment. There are opportunities that are only possible because we’re a very large lender that’s been working with governments, corporates, and other issuers over the past five-plus decades. We know them extremely well. We can go to them rather than them going to the market. Thus, we can benefit from all these high-level opportunities that other investors just wouldn’t have access to.
“This is just one example. Others could be that because of our size and experience, we get access to opportunities in areas such as corporate restructurings, bankruptcies or other restructures, which mean that we might have a seat on the steering committee and can really influence outcomes for investors. It’s yet another tangible example of how our size and scale can make a positive difference.”
IFA Magazine: How important is the strength, depth and quality within your research teams?
Ryan Blute: It’s hugely important. It’s likely that for a lot of UK investors, if they buy a UK Strategic Bond or Corporate Bond Fund then a big chunk of the underlying holdings will be international in nature. By definition, even if an adviser is looking to use a UK portfolio, you need to make sure your manager has people in these other countries who can talk to the borrowers wherever they’re based and get all the relevant information needed first hand. That’s where I believe the strength and depth of PIMCO’s credit research team is a real asset. We have over 80 people around the world, who are meeting up, in person, with the CEOs and CFOs of those companies looking to borrow. This allows us the opportunity to strive for a better yield, better protection etc. for our client. They are a critical piece of the puzzle.
“Moreover, PIMCO has a large team based in the UK with more than 500 employees including 234 investment professionals. This represents a major strength and one which we hope will resonate with advisers and wealth managers who are seeking a manager in whom they can have confidence to deliver for their clients for the long term by actively investing across public and private markets.”
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About Ryan Blute, Head of Global Wealth Management, Europe:
Mr Blute is a managing director and head of PIMCO’s global wealth management business in EMEA. Previously, he served as both the head of PIMCO’s Munich office and as the head of the firm’s product strategy group in EMEA. He is a founding member and head of PIMCO PRIDE across the region. Mr. Blute joined PIMCO in 2000 as an institutional account manager at the firm’s headquarters in Newport Beach. He holds an MBA from the University of Chicago Booth School of Business and an undergraduate degree from the University of Arizona. He also holds the certified public accountant designation.
About Terry Oh, Head of Global Wealth Management, UK:
Mr. Oh is an executive vice president and head of PIMCO’s global wealth management business in the U.K. Previously at PIMCO, he has worked closely with sovereign wealth funds (SWFs) and other institutional investors in EMEA, as well as multinational banks. Prior to joining PIMCO in 2011, he was an associate at TradeRisks, a corporate finance firm providing independent advice, financing, and risk management solutions. He has 13 years of investment experience and holds a master’s degree in finance from the London Business School and an undergraduate degree from the University of Oxford. He is also a CFA charterholder.
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