HEAD-TO-HEAD: Blackrock versus Pimco

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INVESTMENT APPROACH

The Blackrock fund has a hard-currency, Asia credit-focused mandate, that deploys a team-based approach which combines top-down and bottom-up analysis. The strategy is benchmarked against the JPMorgan Asia Credit Index (Jaci), but has the flexibility to invest in off-benchmark plays, including up to 10% in local-currency bonds.

“The strategy is a much traditional one than the Pimco fund,” said Ge.

Neeraj Seth starts by establishing a top-down view and decides the risk budget across various alpha sources, which includes spread duration, duration, and yield curve positioning, and the allocation between investment-grade and high yield, according to Ge.

He uses Blackrock’s vast global network, including weekly meetings with the global CIO of fixed income Rick Reider and the emerging-markets investment committee.

“However, Seth has the discretion to form an independent macro outlook, which at times means implementing a different macro strategy than the global teams,” said Ge.

“While this has borne fruit in the past, this is not always repeatable,” he said.

Afterwards, co-managers Artur Piasecki and Ronie Ganguly work closely with the credit analyst team to select individual credits based on an issuer’s financial health, capital structure, management quality, competitive position within the industry, and relative valuations.

Duration and high-yield exposure are typically managed within +/- one year and +/- 10% relative to the benchmark, respectively.

In a meeting last summer, the managers explained to Ge that they were more selective with their portfolio exposures in response to the heightened market uncertainty spurred by the coronavirus.

They added investment-grade issuances, particularly primary market issues, which included off-benchmark Qatar and Abu Dhabi sovereigns. Even so, it was still underweight investment-grade names relative to the Jaci because of the underweighting in the five-year part of the curve.

Conversely, the team was overweight high-yield credits relative to the index but with a focus on defensive issues. Management was overweight Chinese high-yield property and Indian renewables names because of their strong balance sheets and government backing.

The Pimco fund’s strategy was restructured in August 2020 to become benchmark-agnostic with an income-focus and was renamed Pimco GIS Asia Strategic Interest Bond. Previously it was called the Pimco Emerging Asia Bond Fund.

It now aims to generate a yield of 5%-6% per year while managing the portfolio’s volatility within 4%-8% per year, according to Ge.

“Pimco recognised that Asian investors were keen for a product that focused on generating income,” said Ge.

“The investable universe remains predominately hard-currency Asia credits, but management has the added flexibility of investing up to 50% and a third in high yield and non-Asia issuances, respectively, and a wider duration band of two- to eight-years,” he said.

“While the mandate has been revamped, we take comfort that the investment framework remains intact and clearly structured,” said Ge.

The process begins with the secular forum, which formulates Pimco’s three- to five-year global outlook. Building on this, the four regional portfolio committees (Americas, European, Asia-Pacific, and emerging markets) meet quarterly to establish the six- to nine-month cyclical outlook for their respective regions.

The Asia Pacific portfolio committee — which is chaired by Stephen Chang, the lead manager of the fund — then combines the secular and cyclical views to formulate Asia’s stance on country selection, duration, and yield-curve positioning, according to Ge.

Next, Chang turns to the Asia credit analysts for bottom-up credit selection, which focuses on fundamentals.

“While the framework is robust, we have not seen Chang manage an income-focused portfolio previously, and the strategy has a limited track record,” said Ge.

At a meeting last September, Chang told Ge that the restructured portfolio would contain a much larger allocation to high-yield credits, averaging between 40% and 50%, although its overall average credit quality will remain investment-grade. This is in contrast with the roughly 25% exposure it had when managed relative to the Jaci.

Fund characteristics:

Source: Morningstar

 Country allocation:

Source: Factsheets, 31 December 2020

Sector allocation:

Source: Factsheets, 31 December 2020

Top 10 holdings:

Source: Fund factsheets, 31 December 2020

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