And again, by doing some of that, investors can quickly get their yield level up into the mid-single digits, which from a historical perspective, once again is looking increasingly attractive.
FTA: The bonds market has seen big outflows as well as value drops, but some say ‘every downturn provides opportunity’. Where do you see opportunities in the market right now?
Pimco: As mentioned previously, we see several opportunities in the market after volatility and uncertainty drove the second quarter sell-off.
Early in the year and into the second quarter, investors focused on inflation and US Federal Reserve policy.
As the quarter progressed, though, their concerns migrated to the impact of policy tightening and geopolitics on economic growth and credit sector performance – concerns that persist today.
The market’s dramatic repricing, however, in our view presents better long-term opportunities for active investors than we have seen in years. Yields have risen meaningfully, spreads have widened and carry has increased, providing a potentially powerful source of return.
FTA: How have you responded to those opportunities within your GIS Income Fund?
Pimco: We are targeting higher-quality assets with spreads that have widened in sympathy with more credit-sensitive assets.
The recent sell-off opened an opportunity to add back credit risk in the front end of the yield curve, though we remain a bit defensive relative to our historical norm. We are also taking advantage of higher rates to gradually add a little interest rate exposure to the strategy.
We believe the result is a portfolio differentiated from other income-oriented strategies that tend to focus on more significant-sized exposure to the US corporate credit market – a differentiation which we believe should lead to a better portfolio.
FTA: What are the most exciting areas of the market for your fund right now?
Pimco: The market’s repricing makes us very optimistic about the income-generating ability of the GIS Income Fund over the next few years.
Yet it may be a bumpy journey, with ongoing bouts of volatility and a potential economic downturn. Our portfolio positioning reflects this.
We've continued to focus on cash flow seniority and add-in resilient sectors like agency mortgages, structured products and higher-quality banks, as well as a variety of macro-oriented relative value strategies.
Relative to many passive alternatives, we have less exposure to more economically sensitive areas of the market, like lower-rated corporate credit risk, where we think underwriting standards have weakened.
