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 The U.S. fixed-income house, which until recently managed the
world's largest bond fund, has cut the duration of its portfolio by
half in the past year, sought assets across geographies, and gone
for bonds that will prove resilient if economic conditions
deteriorate.
Duration is the weighted-average maturity of a bond after taking
into account all its cash flows.
Michael Thompson, Pimco's Singapore-based executive vice-president,
told Reuters that Pimco's Income Fund <PONPX.O> invested in
Australian bonds for their appealing yields - despite the risk posed
by the currency.
"You get the high quality, the room for appreciation and the yield,"
Thompson said.
California-based Pimco, full name Pacific Investment Management Co,
had assets $9.4 billion under management in the Income Fund at
end-April.
Pimco Total Return Fund <PRFAX.O> , which was launched by legendary
fund manager Bill Gross, lost its title as the world's biggest bond
mutual fund last month following two years of sustained withdrawals.
It had assets of $107.3 billion at the end of May. Gross left Pimco
last year.
Pimco believes that it pays to take on some interest rate risk in
the current low-yielding but uncertain environment, in which global
markets are on tenterhooks waiting for the U.S. Federal Reserve to
start raising its rates. Meanwhile, major central banks such as
those of the euro zone, China and Japan are still pursuing their own
unique forms of quantitative policy easing.
"When expectations are for increases in interest rates to be
moderate and well-telegraphed and there is broad agreement about
what the forward curve should be, then you want to have low rather
than no duration in your portfolio," said Thompson.
Conservative investors would normally avoid duration risk by going
for shorter tenor bonds in a rising rate environment, but that
strategy also implies lower returns.
Pimco recommends holding a moderate amount of duration risk, given
there is fair amount of consensus about the trajectory for yields.
Current duration on its Income Fund is 2.4 years.
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Emerging markets comprise 35 percent of Pimco Income Fund , with
another 27 percent allocated to the mortgage sector.
Pimco product manager Paul Reisz said the fund was also holding
short-duration Japanese government bills which, though low-yielding,
offered a good return when swapped into dollars.
"When you hedge them back to the U.S. dollar, you can pick up an
additional 20 to 40 basis points," said Reisz.
The best opportunities for interest income, such as mortgage backed
securities or lower-rated bonds issued by banks, were outside Asia.
Yet the bond fund is positive on Asian corporate debt because yields
in that asset class have been less compressed during the past few
years of quantitative easing.
Pimco is however selective in India and Indonesia because bonds
there have mostly priced in the optimism over growth and reforms
promised by new governments.
It is underweight Thailand and Malaysia's local debt, believing
neither market adequately compensates investors for the risks they
face from low oil prices and sagging growth momentum.
(Editing by Eric Meijer)
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