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HomeMy WebLinkAbout96.091113 PIMCO 1.pdf Received at Admin Committee 9/11/2013 Your Global Investment Authority icy Idi 3► ay 'Jil ILA W- Of ti: Strategy Review Orange County Sanitation District 11 September 2013 Past performance is not a guarantee or a reliable indicator of future results.Shares distributed by Pill Investments LLC. PIMCO and YOUR GLOBAL INVESTMENT AUTHORITY are trademarks or registered trademarks of Allianz Asset Management of America L.P.and Pacific Investment Management Company LLC,respectively,in the United States and throughout the world. © The Morningstar Fixed Income Fund Manager of the Year award is based on the strength of the manager,pedormance. Fund Manager of the Year strategy,and firms stewardship. Fixc^. Incmmr. Client-specific update-not for public distribution Biography Stephanie L Ming,CFA Ms.King is an executive vice president and account manager in the Newport Beach office,focusing on U.S.institutional investors within the public client practice. Previously at PIMCO,she worked with a variety of institutional client types and co-headed the U.S. corporate client practice.Additionally,she led the frm's global recruiting function as part of PIMCO's business management group and worked on a variety of talent management initiatives.She currently serves on the steering committee for PIMCO's global inclusion,diversity and culture initiative. Prior to joining PIMCO in 2001,she was with Morgan Stanley, Blue Capital Management and Bain &Company. She has 14 years of investment experience and holds an MBA from Stanford University Graduate School of Business and an undergraduate degree from the Wharton School of the University of Pennsylvania. Todd A.Staley,CFA Mr.Staley is a vice president and account manager in the Newport Beach office,focusing on institutional client servicing.Prior tojoining PIMCO in 2011, he worked as a structured finance associate on the non-mortgage asset backed securitization team at Bank of America. He has six years of investment experience and holds an MBA from the Kenan-Flagler Business School at the University of North Carolina as well as an undergraduate degree from the University of Cincinnati. PIMCO Your Global lnmstmentAuthority P81 Agenda 1. Orange County Sanitation District objectives 2. Market review and performance 3. Outlook and strategy 4. PIMCO update P I M C O Your Global Investment Authority pg 2 j , Orange County Sanitation District objectives P I M C O Your Global investment Authority pg 3 Orange County Sanitation District Objectives Safety • The safety and preservation of principal is OCSD's foremost objective and investments shall be selected seeking to ensure the preservation of capital. Liquidity • Sufficient funds should be available to meet reasonably anticipated operating expenditure needs. Return on Investment • The OCSD investment portfolio should be structured and managed with the objective of achieving a rate of return throughout various cycles. P I M C O Your Global Investment Authority P9 q 2. Market review and performance P I M C O Your GlotwlIn UniintAuthority pgs Q2 2013: Fed policy communications weighed heavily on markets What we expected • U.S.economy would show modest improvements but growth would remain anemic • Fed would continue to support markets with low policy rates and quantitative easing • Europe would continue to flounder and Japan's reflationary experiment would meet early challenges Positioning • PIMCO sought to guard against decoupling of asset prices from fundamentals by reducing credit and spread risks - Undenveighted credit to avoid overvalued assets - Increased duration to neutral/overweight in anticipation of low growth and gradual,eventual Fed tapermg - Favored longer dated TIPS as a hedge against future inflation What happened • Markets sold off after Fed Chairman Bernanke's discussions of QE tapering;rates rose sharply • TIPS underperformed nominal bonds as inflation expectations fell further and technical factors detracted • Emerging markets price-adjusted downward as internal fundamentals, including political unrest,weighed Looking r • • PIMCO's rigorous,time-tested investment process will remain focused on being strategically defensive and opportunistically offensive,seeking returns while protecting clients from undue risks • Nominal rates may again fall as the economy will likely underperform Fed economic projections • Real yields are now positive beyond seven years;inflation valuations becoming attractive on absolute and relative basis P I M C O Your Global Investment Authority pg 6 Quantitative easing may recede but Fed likely to keep policy rate low Unemployment ate(IHS) —Current inflation (RHS)` 10.5 3.0 8.5 ._.__... .--___._._—_____. .. ____. ._..__.._._—__—._._—__ _--____—_ _ 2.5 6.5%Fed policy target y 6.5 2.0 9 2%inflation target �R a � 2.5 __.—_ ___. _._ — ——___—_-- 1.0 05 __"_ __ _ _.—__.___- -_ _ __ ._ ___.________.._.____ — 0.5 Jun'07 1un'08 Jun '09 )un'30 Jun'll Jun'12 Jun'13 QEI QE2 Operation Twist and QE3 Unemployment and inflation in the�ew Normal are missing Fed targets and point to continued accommodative policy As of 31 July 2013 SOURCE:Haver Analytics,BEA Inflation data is current as of 31 July 2013 and reflect recently released comprehensive revisions to the national income and product accounts published by the BEA every five years to more accurately portray the evolving U.S.economy given improved methodologies and newly available data. Year-over-year percentage change in the core personal consumption expenditure deflator P I M C O your Global Investment Authority pg7 Volatility increased as investors interpreted "tapering" as "tightening" Nominal yields increased as the Fed's 4 U.S. Treasury curve —Dec'12 —Mar'13—Jun'13 communications strategy befuddles investors 3 • Fed funds rate anchors long-term yields through 2015 aR orlater IS2 > 1 • Timing on tapering remains data-dependent 0 1M 3M 6M 1Y 2Y 3Y SY 7Y 10Y 30Y Sell-off in TIPS due to fundamental and technical 2 U.S. TIPS curve —Dec'12 —Mar'13 —Jun'13 factors 1. • Fundamentals: Reduced inflation expectations on Fed 0 tapering comments — -1 -2 • Technicals: Significant liquidations from risk parity funds -3 and passive ETFs magnified impact on market 1Y 2Y 3Y aY 5Y 6Y 7Y BY 9Y 10Y 20Y 30Y 40 Spreads to Treasuries by sector* ■2Q'13 change Spreads widened on indiscriminate selling — a 30 • Correlations spiked higher n c 20 S • Liquidity diminished as bid/ask spreads widened 100 ■. . ■... ... ... _.._. U.S.Credit Industrials Utilities Financials U.S.Corp HY As of 31)June 2013 SOURCE:Bloomberg,Barclays Barclays U.S.Credit Index and subindex components P I M C O Your Global Investment Authority pg a Sector performance driven by concerns over Fed tapering Core fixed income Non-core fixed income Global fixed income and currency Equity and commodity 22 20 18 - ®YID'13 .30 Jun'12-30Jun'13 16 --- 14 12 Flo V o -2 -4 . _6 0 1 -12 U.S. MTG IGC Treasuries Mums TIPS HY CMes Global EM EM(S) USE,M Global U.S. EM Commodities bonds local equities equities equities • Treasuries fall on talk of • Risk parity funds worsen • EM local driven by poor FX • Central banks driving strong tapering TIPS sell-off performance equity performance YTD • Steep rise in mortgage rates • Fund outflows weigh on • EM yields up on "hot money" • Technical selling in precious following Fed comments municipal market outflows and protests metals; base metals face oversupply As of 30 June 2013 SOURCE:Barclays, Federal Reserve,JPMorgan,Bloomberg,PIMCO Barclays U.S.Aggregate;Barclays MBS Fixed Rate Mortgage;Barclays Investment Gmde Credit Barclays U.S.Treasury Barclays Municipal Bond;Barclays U.S.TIPS;WA Mertill Lynch U.S.High Yield BB-B Rated;Barclays CMBS ERISA-Eligible;JPMargan EMBI Global;JPMorgan GBI Global ex-U.S.USD Hedged Index,JPMoman GBI-EM Global Diversified(Unhedged);Dollarindex Spot MSCI World,S&P 500,MSCI EM;DJ-UBS Commodity USD($)measured relative to basket of seven currencies on a trade-weighted basis P I M C CI i Your Global Investment Authority Pig Performance review: Long Term Portfolio Orange County Sanitation District-Long Term Portfolio S 431,233,505 f 14,100,000 S d979,966 S 443,353,539 Performance •Portfolio(before fees) Benchmark 10 6 _ 4 5 2 0 _2 '00 .01 '02 '03 '04 '05 '06 '07 '08 '09 .10 '11 '12 YTD 73 Orange County Sanitation District- Long Tenn Portfolio MEMEMEMME Before fees (%) 5.1 18 3.8 24 21 -0.6 -17 -1.9 -2.1 After fees (%) 5.0 3.6 16 22 2.0 -0.7 -1.8 -1.9 -2.1 Benchmark(%) 4.9 3.4 3.3 2.0 1.5 0.5 -0.5 -0.8 -0A As of 30 June 2013 All periods longer than one year are annualized Benchmark BofA Merrill 1s Year GWKorp. P I M C 0 Your Global Investment Authority pg 10 Performance review: Liquid Operating Portfolio Orange County Sanitation District- Liquid Operating Portfolio Market value as of Jun'12 E 54,804,869 E 14054,000 Net linvestrent Earnings E 112,444 Market value as of Jun'13 E 70,973,313 Performance ■Portfolio(before fees) ■Benchmark 8 7 _- 6 ap 5 —_ 4 w 3 2 .00 .01 '02 '03 'W 'OS '06 '07 .08 .09 .10 '11 'U YTD 13 Orange County Sanitation District- Liquid Operating Portfolio MENEEMME Before fees (%) 12 1.9 0.5 0.2 0.2 0.2 0.1 0.0 0.1 After fees (%) 3.0 1.7 0.3 0.1 0.0 0.0 0.0 0.0 0.0 Benchmark(%) 2.8 1.6 02 0.1 0.1 0.1 0.0 0.0 0.0 As of 30 June 2013 All periods longer than one year are annualized Benchmark Cifigroup 3 Month Treasury Bill Index P I M C O Your clonal lnxe:Imenc Authority pg 11 Portfolio positioning Orange County Sanitation District- Long Term Portfolio Orange County Sanitation District- Liquid Operating Porttolio Portfolio' 2.9 3.1 3.0 Portfolio` 0.3 0.4 0.3 Effective duration (yrs.) Index 2.7 2.7 2 g Effective duration (yrs.) Index 0.2 0.2 0.2 Yield to maturity(%) 0.9 0.9 1.2 Yield to maturity(%) 0.1 0.1 0.1 Total curve duration' : -1.3 Total curve duration' : 0.1 031 Dec'12 031 Mar'13 031 Dec'12 031 Mar 13 Sector allocations-Duration weighted ■30 Jun'13 ■Benchmark Sector allocations- Duration weighted ■30 Jun'13 ■Benchmark 3.0 - --_ 0.6 2.5 ----___- ._._._.__--__..- �.L92.0 0.4 B 1.7 0.3 BLS 0.3 0.3 -2 0.2 Lo _ _. ...._.--- ---._._ - 0.2 0.7 . 0.5 - -____. 0�- 0.6�4 0.505 0.�_-_ 0.2 0.0 0.1 0:1 0.301 0.0 0.0 ,. -� 00 0.0 _. .. _... - 0.0 ___.. ._ Government Mortgage Credit Muni/Other Government Related* Treasury/Cash Equivalents Related` In November 2011 PIMCO modified its duration calculation to account for the potential that holders of securities subject to credit risk may,in the event of default recover portion of their investment prior to maturity.The duration for the portfolio reflects the revised calculation. Measures a portfolio's price sensitivity relative to the benchmark to changes in the slope of the yield curve,measured between the 2-30 year Government yields,holding the 7 year yield constant.For every one basis point of steepening(flattening),a portfolio with curve duration of one year will rise(fall)in price by one basis point relative to the benchmark. Godt-related may include nominal and inflation-protected Treasuries,agency debt and FDIC-guaranteed corporate securities P I M C o your Global Investment Authority pg 12 3. Outlook and strategy P I M C O Your Global In a mmt Au hmity pg 13 2013 Secular Outlook: The New Normal has morphed into a series of multi-speed dynamics EUROPE UNITED STATES EMERGING ECONOMIES (-1%to 1% annual real GDP growth) (- 2%annual real GDP growth) (3%to 4% annual real GDP growth) • Risk of"zombification" and a retreat from Fiscal policy impact diminishes;central • China to maintain 6-7.5%real growth, global competitiveness bank actions drive modest healing supported by gradual rebalancing from • Additional debt restructuring likely Sector-driven stories such as housing, production to consumption • Balance of risk tilted to downside will be critical to growth • Brazil,India, and Russia face significant • Worries about level and composition secular headwinds of U.S.potential may grow • Competitive currency devaluations in developed world may limit EM potential JAPAN (0%to 2%annual real GDP growth) • Reflationary experiment to cause initial growth surge but face challenges from: - Demographics - Limits on structural reform - Less accommodating global and regional context SECULAR RISKS Artificially assisted growth and purchased financial stability may breed shortfalls and asset bubbles International and regional systems may fragment, and growing income inequality may destabilize geopolitics Supply shocks and currency debasements may lead to higher and less stable inflation Absent a growth revolution, haircuts may increase over the secular horizon As of 15 May 2013 P I M C O Your Global lne Trent Authority pg 14 Hyperactive monetary policy has ushered in a "stable disequilibrium" • Economic stagnation and contraction • Robust, sustainable growth • Social instability Political renewal and structural reforms • Regional fragmentation • Stronger global linkages Income inequality Macroeconomic factors Unsustainable debt burdens Global polity coordination Regional political dynamics As of 15 May 2013 P I M C O Your GloballmestrrertAuthority Pg15 PIMCO's cyclical framework for the global economic outlook . . . . . rely on liquidity provided CHANGE CYCLICAL OUTLOOK FROM PRIOR (6-1 2 MONTHS) OUTLOOK DESCRIPTION 12 A 12 o Aggressive Japanese fiscal, monetary policies oJapan: Slight • Global demand for EM exports is moderating B decrease • EM not yet shifting to consumption, still • OT export-focused w i EM: Unchanged China GDP growth slowing,financial n �w conditions tightening 0 oHousing recovery underway -- Higher rates could limit consumption, housing U.S.: Unchanged E Fiscal tightening offsetting growth oMonetary policy supporting equity prices u w ECB remains the only active policy institution EU: Unchanged Growth remains dependent on politics • Private credit rationing As of 30 June 2013 Bank deleveraging SOURCE:PIMCO For illustratlee purposes only Potential economic conditions are specific to each geographic region P I M C O Your Global Investment Authority pg 16 Short-term portfolio strategy: Retain exposure to high quality spread sectors while maintaining above-benchmark duration INTEREST RATE STRATEGIES Targeted exposure Supporting details Overweight U.S.duration Continued economic headwinds and policy uncertainty will likely keep short-term rates from increasing in the near term Exposure to non-U.S.duration Diversify sources of high quality duration-Australia, Brazil,and Mexico offer yield compression potential Utilize the 18-36 month portion of the yield curve Continues to be a good source of roll-down as short-term yields remain anchored STRATEGIC POSITIONING Supporting details Focus on investment grade credit 1) Retain exposure to U.S.financials 2) Maintain high quality bias across U.S.and select emerging market corporates 3) Emphasize defensive sectors, such as industrials,which offer diversification benefits and provide yield advantage over Treasuries Selective exposure to covered bonds 1) Emphasize short-dated, USD-denominated covered bonds,primarily in Canada and Nordic countries 2) Offer attractive risk/return profiles fully backed with collateral TACTICAL POSITIONING Targeted exposure Supporting details Maintain cautious exposure to high yield credit High yield will likely be most vulnerable during periods of market volatility;focus on highest quality bonds in non-cyclical sectors Reduced exposure to currencies Reduce exposures amid heightened volatility, especially to commodity-intensive economies and emerging markets As of 30 June 2013 P I M C O Your Global Investment Authority pg 17 Are rising rates a concern? The holding period matters. . . Scenario 1:Sudden change in the yield curve at the beginning of the first year ESTIMATED ANNUALIZED RErURNS 200 bps -1.8% 1.8% 2.6% 2.9% 31% 100 bps -0.1% 1.7% 2.1% 2.2% 2.4% 50 bps 0.8% 1.7% 19% 1.9% 2.0% 0 bps 1.6% 1.6% 16% 1.6% L6% -50 bps 2.5% 1.6% L4% 1-3% 13% -100 bps 2.9% 13% 1.0% 0.9% 0.8% Scenario 2:Steady change in the yield curve for the first 4 years and no change afterwards ESTIMATED ANNUALRED RETURNS 200 bps 0.8% 1.3% 1.9% 2.4% 2.8% 100 bps 1.2% 1.5% 1.8% 2.0% 2.2% 50 bps L4% 1.5% 1.7% 1.8% 1.9% 0 bps 1.6% 1.6% 1.6% 1.6% 1.6% -50 bps 1.9% 13% 16% 1.4% L4% 2.7 -100 bps 2.1% 1.7% L4% 1.1% 1.0% 1.6% Bonds potentially provide po during rising rate environmentsthroughyield/carryand active maragernent As of 31 August 2013 SOURCE_PIMCO Hypotheriol a ample for illustrative purposes only.In the analysis contained herein,li has nu ined hypothetical event scenanos which,in theory,would impact the portfolio returns as illustrated in this analysis.No representation is being made that these scenanos are likely to occur car that any portfolio is likely to achieve profits,losses,or results similar to those shown. The scenarios do not represent all possible outcomes and the analysis does not take into account all aspects of nsk Scenano analysis assumes annual rebalancing.Rate shocks applied at the beginning of each rebalancing period.Total returns are estimated by re-pricing a key rate duration replicating portfolio of par coupon bonds every period.Interest rates are floored at zero. OAS is assumed constant,over 9me. P I M C O Your Global Investment Authority pg 18 4. PIMCO update P I M C O Your Global Investment Authority pg 29 PIMCO snapshot Global presence • Founded in 1971 Employees 2,380 Amsterdam 2 • Investment solutions include fixed • Investment professionals 687 Hong Kong 14 income, active equities, alternatives and • Technical and support 1,693 London 121 asset allocation - Milan 2 • Assets under management: $1.97 trillion Highly experienced Avg Yrs Avg Yrs Munich 59 Excerience at PIMCO ■ New York 109 — $1.60 trillion in third-party • All investment Newport Beach 322 client assets professionals 13 6 Rio de Janeiro 2 — Full complement of vehicles to • Senior professionals 19 9 Singapore 13 meet client needs (mutual funds, ® Sydney 9 separate accounts, LPs, ETFs) Tokyo 25 Toronto 5 Zurich 4 As of 30 June 2013 Effective 31 March 2012, PIMCO began reporting the assets managed on behalf of its parent's affiliated companies as part of its assets under management PIMCO Your Global Investment Authority pg 20 Assets under management by strategy Liquid Absolute Return Unconstrained bond strategies,credit absolute return,otherabsolute return strategies 43.80 Hedge Funds Global macro,long/short credit multi-asset volatility arbitrage strategies 12.13 Opportunistic/Distressed Opportunistic strategies focusing on real estate related assets(residential,commercial),corporate credit 7.10 Asset Allocation Asset Allocation Strategies Global Multi Asset All Asset EM Multi Asset, Real Retirement,Inflation-Response Multi Asset DRA 9173 •StocksPLUS® Combines derivatives-based equity exposurewith active bond management 16.60 Active Equities Pathfinder, Emerging Markets, Dividend,Global Long/Short 4.08 Inflation-Linked Bonds U.S.,Global 75.46 Commodities Actively managed commodity exposure enhanced with actively managed collateral portfolios 23.95 Real Estate Real-estate linked exposumenhanced with actively managed collateral portfolios L46 Intermediate• Total Return,Moderate Duration 557.28 Credit Investment Grade Corporates, Bank Loans,High Yield Corporates,Convertibles 174.78 Cash Management- Money Market Short-Tenn, Low Duration 144.10 Long Duration Focus on long-term bonds;asset liability management 112.90 Global Non-U.S.and global multiple currency formats 119.25 Emerging Markets Local debt external debt curency 74.13 Mortgages Agency MB$structured credit(non-Agency MBS,CMBS,and ABS) 5161 Income Income-oriented,insurance income 46.72 Diversified Income Global credit combining corporate and emerging markets debt 27.69 Municipals Tax-efficient total return management 14.20 Other 10.31 Stable Value Stableincomewith emphasison principal stability 30.40 Tail-Risk Hedging— Pooled and customized portfolios of actively managed tail-risk hedges 43.79 As of 30 June 2013 SOURCE:PIMCO Assets reflect those managed on behalf of third-party clients and exclude affiliated assets.Fund of funds assets have been netted from each strategy. Potential differences in asset totals are due to rounding. Stable value assets have not been ratted from U.S.Total Return,U.S.Moderate Duration and U.S.Low Duration assets "• Tail-risk hedging assets reflect total notional value of dedicated mandates and are not counted towards PIMCO total assets under management P I M C O I Your Global Investment Authority T pg 21