Apriem Portfolio Administrator, Matt Kawashima, recently attended the annual PIMCO wealth management forum where he heard from legendary bond managers like Dan Ivascyn and Mark Kiesel. The forum included dialogue about Dan Ivascyn’s (Group CIO) secular view on income investing in today’s environment, an emphasis on investing in high quality bonds with Mark Kiesel (CIO of Global Credit), and investing in a negative interest rate global environment with Sachin Gupta (Head of Global Portfolio Management).
Multiple managers expressed concerns that we are likely entering an environment with higher volatility and lower returns (investors are being compensated less for the amount of risk they’re taking). It’s an environment that requires bond investors to look for opportunities for yield outside of simple passive investments (similar to investing in an S&P 500 index fund, but for bonds). One area of the market that Dan emphasized was the mortgage market by illustrating valuations have been greatly discounted since the financial crisis (due to overall debt in the housing market being significantly less than what it was in 2008). This chart illustrates this point as the blue line shows the decline in how much money homeowners are borrowing, or leveraging, to finance their homes (loan-to-value ratio). The loan-to-value (LTV) ratio compares how much money a homeowner is putting on a down payment versus how much they are borrowing (the higher the number, the more the homeowner is borrowing). Today the LTV sits at roughly half what it was back in the ’08 housing crisis (showing that the residential housing market may be safer now than in 2008 with homeowners being less likely to default on their mortgages).
Overall, PIMCO’s cyclical outlook reflects a slowing global growth alongside many other large investment firms’ projections. We look forward to hearing from PIMCO’s expert team again at next year’s forum and seeing where we are at that point.