Endowus and PIMCO, one of our key fund management partners, discuss an overview of the global macroeconomic environment and credit markets, as well as updates on the PIMCO funds in the Endowus portfolios.
2:30 Introduction to Endowus
11:18 Introduction to PIMCO
19:30 Economic Outlook by PIMCO
25:39 Brief on PIMCO funds
53.56 Opportunities in emerging markets
Extracted QnA answered by our PIMCO guests speakers
Q: The equity markets have rebounded sharply. Has the Fed central banks policies removed bulk of the risks associated with the Fixed Income markets?
PIMCO: We agree that there is a sharp rebound in the equities market but we observe that the fixed income market has seen price rebound. We believe there is more opportunities in fixed incomes. Bond spread is still at the wide relative to pre-crisis drawdown. The Fed has supported high quality corporate and investment grade bond prices by purchasing of bonds, but for high yield there is an opportunity and risk because the Fed has not supported those.
Q: What are PIMCO's view on impact of negative interest rates, inflation and the strength of USD moving forward?
PIMCO: We feel that the Fed will not drive interest rate to the negative rates level because negative interest rates are not proven to work in supporting the economy. The Fed has shown that they have other instruments to support the economy.
We think that we would be in a deflationary environment without the monetary policies and quantitative easing policies due to the supply and demand shock. Consumer and industrial production has been disrupted greatly by the current crisis. Hence inflation is not a key concern now.
We also do not have a strong view of any currency relative to USD. We believe the FX movements have a huge impact on the returns on the fund, so we take minimal FX positions in our funds.
Q: Why does PIMCO espouse active investing over passive investing for fixed income?
PIMCO: Fixed income indices make less sense because weightage in indexes are often done based on the market value of the equities or debt raised – in fixed income this is counter-intuitive because we are effectively lending more money to companies or entities that are more indebted, and less money to companies or entities that are less indebted.
Passive bond funds also have their investment mandates around ratings agencies and there are many companies that are borderline cases that should or should not be owned. Having an active view on that and over and underweighing on certain companies can bring in additional returns.
There may also be mispricing of bonds issued by the same company and entity, despite having similar credit risk. This could be due to passive bond investment mandates. The ability to negotiate with the companies for better deals with the bond issuing companies also help to us outperform.
We also are not forced to sell or buy bonds when index composition changes – that helps us keep costs low and outperform.