PIMCO- Forecasting Equity Returns in the New Normal.
December 3, 2012 - 10:46am
Our clients consistently ask us for our views not only on individual asset classes, but also on how we think about different assets in overall portfolio terms. As part of our ongoing commitment to better serve our clients, PIMCO is introducing "Asset Allocation Focus." The quarterly article will draw on the combined resources of the firm's asset allocation team and be lead-researched and written by Managing Director Saumil H. Parikhi, a generalist portfolio manager focused on asset allocation strategies who also serves on the firm's Investment Committee and leads our cyclical economic forums. This inaugural edition of "Asset Allocation Focus" lays out PIMCO's framework for understanding and forecasting U.S. equity returns in a changing world.
PIMCO’s founding investment philosophy and process are grounded by three basic principles.
- Investing is a long-term, value-oriented endeavor, which requires discipline and patience
- Successful investment processes focus on both top-down, macroeconomic drivers of returns as well as bottom-up, microeconomic drivers of returns
- Commonsensical risk management is critical for avoiding "left tail" portfolio outcomes and managing portfolio volatility
No financial asset class exemplifies the need for an investment manager to abide by these three basic principles more so than equities.
By and large, the universe of financial assets (stocks, bonds and cash alternatives) derives its returns from the performance of real economic factors (capital, labor, materials and multi-factor productivity, the last being a measure of productivity that captures changes in the volume of goods and services produced with a combination of multiple "inputs" such as labor, materials and capital). Gross domestic product (GDP) and its growth rate are ultimately the source of all cash flows and returns that trickle down into various financial assets based on their individual seniority and place in the economic capital structure. ii
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