Webinar: Reading bond markets with PIMCO - a $2 trillion heavyweight
Endowus Insights

Webinar: Reading bond markets with PIMCO - a $2 trillion heavyweight

January 14, 2021

In our very first Endowus Access series, Sam Rhee hosted Stephen Chang, executive vice president and portfolio manager in the Hong Kong office, managing Asia portfolios and developing PIMCO's business in this space.

Through Endowus Access, you can gain insights directly from the senior portfolio managers from the largest global and local fund companies. Learn about investment outlooks, market views, and institutional frameworks from the best in the industry.

0:00 Introductions

9:40 Brief on Endowus Fund Smart

13:00 Introduction about PIMCO, investment process

23:45 How PIMCO manage Asia Credit portfolios

28:57 PIMCO's Market outlook and views on market disruptions

33:52 PIMCO's views on monetary policy and low interest rates

39:12 PIMCO's views on Asia Fixed Income Markets

44:09 QnA

Excerpts from the Webinar:

How does PIMCO manage its bond portfolio during the liquidity crunch during March and April 2020, and how did the bond funds do during the financial crisis? (44:09)

Stephen: We prepared our portfolios for these liquidity crunch even prior to the crisis. This is part of our risk management process. We have prepared a cash cushion for our portfolio investments, which can be converted into cash quickly to help withstand this volatility.

How this played out was that in February , the spreads for fixed income product started to rise. The CoVID-19 crisis also led to a disruption in how the markets work - traders and portfolio managers start to work from home, lower liquidity in the markets, people not going to the trade floor, and trading inventory and positions being cut.

The Investment Committee decided to increase the true cash level of the portfolios to allow for smoother redemptions for clients. Our priority was to handle the volume and scale of transactions from our clients efficiently. We also wanted to maximise our scale and size of PIMCO as the biggest fixed income fund manager to get the best transaction.

On how fixed income fund managers benefit from scale (49:42)

Sam: Scale is important in the fixed income markets investing. Being at the scale that PIMCO is helps drive a lot of advantages around trade execution and flexibility. Investors get it the wrong way round: in equity investing the bigger you are, the more difficult it is to generate alpha for investment, while in fixed income investing, the smaller you are, the more difficult it is to generate alpha. There is no diminishing marginal returns of scale for fixed income investing.

The fixed income market is also much larger than the equities markets.

How active fixed income fund works better than indexed fixed income funds (52:45)

Sam: For fixed income investing, it is possible to have a more opportunistic approach to investing and still be able to get higher return consistently. This is unlike equities investing, where traditionally active fund managers have done poorly relative to passive fund manager.

Stephan: For fixed income investing, you are getting your returns coupon as well as a change in credit rating of the company. As an investor and a fund manager, we want to avoid the bottom 20-30% of companies within the investable universe that are likely to be unable to pay for the coupons. For equities, if you are not able to identify the top 5% performers well, you are likely to trail index returns by a lot.

Given the inflated prices of fixed income products due to Central Bank policies, is this asset class still a good hedge against stock market volatility? (54:28)

Stephen: For bonds they are trading at pretty low levels, we have realised that zero interest rates may not be the lower bounds in some countries. Ultimately rates depends largely on how monetary policies are executed. Many years ago people thought that Japanese bonds at 3% yields were very long, but this went to zero. On an absolute basis, yield may seems low now, but it can get even lower.

At Asia we see that higher real yield is being offered for fixed income. The china market is one that we are looking at closely, the yield is relatively high compared to other markets. We identify this type of asymmetry and take positions into our portfolio.

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