Pimco’s Ivascyn Sees Lower Returns, Volatility in Credit

(Bloomberg) -- Dan Ivascyn, chief investment officer of Pacific Investment Management Co., expects more volatility and lower returns from frothy corporate credit markets over the longer term..“By far the area of most concern for us is in the credit markets, specifically related to corporate credit risk,” he said. “That’s an area where we’ve had about a decade of very low yields, and an area where we’re getting more concerned about fundamentals.”.Top Pimco executives, speaking to Bloomberg Television Wednesday after the release of its global outlook, presented a bearish forecast for credit markets. They face pressure from the U.S. trade turmoil with China as well as the late-cycle build up of corporate leverage. Executives urged investors to play defense by favoring Treasuries while being selective in placing bets in certain regions and sectors, such as U.S. telecommunications, pipelines and mortgage-backed securities..“It’s the end of an era,” Pimco Global Economic Adviser Joachim Fels, co-author of the outlook, said from its Newport Beach, California headquarters. “We’re entering the age of disruption.”.Scott Mather, chief investment officer of U.S. core strategies at Pimco, compared the credit market risk today to the mid-2000s, before the financial crisis. He pointed to the use of more leverage, poorer loan quality and declining underwriting standards..Riskiest Credit Market.“We have probably the riskiest credit market that we have ever had” in terms of size, duration, quality and lack of liquidity, he said..Mark Kiesel, chief investment officer for global credit, said trade tensions between the world’s two largest economies -- the U.S. and China -- are behind new alarms about credit..“The biggest reason is there’s been a fundamental change in the U.S.-China relationship,” he said. “What was a win-win and expansion of the global pie has turned into a win-lose or even lose-lose. That’s significant. That could actually lead to a U.S. recession.".The firm’s “Dealing With Disruption” outlook highlighted other sources of disruption, such as the rise of populist politics, aging demographics and technology. A recession in advanced economies isn’t imminent but is likely in three-to-five years..Read more about Pimco’s outlook here.Emmanuel “Manny” Roman, Pimco’s chief executive, sees opportunities for investors in private credit, from real estate debt to direct lending..“It’s an opportunity and it’s going to become even more attractive when the business cycle turns,” said Roman, adding that the asset class could return 10 to 12% if managed correctly..Pimco has been investing heavily in technology to improve market forecasting. It’s also backing behavioral finance research for better oversight of its portfolio managers, who haven’t worked through a market downturn for a decade. The firm’s active management style shows its strengths in tougher markets, according to Roman..“We’re sort of hoping for a more difficult environment,” he said. “We’re gearing the firm for a more tumultuous market and making sure we have the resources and a game plan.”.The economic outlook report by the $1.76 trillion asset manager recommended that investors stop chasing yield and keep some dry powder to seize potential opportunities from market disruptions. Pimco prefers U.S.-guaranteed mortgage-backed securities as a defensive source of income. It “will pursue high-conviction ideas in corporate credit” while remaining cautious overall on the asset class, the report says..Ivascyn co-manages the $121.8 billion Pimco Income Fund, the largest actively-managed fixed-income pool, which has returned an average 5.23% over the last five years, outperforming 99% of its Bloomberg peers..A volatile market will be a good time for Pimco to use its scale and skills to take advantage of price overshoots, he said..“To use a boxer’s analogy, this is a counterpunching type market,” Ivascyn said. “It’s subtle, but it means be defensive, be patient, be more liquid, look for lots of little trades along the way that can generate some incremental return and then strike when you have these bouts of volatility.”.--With assistance from James Crombie and Alexandra Stratton..To contact the reporters on this story: John Gittelsohn in Los Angeles at johngitt@bloomberg.net;Jonathan Ferro in London at jferro10@bloomberg.net.To contact the editors responsible for this story: Alan Mirabella at amirabella@bloomberg.net, Vincent Bielski.©2019 Bloomberg L.P.

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Pimco’s Ivascyn Sees Lower Returns, Volatility in Credit

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