There’s a natural tradeoff between yield and risk. In the current environment where yields remain relatively low, it’s especially crucial for income-oriented investors not to stretch for yield – taking on excess risk in an effort to reach their return targets.
Instead, we believe it’s possible to build an income stream that is both sustainable and responsible. That means giving up a bit of incremental yield in certain circumstances in order to buy income-generating assets that have a demonstrated ability to perform well during more difficult macro environments.
PIMCO’s Daniel Ivascyn discusses building a sustainable income stream in a world of low yields and heightened volatility.
A ‘Bend But Not Break’ Approach
A sustainable income strategy has to be able to bend but not break. By that we mean a portfolio manager should be willing to accept some volatility in net asset value, as long as the invested assets have a low probability of real economic loss.
Here are three ways we are approaching this:
1. Incorporate high-quality assets. Use these in combination with traditional income-producing assets to help protect on the downside.
2. Maintain a preference for seniority. By staying with the senior-most bond or tranche in the capital structure of targeted investments, the ultimate recovery will likely be higher should the economy or a particular firm get into trouble.
3. Stay sufficiently diversified. In the current environment, we have a bit less conviction about the attractiveness of one sector versus another, and we are more diversified than ever before.
Daniel Ivascyn is Group CIO and lead portfolio manager for PIMCO’s income strategies and credit hedge fund and mortgage opportunistic strategies. Alfred Murata is a managing director and portfolio manager on PIMCO’s mortgage credit team.
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