Fixed Income ETFs 301 International Fixed Income ETFs Presenter: RONIT WALNY SVP and Global Product Manager with PIMCO
Inside Fixed Income Conference November 2015 Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660, 949.720.6000 For Institutional Investor Use Only
Agenda 1. Why go international? 2. Benchmark selection in a broad universe 3. Currency hedging 4. Additional information pg 3
1. Why go international? pg 4
USD billions Expand your opportunity set globally 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Global bond market EM: $14tn 12/31/1989 3/31/2015 U.S. 60.7% 38.0% Dev. Ex U.S. 38.2% 46.8% EM 1.1% 15.2% Developed ex U.S.: $44tn U.S.: $35tn '90 '92 '94 '96 '98 '00 '02 '04 '06 '08 '10 '12 '14 As of 31 March 2015 SOURCE: BIS Estimated $94 trillion global debt market. Capital_Securities_Review_14 pg 5
Diversify to other economies and currencies ANNUAL RETURNS FOR KEY INDICES (2004 2014) RANKED IN ORDER OF PERFORMANCE (%) 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 22.97 10.25 15.22 22.58 27.40 29.82 19.86 14.54 17.44 5.00 7.43 15.69 9.82 14.67 18.11 4.78 25.56 17.50 12.64 16.76-0.84 7.20 15.53 6.27 12.36 15.15-3.27 22.02 15.68 7.35 12.31-2.02 5.97 14.45-1.05 9.86 11.44-4.59 21.98 12.76 7.35 10.86-5.25 1.66 11.62-3.15 9.72 9.48-5.22 16.02 12.24 7.34 6.81-7.77 0.02 11.44-4.48 6.63 9.44-12.03 11.12 5.54 5.64 5.60-8.98-1.26 9.27-8.28 4.41 6.16-14.38 6.93 4.57 2.13 4.31-13.74-5.72 5.90-12.57-0.65 5.14-24.57-1.44-2.47-1.75-9.47-16.14-8.61 United States Japan Canada External EM Eurozone Australia Local EM United Kingdom As of 31 December 2014 SOURCE: Bloomberg United States represented by Barclays U.S. Agg Index USD Unhedged, eurozone represented by Barclays Euro Agg Index USD Unhedged, Japan represented by Barclays Japanese Agg Index USD Unhedged, Australia represented by Barclays Australian Agg Index USD Unhedged, Canada represented by Barclays Canadian 300 Index USD Unhedged, Local EM represented by JPMorgan GBI-EM Global Diversified Index USD Unhedged, External EM represented by JPMorgan EMBIG Diversified Index USD Unhedged, United Kingdom represented by Barclays Sterling Agg Index USD Unhedged Past performance is not a guarantee or a reliable indicator of future results. Refer to Appendix for additional index and risk information. intl_review_03 pg 6
Percent But yields are mostly lower, so why go international? 3.0 2.5 2.0 10-Year government bond yields 2.61 2.04 1.89 1.76 1.73 Yield 1.5 1.43 1.0 0.5 0.99 0.59 0.36 0.0-0.5-0.12 As of 30 September 2015 SOURCE: Bloomberg pg 7
Ways to generate returns in global bonds 1. Accrue yield 2. Price response to changes in yields 3. Currency appreciation or depreciation pg 8
Rate (%) Rate expectations reflect economic divergence 6 5 4 Federal Reserve Bank of England European Central Bank Bank of Japan 90-day MM futures imp. yields 3 2 1 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 As of 30 September 2015 SOURCE: Bloomberg Refer to Appendix for additional forecast information. Capital_Securities_Review_14 pg 9
Interest rates (%) Global bonds (U.S. dollar-hedged) can buffer portfolios in a U.S. rising rate environment 8 7 6 5 4 3 2 1 0 Interest Rates vs. Growth of $100 invested in Index on 12/31/1992 Rising Rate Period 10y UST (LHS) BC Glbl Agg USD H (RHS) -2.5% 1.6% 1.0% -1.6% -0.3% -0.1% 5.1% -2.0% 1.4% Interest Rates vs. 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 *Total return over shaded period in box 400 350 300 250 200 150 100 Value of $100 invested at start ($) As of 30 September 2015 Hypothetical example for illustrative purposes only. SOURCE: Bloomberg, PIMCO. * Each rising rate period represents an increase in the US 10-Y yield of greater than 100bps. Refer to Appendix for additional index, hypothetical example and risk information. intl_review_06 pg 10
2. Benchmark selection in a broad universe pg 11
Trillions ($) Starting decisions for a global bond benchmark Benchmark considerations 1. Define universe 2. Currency 3. Sectors included Global or ex-u.s.? Emerging markets included? Hedged or unhedged? Sovereigns-only or Aggregate? 100 90 80 70 60 50 40 30 20 Regional weights EM - CEEMEA EM - Latin America EM - Asia U.K. OIC Japan Eurozone Weighting scheme 10 U.S. Market cap, GDP 0 Global Fixed Income As of 30 September 2015 SOURCE: BIS, Barclays Estimated $94 trillion global debt market. pg 12
Market Value (USD Billions) A common starting point 50,000 Composition of Barclays Global Aggregate Bond Index Treasuries (LHS) Securitized (LHS) Duration (RHS) Agencies (LHS) Corporates (LHS) 6.8 45,000 40,000 6.3 Duration has extended 35,000 30,000 25,000 20,000 15,000 10,000 5.8 5.3 4.8 4.3 Duration (yrs; 12 month moving average) Monetary policy has pushed yields lower Share of lowyielding Treasuries is high 5,000 0 2001 2003 2005 2007 2009 2011 2013 2015 3.8 As of 30 September 2015 SOURCE: Barclays Refer to the Appendix for additional risk and index information.!mk_enhanced_fixed_income_diversification_body pg 13
GDP-weighting vs. market cap-weighting Debt-weighted approach BANK Income-weighted approach BANK Lend in proportion to household s debt Lend in proportion to household s income Which makes more sense? Sample for illustrative purposes only SOURCE: PIMCO global_advantage_review_40 pg 14
Two indices with different exposures BARCLAYS GLOBAL AGGREGATE Regional breakout Sector breakout EM - ASIA 3% Dollar Block United 4% Kingdom 6% Japan 16% EM - CEEMEA 2% Eurozone 24% Corporates 18% Europe non-emu EM - Latin 2% America 1% Government 51% Gov't related 13% United States 42% Securitized 9% EM External 3% EM Local 3% Covered 3% PIMCO GLOBAL ADVANTAGE Dollar Block 4% Japan 9% EM - Latin America 11% United Kingdom 4% EM - CEEMEA 14% EM Currencies 13% EM External 15% Corporates 16% Europe non-emu 2% EM - ASIA 15% EM Local 12% Covered 9% ILBs 8% Securitized 7% Government 18% United States 22% Eurozone 19% Gov't related 2% As of 30 September 2015; SOURCE: Barclays, PIMCO Refer to the Appendix for additional risk and index information. pg 15
Considerations for active management THEMES Secular outlook Cyclical outlook MARKET VIEWS Interest rates Yield curve shape Credit trends Country outlook Volatility PORTFOLIO TARGETS Country selection Duration Yield curve position Currency Sector exposure Quality bias INSTRUMENT SELECTION Credit selection Bond selection Instrument selection Currency selection Refer to Appendix for additional investment strategy information. phil_02f_ap pg 16
3. Currency hedging pg 17
Reasons to hedge vs. remain unhedged Hedge Remain unhedged View on dollar neutral/positive negative volatility lower higher cost of hedging low high Refer to Appendix for additional investment strategy and risk information. Global_tab_2 pg 18
Bars - Annual returns Lines - 3y trailing annualized standard deviation Hedging has mixed results through time, but materially less volatility 10% 3 Year Trailing Return and Volatility Barclays Global Aggregate Unhedged Barclays Global Aggregate Hedged 8% 6% 4% 2% 0% -2% -4% 2007 2008 2009 2010 2011 2012 2013 2014 As of 30 September 2015 SOURCE: Bloomberg, PIMCO Uses monthly returns for volatility calculations pg 19
Hedging yield gain or loss from a U.S. perspective 1.50% 1.00% 0.50% 0.00% -0.50% -1.00% -1.50% -2.00% -2.50% EUR JPY GBP CAD AUD CHF total 0.51% 0.39% -0.23% -0.26% -1.98% 1.17% The cost of currency hedging could be negative; i.e., you could get paid for hedging As of 15 October 2015 SOURCE: Bloomberg pg 20
Yield (%) The cost of hedging is often higher in EM 14 12 10 8 6 4 2 0-2 3-month local currency cash rate As of 30 September 2015 SOURCE: Bloomberg * Using SELIC rate for Brazil and 1-month deposit rate for Argentina global_advantage_review_22 pg 21
Summary 1. Why look at global bonds? Expanded opportunity set Diversification of economies Buffer from rising rates in the U.S. 2. Considerations for index selection Define your universe (include EM, US, Sectors?) Hedged vs. Unhedged Weighting Scheme (Market Cap, GDP.) 3. Currency hedging considerations Anticipated direction of the dollar Volatility of currency exposure Cost of hedging pg 22
4. Additional information pg 23
Interest rate differentials significantly drive hedging costs Local yield HEDGING COST = 1.75% 2.60% (10-year Australian sovereign) (-) Pay Local short-term rate 2.00% (3-month Australian cash rate) (+) Receive Domestic short-term rate 0.25% (3-month U.S. cash rate) Hedged yield (=) 0.85% (Hedged yield for U.S. investor) Hedged yield = local yield hedging costs As of 30 September 2015 SOURCE: Bloomberg Sample for illustrative purposes only Refer to Appendix for additional investment strategy and risk information. global_advantage_review_22 pg 24
Yield (%) Curve steepeness (3m-5Y, %) When purchasing bonds, curve steepness is critical 3.0 2.5 2.0 1.5 1.0 2.40 0.67 1.98 1.36 0.80 United States Canada Eurozone Australia 2.61 2.04 1.43 1.2 1.0 0.8 0.6 0.4 0.2 Canada United States 0.5 0.0-0.5 0.33 0.59-0.01-0.04 3M 5Y 10Y 0.0-0.2 Eurozone Australia -0.4-0.6-0.5 0.0 0.5 1.0 1.5 USD 5Y hedged yield (%) 5Y Local Yield 5Y Yield hedged into USD Curve steepness (3m-5Y) United States 1.36 1.36 1.03 Canada 0.80 0.46 0.13 Eurozone -0.01 0.36 0.03 Australia 1.98-0.09-0.42 As of 30 September 2015 SOURCE: Bloomberg Yields represented by local currency swap rates. * 5 Year local yield refers to benchmark government bond yield. 5y yield hedged into USD = 5 Year local yield (differential in 3M deposit rates). pg 25
Bonds Currency Economic impact on currency vs. bonds differ Why buy a foreign currency bond and hedge out the currency risk? Currency risk can dominate the portfolio if left unhedged Growth strong Growth weak An economic factor that is positive for bond prices (e.g. an interest rate cut) may be negative for the exchange rate Appreciates Depreciates Prices fall Prices rise pg 26
Appendix Past performance is not a guarantee or a reliable indicator of future results. CORRELATION The correlation of various indexes or securities against one another or against inflation is based upon data over a certain time period. These correlations may vary substantially in the future or over different time periods that can result in greater volatility. FORECAST Forecasts, estimates, and certain information contained herein are based upon proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. There is no guarantee that results will be achieved. HYPOTHETICAL EXAMPLE Hypothetical and simulated examples have many inherent limitations and are generally prepared with the benefit of hindsight. There are frequently sharp differences between simulated results and the actual results. There are numerous factors related to the markets in general or the implementation of any specific investment strategy, which cannot be fully accounted for in the preparation of simulated results and all of which can adversely affect actual results. No guarantee is being made that the stated results will be achieved. INVESTMENT STRATEGY There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. OUTLOOK Statements concerning financial market trends are based on current market conditions, which will fluctuate. There is no guarantee that these investment strategies will work under all market conditions, and each investor should evaluate their ability to invest for the long-term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice. RISK 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. 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 the current low interest rate environment increases this risk. Current 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. 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. 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. Equities may decline in value due to both real and perceived general market, economic, and industry conditions. Income from municipal bonds may be subject to state and local taxes and at times the alternative minimum tax. Build America Bonds issued by state and local governments are taxable issues. Sovereign securities are generally backed by the issuing government, obligations of U.S. Government agencies and authorities are supported by varying degrees but are generally not backed by the full faith of the U.S. Government; portfolios that invest in such securities are not guaranteed and will fluctuate in value. 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.!mk_dada_global_funds_std_appendix pg 27
Appendix This material contains the current opinions of the manager and such opinions are subject to change without notice. This material has been 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. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO is a trademark or registered trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. THE NEW NEUTRAL and YOUR GLOBAL INVESTMENT AUTHORITY are trademarks or registered trademarks of Pacific Investment Management Company LLC in the United States and throughout the world. 2015 PIMCO INDEX DESCRIPTIONS The BofA Merrill Lynch Global Corporate Index tracks the performance of investment grade corporate debt publicly issued in the major domestic and eurobond markets. Qualifying securities and their respective country of risk (foreign currency long term sovereign debt ratings) must have an investment grade rating based on an average of Moody s, S&P and Fitch. Taxable and tax-exempt US municipal, US DRD-eligible, euro legacy currency and defaulted securities are excluded from the Index. Index constituents are capitalization-weighted based on their current amount outstanding. The BofA Merrill Lynch Global Broad Market Index is an unmanaged index that tracks the performance of investment grade public debt issued in the major domestic and eurobonds market. The Barclays Build America Bond Index is an unmanaged index that tracks the market for taxable municipal securities with respect to which the issuer has made an irrevocable election to designate the bonds as "Qualified Bonds" under the Build America Bond program created under the American Recovery and Reinvestment Act of 2009 or other legislation providing for the issuance of taxable municipal securities on which the issuer receives federal support of the interest paid ("direct pay Build America Bonds"). The Barclays Euro-Aggregate Index in an unmanaged index that tracks fixed-rate, investment-grade euro-denominated securities. Inclusion is based on the currency of the issue, and not the domicile of the issuer. The principal sectors in the index are Treasury, Corporate, Government-Related and Securitized. Securities in the index are part of the Pan-European Aggregate and the Global Aggregate Indices. The Euro-Aggregate Index was launched on 1 July 1998. The Barclays Global Aggregate Government Guaranteed Index is a sub-index of the Barclays Global Aggregate Index, which provides a broad-based measure of the global investment-grade fixed income markets. Barclays Government Bond Index is an unmanaged index consists of securities issued by the U.S. Government with a maturity of one year or more. Barclays U.S. Aggregate Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. These major sectors are subdivided into more specific indices that are calculated and reported on a regular basis. The Barclays U.S. Treasury Index is a measure of the public obligations of the U.S. Treasury. JPMorgan GBI Global (Unhedged) is an unmanaged market index representative of the total return performance in U.S. dollars on an unhedged basis of major world bond markets.!mk_dada_global_funds_std_appendix pg 28
Appendix The Consumer Price Index (CPI) is an unmanaged index representing the rate of inflation of the U.S. consumer prices as determined by the U.S. Department of Labor Statistics. There can be no guarantee that the CPI or other indexes will reflect the exact level of inflation at any given time. The JPMorgan Emerging Markets Bond Index Global is an unmanaged index which tracks the total return of U.S.-dollar-denominated debt instruments issued by emerging market sovereign and quasi-sovereign entities: Brady Bonds, loans, Eurobonds, and local market instruments. JPMorgan Corporate Emerging Markets Bond Index (CEMBI) Diversified is a uniquely-weighted version of the CEMBI index. It limits weights of those index countries with larger corporate debt stocks by only including a specified portion of these countries eligible current face amounts of debt outstanding. The CEMBI Diversified results in well-distributed, more balanced weightings for countries included in the index. The countries covered in the CEMBI Diversified are identical to those in the CEMBI, which is a global, liquid corporate emerging markets benchmark that tracks U.S.-denominated corporate bonds issued by emerging markets entities. JPMorgan Emerging Local Markets Index Plus (Unhedged) tracks total returns for local currency-denominated money market instruments in 23 emerging markets countries with at least U.S. $10 billion of external trade. JPMorgan Government Bond Index-Emerging Markets Global Diversified Index (Unhedged) is a comprehensive global local emerging markets index, and consists of regularly traded, liquid fixedrate, domestic currency government bonds to which international investors can gain exposure. The JPMorgan GBI Global Hedged in USD is an unmanaged index market representative of the total return performance in U.S. dollars on a hedged basis of major world bond markets. JPMorgan GBI Global (Unhedged) is an unmanaged market index representative of the total return performance in U.S. dollars on an unhedged basis of major world bond markets. The JPMorgan GBI Global Ex-U.S. Index (US $ Hedged) is an unmanaged market index representative of the total return performance in U.S. dollars on a hedged basis of non-u.s. bond markets. The JPMorgan GBI Global ex-us FX NY Index Unhedged in USD is an unmanaged index representative of the total return performance in U.S. dollars on an unhedged basis of major non-u.s. bond markets. The PIMCO Global Advantage Bond Index (GLADI) is a diversified global index that covers a wide spectrum of global fixed income opportunities and sectors, from developed to emerging markets, nominal to real assets, and cash to derivative instruments. Unlike traditional indices, which are frequently comprised of bonds weighted according to their market capitalization, GLADI uses GDPweighting which puts an emphasis on faster-growing areas of the world and thus makes the index forward-looking in nature. It is not possible to invest directly in an unmanaged index. CMR2015-1030-142074 pg 29
Fixed Income ETFs 301 International Fixed Income ETFs Q&A
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