The largest fixed income manager in the world, Pimco, surprises by buying corporate debt from sectors closely linked to consumption. The recession will be short and mild or you know something that the market doesn’t see yet.
The time has finally come for Pimco, the legendary fixed income manager founded by Bill Gross. The great investors build their legend seeing or sensing things that no one else. Five years ago, before trade wars, pandemics and invasions; the firm expected a long recession marked by geopolitical tensions .
Your omens are knocking at the door. The US is already in a technical recession and Europe is about to enter a dark phase of rising interest rates and an energy crisis. While most investors are racking their brains to discover how far the impact of a new crisis will go, Pimco is taking the opportunity to renew its portfolio.
In recent months, it has invested more than $2 billion in corporate debt from cyclical companies, closely linked to consumption, but at deep discounts. Specifically, last May he acquired a loan portfolio of 600 million and another 545 million in bonds from Wm Morrison Supermarkets, after the sale of its subsidiary failed.
The fund took advantage of the fall in the operation to obtain a discount of up to 15% for the bonds, according to Bloomberg in May. In the secondary market, bonds have fallen as much as 10% at the beginning of July. They are now trading at $0.82, which is a 6% discount from the issue price.
Last month, the manager acquired 1,000 million in loans linked to the acquisition of the payment terminal unit of Worldline by the Apollo fund. According to market data on the French company’s bonds, the debt offered a 20% discount at the time the operation was carried out. Now they have recovered 10%. The debt was added to the portfolio of the GIS Income Fund, the manager’s largest fund, with more than $120 billion under management.
Pimco’s flagship vehicle is not going through its best moment. So far this year it accumulates a fall of 6%. Last year it offered a negative return, given the general decline in the bond market. Investments are surprising at a time when it is not very clear what the depth of the recession will be. If the crisis drags on, it is likely that investments will cause significant losses, as a result of further declines in fixed income.
Two things can happen for the strategy to offer good returns, that the recession is short and growth returns in general, or that the central banks back down with the withdrawal of purchases and continue to fatten balance by buying debt. The second scenario hides a big crisis, which would force interventions in fixed income.
“For this type of investment to be worthwhile in the long run, two things have to be true: first, you have to be right about the investment thesis; and second, you have to have good liquidity management,” explains Mara Dobrescu, an analyst at morningstar. “Historically, Pimco has been able to do both quite successfully.” It seems that the purchase of bonds goes through a broader strategy of buying assets battered by inflation and fear of inflation.
Lately, your customers aren’t showing much patience. Subscribers withdrew 28.7 billion from the giant in the second quarter, the largest quarterly outflow since the start of the pandemic in early 2020.
The purchases are part of a broader strategy by the firm to capitalize on depressed prices, according to people familiar with the matter, who asked not to be identified because details are private.
A huge gas in the sleeve
With $1.8 trillion in assets under management, Pimco is well positioned to make such bold moves, but it’s an approach that is fraught with risk as the global economy teeters on the brink of recession. The company is likely to have to endure several quarters of poor performance before the investments have any potential to be good, leaving it vulnerable to capital outflows and could incur big losses if the bets fail.
“Para que esto valga la pena a largo plazo, dos cosas deben ser ciertas: primero, debe tener razón sobre la tesis de inversión; y segundo, debe tener un buen manejo de la liquidez”, dijo Mara Dobrescu, analista de Morningstar en París. “Históricamente, Pimco ha sido capaz de hacer ambas cosas con bastante éxito”.
Pero Pimco cuenta con un as en la manga para hacer valer su inversión. Su enorme tamaño. Los activos bajo gestión en todos sus fondos superan los 1,8 billones de euros. Con relativa facilidad, puede hacerse con buena parte de una emisión, lo que le permite obtener mejores precios y ayudar en las reestructuraciones de una compañía, destaca el experto. Pimco cuenta con un equipo de más 60 analistas para analizar el mercado de crédito y detectar bonos infravalorados.
In addition, the huge catalog of funds allows you to take temporary losses, without being too noticeable. “Pimco can keep the debt until maturity, if the price does not recover and spread the risk among several funds,” explains Noel Hebert, director of credit research at Bloomberg Intelligence.