Home > How PIMCO’s Bottom-up Credit Research Works for Investors

How PIMCO’s Bottom‑up Credit Research Works for Investors

To seek to meet investors’ objectives in ever-changing markets, PIMCO’s dedicated Asia credit team (examined in more detail in Part 1 of this series) combines bottom-up views on industry and company fundamentals with top-down macroeconomic views and relative value analysis to best position portfolios based on their investment objectives.

The credit research team synthesizes its bottom-up views through in-depth research reports that help portfolio managers decide whether a company, sector, or even a specific bond might merit new or further attention. These research reports highlight the analysts’ internal credit rating and recommendation for each issuer, and include detailed analysis on a company’s financial results, business outlook, balance sheet, and ESG (environmental, social, and governance) considerations.

Real-world examples at work

Three recent real-world examples of PIMCO’s credit research process include avoiding an investment in a Southeast Asian textile company, picking rising stars (credits with improving fundamentals that are likely to receive ratings upgrades over time) within the high yield property sector in China, and choosing to overweight the renewable energy sector in India. The analysis and recommendations for each differ in a number of crucial respects.

For the textile company, approaching its debut issuance, the analysis centred on the company’s governance. Being a subsidiary of a family-owned group, the company disclosed limited information and showed many transactions with related parties, which the PIMCO credit research analyst believed made it easy to manipulate cash flows. This, combined with the determination that the competitive landscape for the company was fragmented with low barriers to entry, meant the research team ultimately recommended a pass for all portfolios – with a PIMCO internal rating two notches below external agency ratings.

This research led to PIMCO avoiding an oversubscribed bond issuance, which subsequently defaulted on its first coupon payment. PIMCO had zero exposure to this issuer at the time of default.

In another company-specific example, PIMCO successfully invested in a rising star (a company that experienced a rating upgrade) within the crowded China high yield property sector. PIMCO had an overweight exposure to a specific developer that demonstrated its commitment to deleveraging, and that we expected to have strong earnings growth and an improving profit margin. Within a few months of purchasing the developer’s bonds, all three external rating agencies (Fitch, Moody’s S&P) upgraded the credit by one notch, helping drive the bond’s relative outperformance.

In a sector-specific example, PIMCO went overweight the India renewable energy market in mid-2019. The rationale for being overweight the sector included supportive government policy, a project-finance-based structure that is friendly to bondholders, and long-term fixed-price power purchase agreements that supported predictable revenue streams and debt servicing. Both our sector overweight and security selection within the sector contributed positively to our Asia High Yield Strategy.

Due diligence pays off over time

PIMCO's credit research process is both diverse and highly structured, driven by critical thinking and independent judgment. Along with the advantages of PIMCO’s size, it allows PIMCO to seek to outperform over market cycles, and differentiates PIMCO from its competitors who may rely more heavily on third-party resources that are often backward-looking.

Disclosures

Past performance is not a guarantee or a reliable indicator of future results.

All investments contain risk and may lose value. High-yield, lower-rated, securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Currency rates may fluctuate significantly over short periods of time and may reduce the returns of a portfolio. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Mortgage and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and their value may fluctuate in response to the market’s perception of issuer creditworthiness; while generally supported by some form of government or private guarantee there is no assurance that private guarantors will meet their obligations. Equities may decline in value due to both real and perceived general market, economic, and industry conditions. Derivatives may involve certain costs and risks such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested.

This material contains examples of the firm's internal investment research capability. The data contained within the reports may not be related to any product discussed herein, may be stale and should not be relied upon as investment advice or a recommendation of any particular security, strategy or investment product. In selecting case studies, PIMCO considers investment performance in addition to other factors, including, but not limited to, whether the example illustrates the particular investment strategy being featured and processes applied by PIMCO to making investment decisions. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

Socially responsible investing is qualitative and subjective by nature, and there is no guarantee that the criteria utilized, or judgment exercised, by PIMCO will reflect the beliefs or values of any one particular investor.  Information regarding responsible practices is obtained through voluntary or third-party reporting, which may not be accurate or complete, and PIMCO is dependent on such information to evaluate a company’s commitment to, or implementation of, responsible practices.  Socially responsible norms differ by region.  There is no assurance that the socially responsible investing strategy and techniques employed will be successful.  Past performance is not a guarantee or reliable indicator of future results.

The credit quality of a particular security or group of securities does not ensure the stability or safety of an overall portfolio. The quality ratings of individual issues/issuers are provided to indicate the credit-worthiness of such issues/issuer and generally range from AAA, Aaa, or AAA (highest) to D, C, or D (lowest) for S&P, Moody’s, and Fitch respectively.

This material contains the current opinions of the author and such opinions are subject to change without notice. This material is distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. This is not an offer to any person in any jurisdiction where unlawful or unauthorized. | PIMCO Asia Limited is licensed by the Securities and Futures Commission for Types 1, 4 and 9 regulated activities under the Securities and Futures Ordinance. PIMCO Asia Limited is registered as a cross-border discretionary investment manager with the Financial Supervisory Commission of Korea (Registration No. 08-02-307). The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | No part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2020, PIMCO.

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