pimco: the new neutral - philanthropy · 2018. 8. 24. · pimco income representative account add...

PIMCO: The New Neutral

Your Global Investment Authority

Philanthropy Summit 2015

Investing in the New Neutral world

April 2015

PIMCO Australia Pty Ltd

ABN 54 084 280 508 AFS Licence 246862

Level 19, 363 George St. Sydney, NSW 2000

telephone: 02-9279-1771 facsimile: 02-

9279-2580

The financial services described in this

communication are only available in

Australia to persons who come within the

category of wholesale clients as defined in

the Corporations Act 2001 (Cth). They are

not available to persons who are retail

clients, who should not rely on this

communication.

For investment professional use only

pg 2Your Global Investment Authority

Bio

Secular Forum1.

intl_tab_10

pg 4Your Global Investment AuthorityYour Global Investment Authority

PIMCO Investment Process

1cs_pimco_outlook_08

Output: Themes that guide

portfolio construction

Sector allocation ideas

Interest rate direction and volatility

Exchange rate expectations

Credit trends

Annual Secular Forum

(3 – 5 Year Outlook)

Assess long term trends: e.g.

demographics, political

factors

Quarterly Cyclical Forum

(6 – 12 Month Outlook)

Inflation and GDP forecasts

Fine tune the secular outlook

The New Neutral

• Lower potential growth

• Lower inflation

• Lower terminal policy rates

Where are we in the

cycle?• Fiscal austerity fading

• Continual policy support

• Household balance sheet

repair


The New Neutral in a nutshell

Aging population, weak productivity growth,

debt overhang and muted inflation

Slow growth (real and nominal)

Low interest rates


0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

1989 1992 1994 1997 1999 2002 2004 2006 2009 2011 2014

($)

Billio

n

Total Stock of Debt Outstanding

Total Stock of Sov Debt Outstanding

Global Deleveraging? Modest so far:

A large debt overhang remains

Global debt outstanding

As of 30 June 2014

SOURCE: BIS


Neutral Rate = The expected Fed Funds Rate when GDP, inflation, and employment are stable,

and monetary policymakers are neither "easing" nor “tightening.”

“The New Neutral:” PIMCO’s secular forecast

Mk_2cs_pimco_outlook_06a

OPTION A

SCENARIO

Fed gradually increases

to New Neutral

SCENARIO

Fed overshoots; economy

stutters; correction occurs

U.S. policy rate

Current rate

New Neutral:PIMCO’s forecast

Market expectation for neutral

rate

Better labor participation

Corporate spending

Economic growth

Debt overhang

Demographics

Geopolitical instability

NOMINAL*REAL

* Assuming 2% inflation


So how fast is nominal GDP likely to grow?

Rapid GDP growth is unlikely in an environment of low inflation and an aging population

Growth in the labor force

+

Increase in productivity per worker

+

Inflation


Labor force growth: The post-boom bust

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

1949 1956 1963 1970 1977 1984 1991 1998 2005 2012 2019

5-y

ear

mo

vin

g a

vera

ge

Annualized labor force growth rate

Forecast

Demographic and other structural factors suggest labour force growth may stagnate

As of 31 March 2014

Source: HAVER, PIMCO


Demographic factors increasingly relevant for secular GDP growth

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

1990 1993 1996 1999 2002 2005 2008 2011 2014 2017 2020 2023 2026 2029

Gro

wth

Yo

Y%

Working age population growth, UN projections

U.S. Japan

UK Italy

Germany China

As of 31 December 2013

SOURCE: United Nations, Haver, PIMCO


Productivity growth will be key

Productivity growth surged above 3% in the tech boom, but has averaged below 2% recently

As of 31 March 2014

Source: Bureau of Labor Statistics

0.0

1.0

2.0

3.0

4.0

1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010

Yo

Y c

han

ge, 5

y m

ov.

avg

. (%

, SA

)

U.S. nonfarm output/hr


Inflation will likely be modest going foward

US inflation averaged 4% per year between 1960 - 2014

0

2

4

6

8

10

12

14

19

60

19

63

19

66

19

69

19

72

19

75

19

78

19

81

19

84

19

87

19

90

19

93

19

96

19

99

20

02

20

05

20

08

20

11

20

14

Perc

en

t (%

)

CPI YOY Average


Source: Bloomberg


The New Neutral for interest rates

-5

0

5

10

15

20

1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015

Perc

en

t

Nom GDP YoY FF rate UST 5Y

If nominal GDP grows at ~4.5%, then Fed Funds and bond yields may not have far to rise

Neutral?

As of 31 March 2014

Source: Federal Reserve, Bureau of Economic Analysis, PIMCO

Smart Beta2.

intl_tab_12


Smart beta: Benchmark Efficiency

Global_advantage_phil_05

Traditional benchmarks are backward-looking and focused on

market capitalisation causing a structural bias towards highly

indebted countries

Smart beta benchmarks are forward-looking and help investors seize

opportunities in a New Neutral world across a multitude of fixed income

markets and sectors

Looks to avoid over-allocation to excessive borrowers and focuses on countries

with stronger underlying fundamentals

Designed to be more inclusive of newly developing countries, positioning investors

for future rather than past opportunities

pg 16Your Global Investment AuthorityYour Global Investment Authorityglobal_advantage_perf_FUND


SOURCE: BofA Merrill Lynch, Barclays

The PIMCO Global Advantage® Index (GLADI ®) performance contains back-tested performance beginning 01 January 2004, which is prior to the actual launch of the index:

The Global Advantage ® Bond Index incepted on 12 January 2009

* Ten years ending 31 December 2014. All periods longer than one year are annualized

PIMCO Global Advantage® Bond Index vs. Barclays Global

Aggregate Bond Index risk and return (USD unhedged)

-6

-4

-2

0

2

4

6

8

10

12

14

'04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14

An

nu

laiz

ed

retu

rn (

%)

Global Advantage® Bond Index

vs. Global Aggregate Bond Index

PIMCO Global Advantage®

Bond Index (USD unhedged)Barclays Global Aggregate Bond

Index (USD unhedged)

Barclays

Global

Aggregate

Bond Index

(USD

unhedged)

PIMCO Global

Advantage®

Bond Index

(USD

unhedged)

0

2

4

6

8

0 2 4 6 8

An

nu

alize

d r

etu

rn (

%)

Annualized standard deviation of monthly return (%)

Annualized returns versus volatility of return*

PIMCO Global Advantage®

Bond Index (USD unhedged)

Barclays Global Aggregate

Bond Index (USD unhedged)

Yield to maturity (%) 2.6 1.6

Duration (yrs) 4.9 6.5

Annulized returns (%)* 3.9 3.6

Annulized standard deviation (%)* 6.6 5.7


Active management3.

intl_tab_12


100

110

120

130

140

150

160

170

180

2010 2011 2012 2013 2014

Growth of $100 invested in the PIMCO GIS Global Bond Fund (NZD Hedged) - 5 yrs

Fund Benchmark

Active management…choosing the right manager matters

global_advantage_review_42_EM

As of 31 January 2015

The index of the fund is the Barclays Global Aggregate Index hedged into NZD

5 year net of fee

alpha: +257bp

Duration strategies

Sector rotation

Curve positioning

Credit selection

Quality bias

Country positioning

Macro forecasting

ACTIVE

MANAGEMENT

STRATEGIES


Alpha generation becomes even more relevant

1 Year 3 Years 5 Years 10 yearsSince

Inception

PIMCO StocksPLUS Fund (PSTKX) – Inception Date: 13 May 1993

PIMCO StocksPLUS Fund Net

of fees14.62% 19.18% 17.21% 7.97% 9.90%

S&P 500 Index 14.22% 17.47% 15.60% 7.61% 9.34%

Alpha + 97 + 230 + 220 + 93 + 119

PIMCO StocksPLUS Absolute Return Fund (PSPTX) – Inception Date: 28 June 2002

PIMCO StocksPLUS Absolute

Return Net of fees14.35% 19.49% 19.14% 9.61% 10.28%

S&P 500 Index 14.22% 17.47% 15.60% 7.61% 7.89%

Alpha + 85 + 278 + 430 + 273 + 314

Performance of StocksPLUS and StocksPLUS Absolute Return Fund

As of 31 January 2015


A rapidly expanding opportunity set…

Capital_Securities_Review_14

As of 30 June 2014

SOURCE: BIS

Estimated $100 trillion global debt market.

12/31/1989 6/30/2014

U.S. 60.7% 35.0%

Dev. Ex U.S. 38.2% 51.0%

EM 1.1% 14.0%

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

100,000

'90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14

USD

billio

ns

Global bond market EM: $14tn

U.S.: $35tn

Developed ex U.S.: $51tn


-10

0

10

20

30

40

50

60

70

80

90

100

110

120

Apr '07 Nov '07 Jun '08 Jan '09 Aug '09 Mar '10 Oct '10 May '11 Dec '11 Jul '12 Feb '13 Sep '13 Apr '14 Nov '14

Perc

en

tag

e o

f b

on

d e

xpo

sure

(%

)

Government-related¹ Agency mortgage Non-U.S. developed Non-agency mortgage CMBS ABS

Bank loans Corporates High yield Emerging markets Other

Investment processAdjust exposures dynamically given macroeconomic views

stru_766_04

PIMCO Income Representative Account

Add value through continually shifting market conditions


SOURCE: PIMCO1 Government Related may include nominal and inflation-protected Treasuries, agencies, interest rate swaps, Treasury futures and options, FDIC-guaranteed and government-guaranteed

corporate securities.

The representative account information presented is provided as supplemental information to the PIMCO Income Composite performance presentation

pg 22Your Global Investment AuthorityYour Global Investment Authorityglobal_advantage_perf_FUND

Summary

Anticipate modest returns in a New Neutral world

3% for bonds

5% for stocks

Smart beta

Active management

Leverage


Disclaimer

The services and products provided by PIMCO Australia Pty Ltd are only available to persons who come within the category of wholesale clients as defined in the Corporations

Act 2001. They are not available to persons who are retail clients, who should not rely on this communication. Investors should obtain relevant and specific professional advice

before making any investment decision. The information contained herein does not take into account the investment objectives, financial situation or needs of any particular

investor. Before making an investment decision investors should consider, with or without the assistance of a securities advisor, whether the information contained herein is

appropriate in light of their particular investment needs, objectives and financial circumstances.

Investment management products and services offered by PIMCO Australia Pty Ltd are offered only to persons within its respective jurisdiction, and are not available to

persons where provision of such products or services is unauthorised.

Past performance is no guarantee of future results. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. This

presentation contains the opinion of the manager as the date of this presentation, 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. The content of this presentation remains the property of PIMCO. No part of this publication may be reproduced in any form, or referred to in any other publication,

or conveyed to a third party without express written permission.

Copyright 2015 PIMCO

Tony Hildyard

Tel: 021 830720

Email: [email protected]

Address:

Level 19, 363 George Street

Sydney, NSW 2000

Tel: 02-9279-1771

Fax: 02-9279-2580

PIMCO: The New Neutral

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