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. 

“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.

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