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Investment Playbook: Insights from 6 Top Investment Managers

PIMCO on navigating the U.S. mortgage market, BlackRock’s macro outlook and more, from AllianceBernstein, Investec, KKR and J.P. Morgan Asset Management.

New Strategy

It’s time for a rethink of how investors approach the mortgage sector, now that we’re several years out of the 2008–’09 financial crisis, say Daniel Hyman and Jason Mandinach of Pacific Investment Management Co. Despite taking much of the blame for sparking the most recent recession, the U.S. securitized mortgage market has performed quite strongly during the intervening years. Investors should be aware, however, that according to PIMCO’s long-term “new neutral” outlook, returns on mortgage assets may be tapering off. Write Hyman and Mandinach, “PIMCO’s mortgage opportunity strategy thus focuses on three key themes: selective offense, targeted defense and investing in the future of real estate finance.” PIMCO’s offensive lineup includes nonagency residential mortgage–backed securities, as these pose less of an interest rate risk than traditional core fixed-income sectors.

The New Evolution

In the run-up to the Kansas City Federal Reserve’s Jackson Hole symposium last month, BlackRock’s Rick Rieder provided a primer on how to best build a portfolio when Fed policy lacks clarity: “Market participants are making assumptions about what path policy transition might take and are basing their views on historical examples — and subsequent market reactions — which, of course, are not analogous to the present situation.” Rieder warns of possible policy overshoot and of market bubble formation.

Premium Blend

In the present low-interest-rate environment, bond investors need to seek out new opportunities for yield, says Douglas Peebles of AllianceBernstein. Enter the liquidity premium. Going into illiquid investments can offer a solid source of yield in exchange for a lack of access to cash. Peebles outlines two main reasons for higher yield in illiquid assets: credit disintermediation and declining liquidity in the secondary market. “Anxiety held over from the global financial crisis has reduced liquidity for some fixed-income securities in secondary markets,” he writes.

Export Spotlight

China exports showed solid growth in July, with a year-over-year increase of 14.5 percent and 8.2 percent month-over-month, seasonally adjusted. When looking at these numbers, says Michael Hood of J.P. Morgan Asset Management, investors should take into account factors like volatility and misreporting of data, including fake export shipments. But overall, “the upturn in Chinese exports represents an encouraging signal for the rest of emerging-markets Asia,” writes Hood. Regionally, Asian emerging-markets exports appear to have sustained a hit from decreased Japanese spending following a tax hike.

Sustainable Goals

The global consumer class is on track to grow by 3 billion during the next three decades. For social safety nets, infrastructure and energy to keep pace, private capital will have to step in and alleviate public budgetary shortfalls, writes Aniket Shah of Investec Asset Management: “Matching long-term investment projects with long-term capital from institutional investors is critical for the global development agenda and requires financial, economic and engineering talent.”

The Deal with M&A

This has been a banner year for M&A activity, with $1.16 trillion in deals as of the end of August. And, writes Scott Henkin of KKR, this is only set to continue: “With cheap financing, acquiring a company provides an immediate boost to the top — and often bottom — line, whereas organic growth tends to require a longer time frame before impacting results.” Henkin points out that there is concern about how high transaction prices can actually go and “if we will see a repeat of 2008, when deals were hung.” • •

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