Pacific Investment Management Co (Pimco), the global fixed-income fund management company, is entering neutral and low-risk investment modes to avoid higher financial volatility induced by the expected US interest rate rise.
The company will adjust investment durations gradually towards a neutral stance for interest rate exposure as it is projected that global interest rates will rise slowly, with financial volatility projected to heighten gradually.
"It is the first time in many years that Pimco will deleverage overall risk in our portfolio," said Daniel Ivascyn, Pimco's group chief investment officer and managing director, during a seminar titled "Global Outlook and Income Strategy" arranged by TMB Asset Management (TMBAM).
Under this outlook, stocks in Europe, Japan and emerging markets are more than attractive than US equites in terms of valuation, said Mr Ivascyn.
For the bond market, Pimco recommends US, Australian, and emerging market bonds over European and Japanese bonds due to higher yields, he said.
Mr Ivascyn said Pimco's strategy will be to balance risks and yields under this projected investment outlook.
Assets that the company will allocated investment to are made up of emerging market stocks, mortgage-backed securities, corporate bonds with low credit risk, and government bonds in countries with good sovereign credit ratings, he said.
In Pimco's view, mortgage credit and the mortgage-backed securities (MBS) will have higher creditability as the US economy recovers.
MBS is a securities instrument where returns are related to home prices and mortgage loans, which is the collateral backing this instrument.
The company has also allocated funds to emerging market assets providing good returns, with certain funds allotted to US and Australian government bonds to hedge against risks despite the low returns generated, said Mr Ivascyn.
He said Pimco believes that MBS and asset-backed securities are assets that will provide attractive returns over the next two years.
"In the next two years, US home prices are expected to go up about 6% and offer 4-8% yields to investors," said Mr Ivascyn.
In case that home prices decline by 10%, MBS investment is expected to generate 2%, considered a good protection against downside risks, he said.
MBS investment has a low credit risk as the loan-to-value of mortgage loans, which reflects the credit risk of this securities instrument, is around 70% compared with 140% in 2009.
TMBAM has the Global Income Fund (TMBINCOME) that invests mainly in Pimco's GIS Income Fund. The TMBINCOME has assets under management of 94.8 billion baht, ranked the largest foreign investment fund in Thailand as of Sept 19.