With Bill Gross’ abrupt departure, PIMCO’s flagship Total Return Fund has been taken over by Scott Mather, Mark Kiesel and Mihir Worah.
Maher, Kiesel, and Worah have just published a Q&A about their investment approach, and what opportunities they see now.
Here’s the relevant part
Mather: Our belief in the New Neutral continues to anchor our views. We believe the Fed has been looking, and will continue to look, to reflate the U.S. economy. Therefore it is likely to be slow to raise policy rates and any increases will be gradual. Meanwhile, central banks elsewhere, particularly in Europe, Japan, and many emerging market countries, are likely to move in the direction of even further monetary accommodation. There are a few implications: liquidity in the global markets is likely to remain ample for some time to come. And although the global economic recovery remains uneven and substandard, it continues at a robust enough pace to provide a supportive background for many spread sectors and pushes out the timeframe for a turn in the risk cycle. Finally, since not all central banks are moving in the same direction there are likely to be many more cross-market opportunities.
Kiesel: I agree with Scott. Certainly there are many opportunities in the credit markets. Credit spreads may be relatively tight, but with liquidity likely to remain plentiful and corporate profits still very healthy in many sectors, we don’t see room for spreads to widen significantly. It is important to be selective, but we think there are some great investment opportunities in companies with strong growth profiles and pricing power and in industries with high barriers to entry and improving credit fundamentals. For instance, European banks, US energy, and Asia gaming come to mind.
Worah: Central banks are also creating opportunities in the currency and rates markets. Divergent monetary policy is likely to mean continued strength in the dollar, particularly against the euro and yen, and the portfolio is positioned to take advantage of that. Also, though there is currently little inflation, the Fed’s reflationary mindset makes inflation protection via Treasury Inflation-Protected Securities (TIPS) a sensible hedge, since they are quite attractively priced compared to nominal bonds.
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