Strategy Spotlight

PIMCO Target Maturity Emerging Markets Strategy: Offering Attractive Yield, but With Lower Duration and Limited Downside Risk

The strategy seeks to “lock in” potentially attractive levels of yield by selectively investing in a short-dated, diversified portfolio of hard currency-denominated emerging market debt.

We recently launched the PIMCO Target Maturity Emerging Markets Strategy, a broadly diversified, hard-currency-denominated emerging market bond strategy that aims to deliver an attractive return in a more predictable and less volatile path than more traditional benchmark-oriented emerging market solutions.

In the following interview, portfolio manager Francesc Balcells and product manager Olga Serhiyevich discuss the benefits of a target maturity emerging markets strategy and how it differs from more traditional emerging market debt solutions.

Q: What is PIMCO’s Target Maturity Emerging Markets Strategy?
Serhiyevich: This new strategy offers investors the opportunity to allocate to an emerging market debt portfolio with a fixed maturity, consisting of select issues of hard-currency-denominated sovereign, quasi-sovereign and corporate bonds. The strategy aims to provide exposure to potentially attractive yield levels, but without emerging market currency risk and with lower volatility and reduced interest rate sensitivity, by investing in fixed income securities with a relatively short duration. The strategy is based on a bottom-up investment approach emphasising PIMCO’s credit selection process and analytical capabilities in managing target maturity strategies.

Due to its structure, the strategy may potentially provide investors with a more predictable rate of return compared to more traditional benchmark-oriented emerging market debt strategies.

Q: How does the strategy align with PIMCO’s secular outlook for emerging markets?
Balcells: Despite some interest rate normalisation in the US, we expect the current low-yielding environment to persist in most of the developed world as central banks are confronted with the headwinds of low growth, high leverage and deteriorating demographics.

In this low growth environment, emerging markets can remain attractive due to potentially higher returns and generally better fundamentals creating a good backdrop for carry-generating assets, such as emerging market corporate, sovereign and quasi-sovereign debt.

Q: How does this strategy differ from PIMCO’s other emerging market strategies?
Balcells: Similar to PIMCO’s other emerging market external strategies, the Target Maturity Emerging Markets Strategy combines both our bottom-up credit selection process and our top-down views on this asset class.

However, as it primarily invests in bonds with three- to five-year maturities, the strategy has less duration exposure than other emerging market debt strategies and will have a structurally lower volatility. By limiting the investment universe to a certain maturity bucket and avoiding riskier securities, investors may give up some of the potential upside; however, at the same time, they may also benefit from greater protection against downside risks.

Finally, as the strategy is managed to deliver a target yield, it also seeks to minimise transaction costs and to avoid defaults.

Q: Can you speak to the strategy’s portfolio construction and security selection process?
Balcells: The goal of the portfolio is to maximise total return with a prudent level of risk, so we hand pick all the bonds we will be comfortable holding for the life of the strategy. We start with the broader investable fixed income universe that includes all emerging market hard-currency-denominated debt with maturities around the maturity date of the strategy, and then select those issuers who have been vetted by our research team as likely to have a reasonably stable credit profile for the duration of the strategy. Once we have made our selection, we go through multiple iterations of analysis to ensure that the portfolio is well-diversified across issuer types, regions, countries, sectors and companies. Guided by the portfolio’s construction constraints, the resulting portfolio incorporates our sovereign views and PIMCO’s best ideas in corporate, quasi-sovereign and sovereign sectors.

Q: How do you manage the risks embedded in a target maturity strategy?
Balcells: The starting framework for this strategy is a buy-and-hold approach. As such, managing a successful target maturity portfolio in the emerging market debt sector requires us to select corporate, quasi-sovereign and sovereign credits that exhibit strong fundamentals and whose profiles the manager understands well. Because credit quality deterioration, credit defaults or early repayments may pose significant risks to the final asset value of the portfolio, we undertake rigorous research of every holding.

Our global investment team of more than 60 credit research analysts and more than 20 emerging market portfolio managers give us the ability to perform independent, bottom-up analysis of credit profiles for issuers in which we invest. Such deep analysis is complemented by our ongoing local dialogue with issuers’ management teams and continuous monitoring to help us properly assess the risks of investing.

By its very nature, a pure yield-to-maturity estimation, which buy-and-hold portfolios use as guidance for portfolio construction, is not a perfect predictor for managing such a portfolio effectively. Limited availability of assets with set maturity dates, early repayments, transaction costs from inflows and outflows and coupon reinvestments are some of the examples of risks we need to be able to properly incorporate in managing the strategy.

As such, we have developed additional proprietary analytics that assess multiple scenarios of spread and curve movements to ensure the strategy delivers its target yield under almost any market conditions.

Q: What are the advantages of investing in PIMCO’s Target Maturity Emerging Markets Strategy?
Serhiyevich: In the environment of lower than historically expected yields, investors continue to be drawn to emerging markets because they offer a yield advantage with a generally better quality of fundamentals. Cognisant that some investors are worried about the volatility of the asset class given the potential for unpredictable market developments, currency movements and interest rate sensitivity, we designed a solution to minimise these risks by focusing on shorter-dated assets and investing in hard-currency-denominated debt. The key advantage of the target maturity structure is that it delivers a predictable return over the set investment horizon, in this case four years. While interim market volatility is certainly something to expect, investors who are prepared to hold the strategy to maturity can expect to realise the return approximated by the initial average yield of the portfolio.

Since the composition of the strategy is a result of the investment team’s bottom-up selection of emerging market credits we prefer across multiple sectors, unhindered by the constraints of a traditional benchmark, interim volatility of the solution will likely be almost half that of traditional emerging market strategies.

Q: Why launch such a strategy now?
Serhiyevich: Across emerging markets, yields are at attractive levels both on an absolute and relative basis. At the same time, some of the recent headline-generating risks are subsiding and we are well-through a very busy emerging market elections calendar – such as Brazil – in 2014, a contributing factor that has kept spreads and yields elevated. So there are plenty of attractive opportunities in emerging market debt. From a quality perspective, we will be comfortable selectively allocating to credit issuers that exhibit low default and credit deterioration risks for an extended period of time while we receive a relatively high compensation for holding such risk.


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Past performance is not a guarantee or reliable indicator of future results.

There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors, and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market.

A word about some risks: Investing in the bond market is subject to certain risks that fixed income securities will decline in value because of changes in interest rates, and the risk that the manager’s investment decisions might not produce the desired results. Bonds with longer durations tend to be more sensitive and more volatile than securities with shorter durations; bond prices generally fall as interest rates rise. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Derivatives may involve certain costs and risks such as liquidity, interest rates, market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested. Equities may decline in value due to both real and perceived general market, economic, and industry conditions. Diversification does not ensure against loss.

This presentation contains the current opinions of the manager and such opinions are subject to change without notice. This presentation has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this presentation may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO Europe Ltd (Company No. 2604517), PIMCO Europe, Ltd Amsterdam Branch (Company No. 24319743), and PIMCO Europe Ltd – Italy (Company No. 07533910969) are authorised and regulated by the Financial Conduct Authority (25 The North Colonnade, Canary Wharf, London E14 5HS) in the UK. The Amsterdam and Italy Branches are additionally regulated by the AFM and CONSOB in accordance with Article 27 of the Italian Consolidated Financial Act, respectively. PIMCO Europe Ltd services and products are available only to professional clients as defined in the Financial Conduct Authority’s Handbook and are not available to individual investors, who should not rely on this communication. | PIMCO Deutschland GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany) is authorised and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie- Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 32 of the German Banking Act (KWG). The services and products provided by PIMCO Deutschland GmbH are available only to professional clients as defined in Section 31a para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication.