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Pimco’s key investment themes for 2018

Pimco’s key investment themes for 2018

Commodities, master limited partnerships (MLP) and private assets are the three key themes Pimco will focus on this year, says Mihir Worah, chief investment officer for asset allocation and real return, and Geraldine Sundstrom, managing director and portfolio manager for asset allocation.

Although, the past several years have been challenging for commodities, both Worah and Sundstrom believe the sector can be an important component to investor portfolios in 2018 and beyond.

‘Commodities historically have tended to do well in the later stages of a business cycle.

‘Unlike equities, which tend to anticipate changes in growth and earnings, commodities are more rooted in the present and tend to outperform as capacity constraints are developing rather than in advance,’ the duo said in a report.

In the case of MLP, the executives’ optimism is driven by projected growth in earnings before interest, taxes, depreciation and amortization from project completions and improved underlying fundamentals.

Last year, for example, the benchmark Alerian MLP index underperformed the S&P 500 and spot crude oil by 28% and 22%, respectively.

‘In 2018, some of these concerns continue,’ they said. ‘However, we believe MLPs represent one of the most attractive opportunities for value-oriented investors seeking higher-yielding assets.

‘We expect the already attractive yields of the sector will become more secure if the average dividend coverage ratio is greater than 1.2 and leverage ratios fall to under 4.0.

‘Moreover, dividend cuts and deleveraging that have occurred over the past 18 months have helped MLPs evolve into strong franchises that have strong credit metrics and are not as reliant on capital markets access,’ they added.

Selective investment in private assets is another area of interest for Pimco, which prefers off-the-run situations or very large financings where others cannot compete.

‘We also think that both direct corporate and residential real estate lending are reasonable investments, with less competition and more structural rights, as well as attractive asset values underlying the loans.’

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