Bond investor Pimco is also increasingly looking to alternatives to traditional bond categories. The fund house sees attractive income-generating opportunities in real estate and private credit and plans to continue investing in these areas.
That is what Pimco wrote this week in its outlook for the coming years. The asset manager, which invests primarily in bonds, recommends working with flexible mandates in order to be able to make use of the full range of fixed-income opportunities.
The reason for Pimco’s interest in private placements is their illiquidity and complexity premiums. However, the investor cautions that the global search for yield has led to significant capital formation in certain segments of the private credit markets. “This can lead to tighter valuations and weaker lending conditions. This is particularly evident in mid-market corporate lending, with companies backed by private equity sponsors.”
Within private credit, corporate capital solutions and more complex asset-based loans deliver better risk-adjusted returns than more traditional PE-sponsored loans to mid-market companies, according to Pimco. The house lists senior loans, but also subordinated capital and private credit structured equity investments as possibilities.
Residential mortgages and specialised finance are also of interest to Pimco, as investors can benefit from strong asset coverage, borrower diversification and income streams that are less correlated with more traditional credit markets.
Winners and losers
More generally, the fund house writes in its outlook that investors should distinguish more between winners and losers within credits as well as within equities in the coming period, as returns in all asset classes will be low and volatile in the coming years. Within credits, CIO Andrew Balls, speaking to journalists, referred to the transition from brown to green energy. “Companies in brown sectors have much higher levels of debt than those in green sectors.”
According to Pimco, the reason investors should expect lower returns and more volatility is the increase in uncertainty about economic growth and inflation. According to Pimco, this world of “dislocation and divergence” will provide a more difficult investment environment than that of “The New Normal’ - the past decade. Balls: “Low real and nominal yields on fixed income markets and historically high equity multiples - reinforce the expectation of lower yields.”
For its own asset allocations, Pimco has decided to be “constructive” around equities and thus be sharper on winning and losing countries, sectors and individual stocks. Because the fund house expects hardware investments to take centre stage in the coming years, Pimco itself is targeting semiconductor manufacturers, factory automation equipment suppliers and suppliers of green energy and mobility. “We expect these sectors to form a significant part of our portfolio.”
Quantitative capabilities
Incidentally, Pimco also wrote in the outlook that it will further develop its quantitative capabilities and technology in order to be able to offer quantitative strategies to clients in the future. The fund house receives demand for this from clients and wants to support the investment process with it.