Time for beta gains is over, says PIMCO's $85bn star

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PIMCO GIS Global Bond manager Scott Mather is eyeing opportunities in selective emerging market debt despite remaining in defensive mode overall.

Speaking to Citywire Global at PIMCO's Newport Beach headquarters in California, the Citywire AAA-rated Mather said that correlations in bond markets are now breaking down as markets start to normalise.

Over the next two to three years Mather predicts annualised returns of mid-single digits for global bonds as monetary policy from central banks starts to normalise.

‘The time for beta gains are over so looking forward an absolute return approach will be more effective,' said Mather, who was promoted as one of six new deputy CIOs at PIMCO at the end of January following the departure of chief executive Mohamed El-Erian.

Mather, who directly runs $85 billion and oversees a further $350 billion, added: ‘We remain defensive on bond maturity and duration risk as we think central banks will continue to keep near term rates near zero.'

‘As the Fed pulls back from QE, further out, 10 to 30 year yields will start to normalise. On the offensive side emerging markets are starting to look attractive and after steady and persistent outflows it’s time to start to differentiate between them.'

While he said some emerging markets will stay in crisis mode, others, such as Brazil and Mexico, have already made the necessary political and fiscal adjustments necessary to recover.

He has taken the fund up to 10% in emerging market debt after adding selective Brazilian and Mexican corporate bonds but is avoiding sovereign credit risk in the two countries.

He is also eyeing selective opportunities in China and Russia after the sustained sell-off in the EMD asset class over the past nine months. 

Meanwhile his exposure to EM currency is lower than normal as he thinks even emerging markets with the best fundamentals will struggle to perform well in the current environment.

He currently has small allocations to Korean, Mexican, Brazilian and smaller European local currencies.

Liquidity Events

Overall he remains cautious on bond duration and maturity risk, and wary of what he calls further ‘mini liquidity events’ set to occur over the coming months.

‘Over the past few months we have moved to more liquid strategies than most as rates and monetary policy start to normalise, as we expect further liquidity events such the one on May 22 [after Bernanke’s tapering speech].

‘We think there will be more of these liquidity events. It could be emerging markets that cause it, or it could be a geopolitical shock or an equity market correction. We have not seen a 10% correction in equities for a long time.’

‘Such an event would impact spreads across many areas of the asset class such as high yield or investment grade corporates.

Over the last five years to the end of February 2014, the fund has returned 57% compared to its Citywire benchmark, Citi WGBI TR, o 23.9%.