GLOBAL - PIMCO has launched a new concept in fixed income investing which is said to provide an improved measure of credit market beta by shifting away from market cap weightings and adopting a variety of fixed income vehicles to deliver counter-cyclical rebalancing.
Known as the Global Advantage Strategy, PIMCO has designed the concept and a new form of fixed income index so it can invest in a wider range of fixed income and forward-looking exposure by focusing first on the allocation based on gross domestic product (GDP) weightings, rather than through a market cap-based approaching to indexing which is inherently backward-looking and therefore reflective only of past pricing.
PIMCO has a patent pending on its Global Advantage Bond Index (GLADI) which in back-testing showed the system should counter the prospect of "over-allocating to excessive borrowers", when securities are already going up in price, and instead allocates relatively equally in both geographical and sectoral allocations, and mixes holdings in nominal and real instruments, as well as cash and derivatives.
The global fund strategy - managed by co-chief investment officer, Mohamed El-Erian and Ramin Toloui, executive vice president - splits investments first into regions according to their GDP, to give US, eurozone, Japan, other industrialised countries - Australia, Canada, Denmark, New Zealand, Norway, Sweden, Switzerland and the UK - and emerging markets holdings.
It then weights allocation again according to their interest rate duration, credit premium and securitised instrument premium, allowing PIMCO to invest in interest rate swaps - picked from 2-yr, 5-yr, 10-yr and 30-year swaps - along with inflation-linked bonds, investment-grade corporate debt, external sovereign bonds as well as mortgage-backed securities and covered bonds.
At the final stage of bottom-up selection, the structure then allows PIMCO to select securities based on eligibility criteria and market profile, so what the index effectively holds is a mix of 17 sub-indices or instrument sectors carrying approximate equal weighting.
Interestingly, PIMCO's regional weightings means the emerging markets sector has the largest GDP, with 27.9% of the index, but is a little more complicated to manage than other sectors because of a lack of liquid interest rate swaps, so it has a balance of locally-denominated bonds, those denominated in dollars and euros as well as short-duration local currency investments delivered through short-dated fixed income derivatives in one-month, two-month and three-month forex baskets.
The index is rebalanced each October to ensure the weighting is towards the most liquid and representative bonds of each sector of the market, and is designed to tap lower pricing opportunities when traditional indices might usually suggest higher-priced securities should be purchased.
The matrix itself classifies all bonds according to the most relevant factors in each market and the number of bonds needed for each sub-sector but in the main those with the highest rating are selected first.
The actual weighting at this stage means PIMCO's new index is weighted as:
Almost 70% of investments are held in vehicles with less than seven years' duration while 87% of investments are A-rated grade holdings or above.
The balanced weighting of geographies and vehicles should allow PIMCO's strategy to avoid some of the cyclical pressures experienced over recent months, and is designed to recognise that a range of constantly evolving dynamics will influence investments but still allow investors to keep up with changes.
"The world is in the midst of dramatic transformations in growth drivers, wealthy dynamics and institutional arrangements," said El-Erian. "This strategy is designed to help position fixed income investors for both that journey and the ultimate destination."
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