PIMCO: Why Investors Should Go Short and Go Global

A report has found globalization in investment strategies could help investors ride out growing market volatility and find better opportunities for greater returns.

(November 25, 2013) — Globalized investment strategies could aid investors to increasingly meet their objectives and better manage interest rate risk in the midst of volatile markets post-2008, according to PIMCO.

The report by Craig Dawson, a managing director at PIMCO’s Munich office, said investing across multiple market sectors and in broad interest rate strategies would best serve investors’ needs and deliver better performance.

“Expanding one’s opportunity set to include multiple regions and market sectors is a critical approach to enhancing return potential and managing risks in a world that remains awash in central bank activism, political uncertainty and major economies operating below potential,” Dawson said.

Still deep in the aftermath of the financial crisis, investors have had to rethink traditional methods of risk management, the article said. Those with only a core portfolio with assets in a single region would have achieved “limited performance” and missed out on attractive opportunities such as emerging market bonds and alternative fixed income based solutions.

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“Credit risk is no longer a phenomenon of corporate bonds and emerging markets, but of countries that have previously been considered developed nations,” Dawson said in the report. PIMCO said this trend demands investors to be nimble and diversify their allocations—“from sovereign and supra-national to corporate issuers and across seniority levels of specific issuers.”

The volatile market environment caused by heavy reliance on central banks was another repercussion from 2008, the report concluded. From such unprecedented “activism,” central banks have held a strong grip on bond markets, leading to volatility in interest rates and bond yields. These conditions could prompt investors to decide whether they need to add interest rate risk as maturity extension or hedge against a possible rise in interest rates.

A solution, according to PIMCO’s Dawson, is to go global: “Globalization of interest rate exposure works best with the discretion to manage duration more actively, including going short to benefit from an expected rise in yields.”

Investors should also develop their strategies to depend less on a positive market beta—a road towards “absolute-return-oriented approaches” with a possibility to go short, Dawson argued.

Implementing inherently global strategies would point investors to successful management of global mandates, with broadened investments across asset classes, market segments, and geographies, the report said.

“A global investment universe allows investors to cope with the fundamental shift in the world economy and the multi-speed growth paths of emerging and developed market,” Dawson said.

Related content: Why US Investors Are Turning to Global Bonds

(November 25, 2013) – Freezing a corporate defined benefit (DB) pension plan would save 3.1% of total firm assets, on average, over a 10-year time horizon, researchers have said.

That figure was the net savings calculation, and takes into account the additional defined contribution (DC) matching payouts that most firms take on after closing their pension programs to new members.

The study, published as a working paper in the US Federal Reserve’s finance and economics discussion series, had three co-authors: Stanford University Finance Professor Joshua Rauh, Fed Economist Irina Stefanescu, and Columbia University Professor Stephen Zeldes.

The researchers primarily sourced the raw data from Form 5500, a mandatory annual filing by plan administrators with the US Department of Labor and Internal Revenue Service. Rauh, Stefanescu, and Zeldes restricted their analysis to US-based plans with at least 1,000 active participants.

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The dataset spans the years 1999 through 2010, and includes 213 schemes which were frozen during that time period, in addition to some which remained open.

Comparing the what these plans would have accrued if not frozen to the actual increase in 401(k) and other DC contributions for firms that freeze, the authors found only partial compensation to employees for the lost DB benefits.

“Net of the increase in total DC contributions, firms save between 2.7 % and 3.6% of payroll per year,” the researchers wrote. “Workers would have to value the structure, choice, flexibility, or portability of DC plans by at least this much more to experience welfare gains from freezes.”

Furthermore, they found that firms with potentially more assets to save were also more likely to undertake a plan freeze and switch to DC.

The authors did acknowledge that “there are still many other factors that enter a firm’s decision to freeze, including the impact on the volatility of cash flows, the demand of employees for more portable benefits, and the relative effects of the two types of plans on reported accounting income. The relative importance of these effects compared to the desire to save costs remains an open question.”

Read the full paper, “Cost Shifting and the Freezing of Corporate Pension Plans,” here.