The challenges of higher interest rates and inflation prompted investors to look for new sources of income and diversification. Bonds are one of them. But as we know, different bonds react differently to rising interest rates. Furthermore, investment grade, high-yield and emerging market bonds are considered to be less sensitive to interest rates than government bonds, so their price return is better in a rising rate environment. They usually have higher yields, and their total return is also better. Another factor influencing bond returns is duration, or sensitivity to interest rate changes, with prices of bonds with lower coupons and longer to maturity being more impacted by rises and falls in interest rates.
Given the diverse and complex nature of this asset class, highly skilled active managers with deep resources such as PIMCO are better suited to navigate this space. As you know, active strategies have the potential to outperform the market, using flexible approaches for selecting high-quality bonds and setting sector weights.
PIMCO Global Investment Grade Credit Fund
The investment objective of the PIMCO Global Investment Grade Credit fund is to maximise total return, consistent with preservation of capital and prudent investment management. It focuses on the higher-quality end of the bond market and invests at least two-thirds of its assets in a diversified portfolio of investment grade corporate fixed Income. The fund is actively managed aiming to outperform the Barclays Global Aggregate Corporate Index.
This fund has been managed by Mark Kiesel since launch in 2008. Kiesel is a CIO Global Credit and head of the firm’s global corporate bond portfolio managers. He is supported by Mohit Mittal and Jelle Brons who were named as a co-managers in October 2016.
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Macroeconomic analysis is at the heart of PIMCO’s investment process, and the top-down positioning is determined by PIMCO's Investment Committee. As a member of the committee, Kiesel helps formulate the top-down themes that show up in the portfolio's interest-rate positioning and sector weights. This is supplemented by detailed regional and issuer analysis conducted by the large credit analyst team, which is one of the largest and experienced teams of research analysts in the market today. The final portfolio is well diversified across a wide range of bonds and the manager makes significant use of credit default swaps in building this portfolio.
What does the fund invest in?
The portfolio includes more than 1,400 bonds, varied by geography, credit rating and duration. By holding a good spread and selecting individual bonds carefully, the managers have achieved consistent performance with below average volatility. In addition, the portfolio is paying a good level of income with a current yield of 4.5%.
Portfolio duration is broadly in line with the market - effective duration is currently just over six years against the Barclays Global Aggregate Corporate Index of 5.7 years and may vary within two years of the benchmark.
While the strategy focuses on investment grade corporate bonds, it may tactically invest up to 15% of assets in below-investment grade issues in areas such as high yield and emerging markets bonds.
At the end of October, over 90% of the portfolio is invested in investment grade bonds, with 28.4% in AAA – rated and over 40% in BBB-rated bonds. Geographically, the fund's largest exposures are to the US, accounting for around 70% of the portfolio.
At sector level, allocation is over 18% allocation to banks where the managers favour the senior debt of large national champion banks, which are well positioned following more than a decade of restructuring, de-risking and de-leveraging. The portfolio is positioned for a rebound in tourism with a focus on so-called fun sectors such as airlines, hotels, gaming, vacation rental property, theme parks and concert venues.
How has the fund performed?
Despite the challenging recent years, the fund is positioned to achieve consistent performance with an attractive level of income over the long term.
The managers are optimistic about the outlook for corporate bond markets. Per the managers, “yields are back to their highest levels since the global financial crisis, investors have an opportunity to potentially earn near-equity-like returns in high-quality corporate bonds, which have historically had one-third to half the volatility of equities”.
Given that not all countries are at the same stage of the cycle in terms of growth and inflation, there is significant global differentiation by sector and industry, which gives the managers more confidence in applying their active management approach in global credit markets.
|01/11/2022 - 31/10/2023
|01/11/2021 - 31/10/2022
|01/11/2020 - 31/10/2021
|01/11/2019 - 31/10/2020
|01/11/2018 - 31/10/2019
|PIMCO GIS Global Investment Grade Credit Fund
|Bloomberg Global Aggregate Credit Total Return Index
|Morningstar Global Corporate Bond Category
Source: Morningstar as at 31st October 2023. Total Return in GBP. Past performance is not a guide to future performance.
Why do we recommend this fund?
The fund features in the ii Super 60 list of high-conviction funds as a Global Bonds Income recommendation.
This fund offers diversification benefits and greater income potential from a broad portfolio of investment grade corporate bonds, while seeking to retain many of the defensive features of government bonds. PIMCO is one of the largest bond managers in the world with deep resources allowing for high-quality research and access to all areas of the market. The fund manager holds an excellent performance track record and together with a highly competitive ongoing charge of 0.49% makes this fund a strong choice as a core fixed-income holding in a well-diversified portfolio.
Please find the factsheet here.
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