PIMCO’s Geraldine Sundstrom on navigating risk with a dynamic multi-asset strategy
Focus is a publication that brings you face to face with a selection of the most in-demand asset managers in the UK and across the globe.
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Investment markets have arguably never been as disruptive as over the past five years. Even before the onset of a global pandemic, investors had been challenged by record low yields, the possible threat of a global recession and of course a renewed focus on investing sustainably. Against this backdrop, the need for a flexible multi-asset strategy that can navigate risk across all market environments has become essential.
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In this Focus, fund manager Geraldine Sundstrom, manager of the PIMCO GIS Dynamic Multi-Asset Fund (DMAF), explains how this strategy moves beyond traditional assets to manage downside risk and capture market opportunities as they arise.
Sundstrom also explores the challenges on the horizon and offers her outlook on how to deliver investor returns in what could continue to be a tumultuous market environment in 2021.
Benchmark: Unless referenced in the prospectus and relevant key investor information document, a benchmark or index in this material is not used in the active management of the Fund, in particular for performance comparison purposes. Where referenced in the prospectus and relevant key investor information document a benchmark may be used as part of the active management of the Fund including, but not limited to, for duration measurement, as a benchmark which the Fund seeks to outperform, performance comparison purposes and/or relative VaR measurement. Any reference to an index or benchmark in this material, and which is not referenced in the prospectus and relevant key investor information document, is purely for illustrative or informational purposes (such as to provide general financial information or market context) and is not for performance comparison purposes. Please contact your PIMCO representative for further details.
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The Fund benchmark is: 1M Euribor Index. Correlation: As outlined under “Benchmark”, where referenced in the prospectus and relevant key investor information document, a benchmark may be used as part of the active management of the Fund. In such instances, certain of the Fund’s securities may be components of and may have similar weightings to the benchmark and the Fund may from time to time show a high degree of correlation with the performance of any such benchmark. However the benchmark is not used to define the portfolio composition of the Fund and the Fund may be wholly invested in securities which are not constituents of the benchmark. Investors should note that a Fund may from time to time show a high degree of correlation with the performance of one or more financial indices not referenced in the prospectus and relevant key investor information document. Such correlation may be coincidental or may arise because any such financial index may be representative of the asset class, market sector or geographic location in which the Fund is invested or uses a similar investment methodology to that used in managing the Fund.
PIMCO Funds: Global Investors Series plc is an umbrella type open-ended investment company with variable capital and is incorporated with limited liability under the laws of Ireland with registered number 276928. The information is not for use within any country or with respect to any person(s) where such use could constitute a violation of the applicable law. The information contained in this communication is intended to supplement information contained in the prospectus for this Fund and must be read in conjunction therewith. Investors should consider the investment objectives, risks, charges and expenses of these Funds carefully before investing. This and other information is contained in the Fund’s prospectus. Please read the prospectus carefully before you invest or send money. Returns are net of fees and other expenses and include reinvestment of dividends. The performance data represents past performance and investment return and principal value will fluctuate so that the PIMCO GIS Funds shares, when redeemed, may be worth more or less than the original cost. Potential differences in performance figures are due to rounding. The Fund may invest in nonU.S. or non-Eurozone securities which involves potentially higher risks including non-U.S. or non-Euro currency fluctuations and political or economic uncertainty. For informational purposes only. Please note that not all Funds are registered for sale in every jurisdiction. Please contact PIMCO for more information. For additional information and/or a copy of the Fund’s prospectus, please contact the Administrator: State Street Fund Services (Ireland) Limited, Telephone +353-1-776-0142, Fax +353- 1-562-5517. © 2021.
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THE INTERVIEW
the tumultuous investment
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FUND SNAPSHOT
Market Outlook
In the 15 months to 31 March 2021, the fund delivered an annualized return of 13.1% in GBP after fees. This was just slightly behind the MSCI World index – a proxy for equity market performance – which returned 14.7% (GBP Hedged) over the same period. The fund also significantly outperformed the struggling UK equity market, which saw the FTSE 100 fall 5.7%.
“Before the pandemic, PIMCO already warned that we were late in the economic cycle, so it was time to go up the quality ladder,” she explains. “As a result, we had modest levels of total risk in the portfolio, with equity exposure focused on higher quality names and, on the fixed income side, investment grade credit along with safe duration high quality government bonds.”
Flight to quality
unprecedented environment investors faced during 2020 and the start of 2021.
und manager Geraldine Sundstrom notes she follows a time-tested motto when it comes to managing investor portfolios: one that focuses on “winning by not losing”. It is a strategy that has paid off for the PIMCO GIS Dynamic Multi-Asset Fund in the
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Navigating
Our global breadth allowed us to understand the situation was tremendously serious early on
Geraldine Sundstrom, managing director and portfolio manager
Being dynamic is very important these days, more so since yield levels are extremely low
waters of
2021
Sundstrom strongly believes that the strong performance is down to the agile, dynamic asset allocation that allows the Fund to be completely unconstrained from any benchmark or static allocation, while also protecting returns on the downside. “Being dynamic is very important these days, more so since yield levels are extremely low,” she says. “Static asset allocation is unlikely to respond well in times of stress. We also find ourselves in times of disruption – climate, technological, political – and managers need to have the tools to be able to adjust to this. A passive allocation is not enough.”
However, Sundstrom is also convinced that in moments of great uncertainty, such as what we have faced over the last 15 months, it is important to have “a framework, an anchor, a beacon.”
For DMAF, the ovearching investment process takes a 360 degree view of markets; an annual Secular Forum which creates a 3-5 year outlook, and to stay agile, the outlook is continuously refined via Cyclical Forums which examine a timeframe of 12months. These fuel the work of the Investment Committee. The Fund benefits from insight of over 250 investment professionals from across the globe and an investment process that has been time-tested over 50 years.
This, according to the manager, has been one of the factors that has helped the Fund navigate the “tumultuous waters” of the pandemic environment.
As the pandemic hit, quick thinking was key. “It was a shock for all of us, but we had a very resilient portfolio and took swift action,” says Sundstrom. “We were extremely dynamic and in February, we had already started to reduce certain exposures. Our global breadth allowed us to understand that the situation was tremendously serious early on.”
This led to the managers dramatically trimming risk in the portfolio, halving equity exposure to protect the Fund on the downside as well as going short high yield, which had been identified as a vulnerable area. As Sundstrom puts it, “quality was the motto.”
Yet it was equally as important to recognise the moment when the cycle would turn; 2020 was not just a “wait and see environment,” but rather one in which to act quickly.
Sundstrom recalls: “We could see that the response from authorities was so big, something we had never seen before. We had to be very dynamic. We peeled off the hedges and a couple of weeks after the drawdown, we already had to think about the recovery.”
Identifying these fundamentally driven turning points in the business cycle is amongst the most important decisions a Fund manager can make.
Turning point
With her 24 years of investment experience and a strong track record managing the Fund – which has just celebrated its five-year anniversary – she has ample experience in making such decisions.
Also of key importance is the underlying work done by the wider PIMCO team, which leaves “no market segment unturned,” allowing Sundstrom to access the best ideas PIMCO has to offer.
Going into the pandemic, the Fund already had exposure to the themes that thrived as a result of lockdowns and vaccine development: software, internet, healthcare and biotech. Now, the portfolio has pivoted to areas that are geared towards the economic recovery taking place across the globe.
This has involved a move from pure quality to more cyclical sectors benefitting from recovery efforts, as well as areas such as robotics, renewable energy and electric vehicles, which are poised to gain from fiscal spending and a renewed focus on the environment.
“We are positioning ourselves in those sectors that are going to benefit from enduring tailwinds, such as monetary and fiscal support, instead of looking for the one-hit-wonder,” Sundstrom says.
She believes that this approach, aided by her team’s “medium-term vision and cool head”, will allow the Fund to perform strongly for the rest of the year and beyond.
one that focuses on “winning by not losing”. It is a strategy that has paid off for the PIMCO GIS Dynamic Multi-Asset Fund in the unprecedented environment investors faced during 2020 and the start of 2021.
und manager Geraldine Sundstrom notes she follows a time-tested motto when it comes to managing investor portfolios:
the tumultuous investment waters of
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PIMCO GIS Dynamic Multi-Asset Fund
On the road to a green recovery
MARKET OUTLOOK
PIMCO GIS Dynamic Multi-Asset Fund since inception returns
The ‘upside’ of downside awareness
As of 30/04/21. Source: PIMCO, Bloomberg. Data shown since 29 February 2016 for the PIMCO GIS Dynamic Multi-Asset Fund Euro Institutional Accumulation Shares. Equity market represented by the MSCI ACWI EUR Hedged index. Past performance is not a guarantee or a reliable indicator of future results.
Cumulative Performance (%)
As of 31 May 2021. Source: PIMCO. Benchmark: 1 month GBP Libor Rate. The fund is actively managed in reference to the 1 month GBP Libor Rate as further outlined in the prospectus and key investor information document. *Performance since inception: 25 February 2016.
Past performance is not a guarantee or a reliable indicator of future results. All periods longer than one year are annualized. Additional 12 months rolling chart can be found in the appendix for further information. Refer to Appendix and the relevant sections of the Fund prospectus for additional performance and fee, chart, GIS funds, index and risk information.
1: Volatility is based on 1 Month net of fees returns of the Institutional (GBP Hedged) Accumulation Shares. 2: Risk free rate used is the ICE BAML Sterling Govt Bill Index. 3: Beta computed using weekly data versus the MSCI ACWI GBP Hedged Index. 4: Morningstar benchmark shown for performance comparison purposes only.
The PIMCO GIS Dynamic Multi-Asset Fund has the ability to provide upside exposure with constrained downside risk
Nimble approach in seeking to exploit opportunities and navigate risks
The Fund team utilizes the broad tool kit available while emphasizing diversification
Building in a sustainable boost
The Fund aims to focus on sectors benefitting from green and digital policy initiatives in favoured regions and sectors. In doing so, the Fund’s average equity and corporate issuer emits significantly less CO2 than broader market indices
As of 30 April 2021. Source: PIMCO, MSCI. For illustrative purposes only. Absolute carbon emissions and carbon intensity calculated using the weighted average of corporate holdings in the portfolio, rather than total portfolio metrics. Carbon Intensity is defined as the weighted average Carbon emissions (Scope 1 + Scope 2 emissions in tCO2e)/Revenues in USDm. Scope 1 emissions are direct emissions from a company while Scope 2 are in direct emissions from the generation of purchased energy. Equity market represented by the MSCI ACWI Index; Credit market represented by the Bloomberg Barclays Global Credit Index.
“Follow the money”
DMAF’s average equity and corporate issuer emits 6,022,372 less tons of CO2 than the broad market’s, which is equivalent to:
Incandescent lamps switched to LEDs
Tree seedlings grown for 10 years
Passenger vehicles taken off the road in one year
Homes powered by clean energy for one year in the United States
228,987,535
100,372,869
1,300,728
694,622
OR
Key facts
Fund launch date
Morningstar rating
Total Net Assets
Feb 2016
£6.22bn
As of 30 April 2021. Source: PIMCO.
Core asset allocation strategy
May serve as a core portfolio asset allocation solution, around which satellite allocations may be made
Liquid alternative strategy
May serve as a liquid alternative strategy, given less reliance on mainstream equity participation, particularly in down markets
Tactical allocation complement
May serve as a tactical complement to a static policy allocation in seeking greater portfolio adaptability over a cycle
How can this fund fit in your portfolio?
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Board independence, remuneration, diversity, audit and accounting, historic fraudulent activity
Governance
Is the overall impact of the products and services contributing towards a net benefit within society?
Products & services
As of 30/04/21. Source: PIMCO, Bloomberg. Data shown since 29 February 2016 for the PIMCO GIS Dynamic Multi-Asset Fund Euro Institutional Accumulation Shares. Equity market represented by the MSCI ACWI EUR Hedged index.
Climate, which was seen as a super-secular factor until now, has become very ‘right here, right now’
Market outlook
On the road to a
green recovery
Geraldine Sundstrom, manager of the GIS PIMCO Dynamic Multi-Asset Fund, has a catchy name for this new cycle: Cyclicality 2.0. This is based on the belief that the recovery from the pandemic will be a green and digital one, supported by recovery packages announced by governments from across the world.
he coronavirus pandemic has potentially changed the world around us forever. Accordingly, investors have had to adjust to a new reality, and do so quickly as 2020 marked the end of one economic cycle and the beginning of another.
T
“Climate, which was seen as a super-secular factor until now, has become very ‘right here, right now’,” Sundstrom says.
“In this recovery, over 70% of world GDP is striving for a CO2 free future. This is putting a lot of demand on certain commodities and this trend is much more structural and fundamental in nature than markets want to think.”
This realisation has led the Fund to pivot more towards areas that we believe will benefit from the recovery and a new economic cycle, such as robotics, renewable energy and electric vehicles.
Another area with “amazing hidden value,” according to Sundstrom, is forestry, with its ability to help reduce CO2 emissions, but also provide the world with various materials which are in high demand: biofuels, bioplastics and construction materials.
“We are seeing the price of lumber and pulp reaching highs never seen before, as the world wants to replace plastic with paper, kerosene with biofuel,” says Sundstrom.
Conversely, sectors such as fossil fuels could be “deeply disrupted from a secular standpoint,” so require caution, though the manager is careful to point out that not all fossil fuel companies are automatically excluded from the Fund.
“There are some companies that have very good transition plans, are credible, and have a green future in their brown present,” she explains. “Our approach is a bit more holistic.”
The focus on a digital and green recovery has also led the Fund to invest in semiconductors, which are poised for increased demand from technological innovation, such as AI and 5G; as well as renewable energy kit makers, such as solar panel and wind turbine producers. “Times have changed. If the previous cycle was defined by infrastructure projects as the main recipient of public investment funds, this second version of cyclical recovery focuses more on ethereal elements that surround and support us: it’s chips, not bricks, that matter.”
Asian opportunities
Many of these opportunities, according to Sundstrom, are to be found in emerging markets, especially in Asian countries, including South Korea, Taiwan, China and Japan.
“We found that the lion’s share of the enablers that could produce these are to be found in Asia, and we are not shy to go and invest in those companies,” she says.
The market at the moment is very worried about inflation
Meanwhile, Sundstrom expects inflation concerns to be the “number one thing” to drive markets over the coming months – a worry that PIMCO does not share and where she sees opportunities for the Fund to outperform as a result.
Inflation fears
“The market at the moment is very worried about inflation,” says Sundstrom.
“We believe we will have a spike, but things will land in a reasonable zone, so it is not a reason for concern. It is very important for us to not miss the forest for the trees.”
PIMCO’s view is that after a bout of inflation this year, 2022 will see the withdrawal of fiscal stimulus and potentially higher taxes, stopping price rises in their tracks.
In the midst of the pandemic, the Fund managers already made a correct call on inflation, believing it would normalise from extremely low levels.
They shifted half of the holdings from U.S. nominal government bonds into treasury inflation protected securities (TIPS) during the summer, which paid off. Now, it is time for another strategic move to take advantage of the current market panic.
“We have to harvest inflation next,” says Sundstrom. “In certain areas, inflation is growing, and we want to take advantage of this.”
adjust to a new reality, and do so quickly as 2020 marked the end of one economic cycle and the beginning of another.
he coronavirus pandemic has potentially changed the world around us forever. Accordingly, investors have had to
