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Bond Fund Giant Pimco Cuts Back on Risk Amid Uncertainty

CNBC.com
Thursday, 29 Sep 2011 | 10:38 AM ET

The world's largest bond fund said it is cutting back on its exposure to riskier assets amid concerns about the outlook for the global economy.

Bill Gross
Scott Eells | Bloomberg | Getty Images
Bill Gross

Pacific Investment Management Co., or Pimco, now favors high-quality emerging market debt, senior portfolio manager Saumil Parikh, who is also a member of the fund's investment committee, said in a quarterly outlook.

He added: "Emerging economies are in a very different cyclical position relative to developed economies. We expect emerging economies to transition from being producers and investors of last resort to being consumers of first resort over the secular horizon."

Pimco is also moving into U.S. municipal bonds, as well as U.S. agency and non-agency mortgages, according to the statement.

"Given our outlook for slow growth globally and recession in Europe, we are focusing on protecting portfolios against downside risk," said Parikh.

Pimco said three long-term factors have added to the uncertainty going forward: Europe’s debt deleveraging, the U.S. debt ceiling debate and ratings downgrade, and stubborn cyclical inflation in Asia and Latin America.

"Global imbalances have continued to rise in the post-financial crisis environment, global leaders continue to fail in their policy coordination efforts, and deleveraging and reregulation continue to be critical over the course of our cyclical horizon," Pimco said in a statement. "We are transitioning into a world where we believe the incentives of policymakers and the divisiveness of politics will become the predominant drivers of investment returns and economics."

Over the next 12 to 18 months, Pimco said it expects the global economy to expand at a very modest rate of 1 percent to 1.5 percent, compared with estimates of 2.7 percent to 3 percent growth in 2011.

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