Investors Should Manage Against Downside Risk to Compound Returns, PIMCO Says

(June 13, 2012) — Investors should focus on managing against downside shocks in order to compound attractive returns over the long term, according to the Pacific Investment Management Co. (PIMCO).

According to Neel Kashkari, managing director and head of global equities at PIMCO, clients and advisors should focus on strategies that can be used to manage downside volatility through the following strategies:

1) Buying higher-quality companies and those with strong balance sheets, because they tend to be more resilient against shocks, according to our research.

2) Buying companies at deep discounts to their intrinsic value.

3) Buying companies offering more immediate return on investment through dividends.

4) Actively hedging the portfolio, with tail risk hedging (which refers to taking a defensive position against extreme market shocks), or other means.

5) Investing in multi-asset solutions that provide diversification and include equities, fixed income securities and commodities in one vehicle.

Meanwhile, according to the firm, equity investors should continue to focus on higher-quality companies with strong balance sheets that are selling into growing markets, including those that pay healthy dividends.

“Many investors aren’t sure what to do – where to turn for ‘safe’ investment returns in light of this volatility,” Kashkari asserts in a recent paper. “As I regularly meet with clients and financial advisors, I repeatedly hear a few questions about how to navigate these choppy equity markets.”

Touching on the benefits of equities to help prevent major downside risk, Kashkari added: “Given our outlook that moderate inflation is the outcome with the highest long-term probability, we believe equities should be a meaningful part of a diversified investment portfolio. Equity investors should continue to focus on higher-quality companies with strong balance sheets that are selling into higher-growth markets.”