Strategy Spotlight An Introduction to PIMCO’s GIS Low Duration Income Fund Seeking attractive income while keeping interest rate risk low.
Today, many fixed income investors are seeking attractive income as they reduce interest rate exposure in an environment of rising interest rates. To meet these needs, PIMCO has created the GIS Low Duration Income Fund. It aims to maintain structurally low interest rate sensitivity and, as the newest addition to PIMCO’s Income suite, it has a similar approach as PIMCO’s GIS Income Fund. Portfolio Manager Alfred Murata and Fixed Income Strategists Paul Reisz and Anmol Sinha explain the fund’s unique characteristics and how it may fit into an investment portfolio. Q: What is the PIMCO GIS Low Duration Income Fund? A: The PIMCO GIS Low Duration Income Fund seeks to deliver an attractive and consistent level of income; its secondary objective is to generate modest capital appreciation over a normal cycle. Given its flexibility and broad opportunity set, it can capitalize on PIMCO’s best income ideas across global fixed income markets and reflects PIMCO’s macro themes and extensive bottom-up research. The portfolio construction aims to have diversified sources of returns, rather than rely primarily on a single sector to generate returns. In addition, the fund’s zero-to-three-year duration band provides the opportunity to be potentially more resilient in rising rate environments. To maximize the probability of achieving these objectives, we have divided the portfolio into two larger components: one invested in higher-yielding assets, which we expect will perform well if economic growth is stronger than anticipated, and the other invested in higher-quality assets, which we expect will perform well if economic growth is weaker than anticipated. The resulting diversification enables the fund to seek net asset value (NAV) stability and longer-term capital appreciation while maintaining a low interest rate risk profile. Overall, the fund’s flexible guidelines and PIMCO’s resources allow us to focus on generating consistent income with an attractive risk-adjusted-return profile. Q: What are the similarities and differences between the PIMCO GIS Low Duration Income Fund and the PIMCO GIS Income Fund? A: With respect to similarities, both strategies have dual objectives of income generation and capital preservation, and both strategies aim to achieve these objectives by implementing PIMCO’s best ideas around the globe. With respect to differences, the PIMCO GIS Low Duration Income Fund will tend to have lower interest rate risk, lower credit risk, a lower distribution yield and the potential for less volatility than the PIMCO GIS Income Fund, given its lower duration band. While the PIMCO GIS Low Duration Income Fund employs the same investment philosophy and multi-sector approach as the PIMCO GIS Income Fund, it seeks opportunities primarily in shorter-maturity securities. Q: How does the PIMCO GIS Low Duration Income Fund differ from, and complement, PIMCO’s other shorter-duration strategies? A: The funds in our short-duration suite all aim to maintain low exposure to interest rate risk. Beyond that, the differences lie in their risk-return objectives (shown in the chart). Typically, low duration strategies tend to follow a benchmark or sector-oriented approach. The PIMCO GIS Low Duration Income Fund is a benchmark agnostic strategy, in keeping with the investment philosophy of PIMCO’s broader income suite, and thus can employ greater flexibility to capture attractive income opportunities and help mitigate potential volatility. The PIMCO GIS Low Duration Income Fund aims to provide attractive and consistent income, and can take on more credit risk than our short-term and low duration strategies in an effort to achieve this. The fund can be a good complement to core bond-oriented strategies, like the PIMCO GIS Low Average Duration Fund, as it adds a yield focus with a little more credit exposure while still maintaining structurally low interest rate risk. Q: What role may the PIMCO GIS Low Duration Income Fund play in a portfolio? A: The PIMCO GIS Low Duration Income Fund may be an attractive solution for investors with several different goals. First, it could be a fit for investors who are looking for attractive yield but want to reduce interest rate risk, perhaps in anticipation of rising rates. Similarly, investors who are comfortable with a potentially lower return profile than the PIMCO GIS Income Fund – and therefore a slightly lower risk profile – could find the fund attractive. The PIMCO GIS Low Duration Income Fund could also be a solution for those currently invested in traditional shorter-duration strategies but who seek additional yield. In a low-return world, the emphasis on attractive and competitive income with low interest rate risk can be particularly compelling. In addition, the PIMCO GIS Low Duration Income Fund has the potential to be a diversifier to other offerings in the short duration space (including those that emphasize short duration credit) due to its global opportunity set, flexibility and focus on risk management. Q: How are you positioning the PIMCO GIS Low Duration Income Fund for the current environment? A: Given our outlook for continued solid global growth this year and the ongoing removal of accommodative monetary policy by global central banks, we are cautious on interest rate risk. As a result, we are keeping duration towards the lower end of the range, between one and two years. Within all of our income strategies, we try to achieve two goals: generate an attractive, consistent income stream and maintain stability in the NAV of the portfolio. The portfolio construction and balance of assets across higher-yielding and higher-quality assets help meet the objectives. Currently, the more return-seeking component of the Low Duration Income portfolio – which we think will generate attractive income if economic growth is stronger than expected – includes U.S. non-agency mortgage-backed securities, which are bonds backed by residential mortgages that do not have any type of government guarantee. This reflects our view for a continued recovery in the U.S. housing market. For the more defensive component of the portfolio, we like high-quality sovereign exposure in countries like the U.S. and Australia to provide income as well as downside protection. We also make tactical allocations as we see opportunities arise, and we believe flexibility is key in today’s market environment. Overall, we aim to diversify the PIMCO GIS Low Duration Income Fund across many fixed income sectors and geographies.
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