The Secret to Sustaining Income

There’s a natural tradeoff between yield and risk. In the current environment where yields remain relatively low, it’s especially crucial for income-oriented investors not to stretch for yield - taking on excess risk in an effort to reach their return targets.

Instead, we believe it’s possible to build an income stream that is both sustainable and responsible. That means giving up a bit of incremental yield in certain circumstances in order to buy income-generating assets that have a demonstrated ability to perform well during more difficult macro environments.

PIMCO’s Daniel Ivascyn discusses building a sustainable income stream in a world of low yields and heightened volatility.

A ‘Bend But Not Break’ Approach

A sustainable income strategy has to be able to bend but not break. By that we mean a portfolio manager should be willing to accept some volatility in net asset value, as long as the invested assets have a low probability of real economic loss.

VIEW ALL

View all

Here are three ways we are approaching this:

1. Incorporate high-quality assets. Use these in combination with traditional income-producing assets to help protect on the downside.

2. Maintain a preference for seniority. By staying with the senior-most bond or tranche in the capital structure of targeted investments, the ultimate recovery will likely be higher should the economy or a particular firm get into trouble.

3. Stay sufficiently diversified. In the current environment, we have a bit less conviction about the attractiveness of one sector versus another, and we are more diversified than ever before.

Daniel Ivascyn is Group CIO and lead portfolio manager for PIMCO’s income strategies and credit hedge fund and mortgage opportunistic strategies. Alfred Murata is a managing director and portfolio manager on PIMCO’s mortgage credit team.

Disclaimer

This publication is issued by PIMCO Australia Pty Ltd ABN 54 084 280 508, AFSL 246862 (PIMCO Australia) and is intended to provide general information only. This publication has been prepared without taking into account the objectives, financial situation or needs of investors. Before making an investment decision investors should obtain professional advice and consider whether the information contained herein is appropriate having regard to their objectives, financial situation and needs. Investors should obtain a copy of the offer document in relation to any financial product mentioned in this publication before making an investment decision.

Investment management products and services offered by PIMCO Australia are offered only to persons within its respective jurisdiction, and are not available to persons where provision of such products or services is unauthorised.

Past performance is not a reliable indicator of future results. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Neither PIMCO Australia nor any of its related bodies corporate make any representations or warranties, express or implied, as to the accuracy or completeness of any of the information contained in this publication. To the maximum extent permitted by law, neither PIMCO Australia nor its directors, employees, agents, representatives or advisers accepts any liability whatsoever for any loss arising from the use of information in this publication. This publication contains the opinion of PIMCO Australia and such opinions are subject to change without notice.  The content in this publication remains the property of PIMCO Australia. No part of this publication may be reproduced in any form, or referred to in any other publication, or conveyed to a third party without express written permission of PIMCO Australia. PIMCO is a trademark or registered trademark of Allianz Asset Management of America L.P. in the United States and throughout the world.

© PIMCO, 2015.