PIMCO’s credit strategy focuses on adding value through a disciplined approach to credit selection combined with top-down macroeconomic forecasts for region and sector rotation. PIMCO’s philosophy and approach to global credit markets is consistent with our conservative, yet innovative, approach toward fixed income markets.
Specifically, the philosophy for investing in corporate and sovereign credit markets embodies three key principles:
1) Major shifts in portfolio strategy are driven by longer-term or secular trends as opposed to short-term aberrations in market conditions
2) An emphasis is placed on adding value through combining bottom-up fundamental credit research with top-down macroeconomic analysis
3) Consistent investment performance is pursued by emphasizing independent research and prudent diversification with respect to industries and issuers. The strategy is managed in the context of the PIMCO outlook for the global economy and markets, but investment decisions and value-added opportunities come primarily from traditional bottom-up credit analysis.
Credit ResearchPIMCO’s experienced team of credit analysts, located around the globe, is responsible for evaluating corporate credit. We place a great deal of importance on independent analysis when evaluating corporate credits. We never rely on rating agencies alone. Our staff of seasoned credit analysts rates every credit that we hold. Our research is focused on issues with improving credit profiles and prospects for rating upgrades and, therefore, greater capital appreciation potential. A prerequisite to our evaluating an issuer is access to management. We concentrate on issuers with strong underlying businesses and competitive positions.
Our credit research framework focuses on business and financial risk at the issuer level, as well as security specific risk with the structure of the issue. With respect to business risk, we evaluate the overall industry dynamics, the company’s competitive position within the industry, the quality of the business plan and the quality of management and their ability to execute on the business plan. In terms of financial risk, we evaluate a variety of financial ratios measuring leverage, cash flow, interest coverage and liquidity.Default and spread widening risk are the dominant potential risks in purchasing corporate debt securities. Our focus on higher quality corporates, combined with our comprehensive evaluation of credits, both at purchase and on an ongoing basis, reduces the risk of downgrade or default.
There are four common criteria that each analyst will focus on: 1) business model 2) cash flow 3) balance sheet, and 4) security structure. The specific metrics and financial ratios will vary based on the industry and as a result the format of reporting the analysis will also vary. In addition, emphasis on the four factors listed above will also depend on the industry, however the general criteria applied to the analysis is consistent across our Global Credit Research team.
In addition to PIMCO’s disciplined approach to fundamental credit research, extensive analytical tools are used to measure and monitor the risk characteristics of the portfolio. PIMCO has invested considerable resources in developing proprietary models and analytical tools that enable a robust approach to risk management. These tools are important in managing credit strategies as their flexibility facilitates analysis at the regional, sector and security level. These models include our Bonds Under Management report, which provides an extensive summary of portfolio holdings and portfolio-level risk characteristics. Additionally, the PIMCO Position Blotter system provides risk and portfolio structure information, allowing for the aggregation of detailed security-level information into a variety of risk matrices including sector and issuer exposure by quality and duration bucket.
Extensive use of analytical tools allows us to maximize the value of our investment professionals and provides a dispassionate check on our investment decisions. These systems also augment our understanding of the strategies that have consistently added value to our clients’ portfolios.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. PIMCO Canada Corp., 199 Bay Street, Suite 2050, Commerce Court Station, P.O. Box 363, Toronto, ON, M5L 1G2, 416-368-3350. ©2017, PIMCO.
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