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Investment Strategies

Investing in Opportunities in European High Yield Bonds

Charles Watford, Bruce Nicholson
The PIMCO GIS European High Yield Bond Fund allows investors to potentially benefit from attractive yields and a robust set of opportunities in the European high yield bond market.

At almost €500 billion and with over 800 different bonds, the European high yield market offers investors numerous opportunities in an asset class that has historically produced attractive risk-adjusted returns, particularly compared to European equities (past performance is not a guarantee or a reliable indicator of future results).

The PIMCO GIS European High Yield Bond Fund offers investors access to this compelling opportunity set. We believe investors can benefit from our long-term investment process, experience in credit investing, and global resources.

Product Strategist Daniel Kraft and Portfolio Managers Charles Watford and Bruce Nicholson discuss the Fund’s potential benefits and the team’s investment approach.

Q: What is the PIMCO GIS European High Yield Bond Fund?

Kraft: The PIMCO GIS European High Yield Bond Fund is an actively managed UCITS mutual fund focused on the European high yield corporate debt market. The fund seeks to maximize total return by investing in the higher-quality tiers of Europe’s growing high yield market, combining PIMCO’s top-down macroeconomic analysis with bottom-up credit research. The team selects a diversified portfolio of corporate bonds, focusing on stable income and opportunities for price appreciation, while seeking to avoid defaults and permanent impairment of capital.

At PIMCO, we have been managing dedicated European high yield portfolios since the early 2000s and the European high yield strategy benefits from the strength of PIMCO’s broader credit platform. The Fund leverages the global resources of our global and U.S. HY strategies, which have been offered to investors via UCITS mutual funds since 2005 and 1998, respectively.

The launch of the PIMCO GIS European High Yield Bond Fund was part of a broader build out of our leveraged finance platform as we added regional high yield strategies to our global platform including the PIMCO GIS Asia High Yield Bond Fund in 2019 and the PIMCO GIS European High Yield Bond Fund in 2020.

Q: How does an allocation to European high yield fit within a diversified portfolio?

Kraft: An allocation to a dedicated European high yield strategy can offer a number of advantages to investors. Firstly, this type of strategy offers the potential for attractive risk-adjusted returns compared to European equities, with the potential to offer more stable income with lower volatility (Figure 1).

Figure 1: An allocation to European high yield may provide a compelling alternative to an allocation to European equities

The graph shows annualized return (on the y-axis) and annualized volatility (on the x-axis) over the past 20 years for three different asset classes: the European high yield market, the EuroStoxx 600 equity index, and the EuroStoxx 50 equity index. The European high yield market falls in the top left of this chart, with a historical annualized return of over 7% over the past 20 years, with an annualized volatility of around 10%. The two equity indices are to the right of the European high yield market on this chart. The Euro Stoxx 600 index has delivered an annualized return of just below 7% over the past 20 years with an annualized volatility of slightly below 15%, i.e. a similar return to the European high yield market but with a higher volatility. Similarly, the Euro Stoxx 50 index has delivered an annualized return below 6% over the past 20 years with a volatility of over 17%, i.e. a meaningfully lower return and higher volatility than the European high yield market.

Additionally, a European high yield strategy may potentially offer a higher level of income, with lower interest rate risk, than investment grade corporate bonds. This type of strategy also offers lower currency hedging costs for Euro-based investors, which can be significant when considering allocations to non-Euro denominated bonds. Finally, European high yield offers diversification from other regional high yield strategies, as Europe represents more than 20% of the global high yield market.

Q: What does the opportunity set look like?

Watford: The European high yield bond market has grown to just below €0.5trillion in size with over 800 different bonds outstanding. It is a comparatively “high quality” high yield market, with close to 70% of the universe consisting of BB-rated issuers. These companies generally offer attractive risk-return profiles with relatively low default rates and lower levels of interest rate risk than higher-rated, longer-duration fixed income sectors.

Many of the issuers are large, publicly-listed international companies that are important to the European economy. Some of these issuers are described as “national champions” and some have benefited from sovereign support in difficult times. These companies tend to be more stable due to their size and diversification.

The market also includes bonds issued by global companies that are denominated in European currencies. This increases our opportunities and enables us to diversify by including bonds from non-European borrowers in the portfolio while allowing investors to benefit from our global credit research resources.

Q: How does PIMCO approach investing in the European high yield bond market and what differentiates this approach?

Nicholson: Our approach is focused on building an actively managed, diversified portfolio through individual security selection. We select from the opportunities analysed by our global team of over 80 credit research analysts – close to 20 of which sit in London. Importantly, PIMCO credit analysts assign independent credit ratings (based on a forward-looking research process) to every issuer in the portfolio, and we do not rely on rating agencies for credit ratings.

A hallmark of PIMCO’s investment philosophy is our focus on total return and not just income. PIMCO looks to maximize total return by focusing on issuers we believe have good prospects for price appreciation due to improving credit fundamentals. This might include “rising stars” or companies likely to call or tender for their bonds ahead of maturity. Identifying these opportunities combines independent issuer research, quantitative analysis, and macroeconomic forecasting.

On the other side of the coin, we focus on avoiding defaults and permanent capital loss by working to identify and avoid credits with deteriorating fundamentals. Since we began managing dedicated European high yield portfolios for our clients in the early 2000s, we have achieved an average default rate that is materially lower than that of the market.

Q: What do you look for in an issuer?

Watford: We look to identify companies which can deleverage their businesses and manage through downturns. We look for businesses that have material barriers to entry, superior pricing power to cope with inflation, high asset backing, and/or solid growth prospects. In addition, our team looks for catalysts that can change the credit profile of a business; for example, asset disposals or changes in the macro-economic cycle that can lead to rating upgrades and/or price appreciation.

We recognize that a company’s credit profile can change over the course of an economic cycle. Therefore the PIMCO credit process evaluates companies on a forward-looking basis and uses stress tests to consider how a company can manage through downturns. This helps us identify rising star companies with improving credit profiles and ratings trajectories, and enables us to avoid exposure to deteriorating credit situations.

Q: How can investors access the European high yield market with PIMCO?

Kraft: We see increased demand from clients looking to access the European high yield market via our dedicated public mutual fund as well as via customized mandates. To access the strategy via a UCITS mutual fund, we offer the actively managed PIMCO GIS European High Yield Bond Fund. Since its inception in January 2020, the Fund has had a strong start, outperforming its benchmark by a cumulative total of over 6% before fees and ranking in the top quartile compared to peers in the Morningstar category.

In addition, we also have significant experience in working with our clients on customized solutions tailored to their specific needs and objectives that can be accessed via a separately managed account with PIMCO. Finally, we offer the PIMCO Euro Short-Term High Yield Corporate Bond Index UCITS ETF, a smart-passive solution focused on the 0-5 year segment of the European high yield market.

Figure 2: PIMCO GIS European High Yield Bond Fund - 12-Month Rolling Performance

The graph shows the historical rolling 12-month performance of the PIMCO GIS European High Yield Bond Fund and its benchmark: from the inception of the Fund on 31 January 2020 to 31 January 2021; from 31 January 2021 to 31 January 2022; and from 31 January 2022 to 31 January 2023. The performance figures for the Fund shown on the graph is the after-fees performance for the Institutional share class, Euro-hedged and the benchmark performance is also Euro hedged. For the first year of the Fund’s existence from 31 January 2020 to 31 January 2021, the Fund delivered an after fees return of 5.00% while the benchmark delivered 2.52% over the same time period. For the second year of the Fund’s existence from 31 January 2021 to 31 January 2022, the Fund delivered an after-fees return of 0.86% while the benchmark delivered 0.88% over the same time period. For the third year of the Fund’s existence from 31 January 2022 to 31 January 2023, the Fund delivered an after-fees return of minus 5.19% while the benchmark delivered minus 7.22% over the same time period.


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Charles Watford
Portfolio Manager
Bruce Nicholson
Portfolio Manager
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