A number of money managers are taking risk off the table across portfolios, moving to a more cautious approach to investment and focusing on capital preservation as tail risks begin to rise.
Some also are choosing to avoid assets that are being supported by central banks' extensive monetary policy actions.
Pacific Investment Management Co. expects to focus on capital preservation and to have more cautious positioning in portfolios over the next three to five years, said Andrew Balls, chief investment officer-global fixed income, in London. He highlighted negative fixed-income yields in Europe and Japan, but there is “an asymmetrical risk that yields will rise over time, so we want to be attuned to that. And medium term we want to avoid negative yields.”
PIMCO's latest secular outlook concludes that tail risks are rising. The $1.5 trillion money manager believes that, in the absence of structural reforms, central bank policies are approaching their limits. Political uncertainty is rising, and unsustainable debt levels mean long-term risks of capital impairment or inflation are also rising.
The firm's medium-term approach is similar to pre-2008, but is different from “a few years ago as valuations have become more stretched,” negative risks have “probably increased, and the ability of central banks to drive asset prices (has) probably diminished.” This adds up to “a more cautious stance” for executives. The manager is particularly cautious on the eurozone, having previously been more positive and overweight sovereign assets in the region. But rising populist political parties and the “perfectly plausible” scenario of eurozone governments completing bail-ins to address excessive leverage have made executives more cautious. Mr. Balls said that in traditional strategies, PIMCO wants to avoid “higher risk, less liquid” assets.