In our most recent UWJ Quarterly Journal, we highlighted the growing interest in ESG or environmental, social and governance issues when it comes to investing. As we have seen in recent months companies are being forced to give more consideration to issues like climate change and organisational culture or risk losing access to the capital markets they rely upon. To date, the ESG approach has primarily been applied to sharemarkets, not bond markets, and to be honest on many occasions it appears to be more of a marketing strategy rather than an investment one.

As part of our extensive due diligence process we have been seeking opportunities to add further diversification to our clients Capital Stable or low risk allocations within their portfolio. Unfortunately, the bond strategies available to most investors in 2018 fall into two distinct strategies; long-term (and hence interest rate sensitive) index-like bond funds and short-term floating rate strategies.

These strategies effectively allow you to benefit from only two outcomes, increasing short-term rates, or decreasing long-term rates, they provide little exposure to the remainder of the yield curve. In the PIMCO ESG Bond Fund, we believe we have found a suitable alternative for those seeking lower risk returns and protection from sharemarket volatility.

Why now for global bonds?

It is clear that interest rates have bottomed in most major economies with the threat of rate hikes continuing to grow. This is seen by many as a time to be reducing exposure to bonds. Yet, this oversimplifies the operation of bond markets and the all-important yield curve. The benefit of PIMCO’s strategy is that it is benchmark unaware and they are able to take active positions based on their long-term expectations for individual economies and markets. This affords the managers flexibility to reduce the duration (or average maturity) of their portfolio, currently around 5 years, and target specific periods on the yield curve where they believe opportunities are presenting. This means they can be exposed to the potential for rate increases or decreases in various periods in the future (Note: bond positions increase in value when rates (or rate expectations) fall). One such opportunity, is the threat of a slowing US or global economy in the next 3 to 5 years, which is likely to trigger a strong period for bonds.

Who is PIMCO?

PIMCO, or Pacific Investment Management Corporation, is one of the world’s largest and most successful fixed income investment specialists. The firm was founded in 1971 in Newport Beach, California, by the well-known and highly respected Bill Gross. The company has over $1.7 trillion in assets under management and employees 2,400 staff across 14 global offices. The core of PIMCO’s approach is their top-down macroeconomic analysis, which relies on their 775 investment professionals to identify the macroeconomic direction of the global economy.


PIMCO’s success and the experience of their investment team speaks for itself. The company has since its founding been dedicated to knowing more than their competitors and achieve this by training and retaining the best investment analysts in the industry. The company has specialist teams operating in all aspects of global fixed income markets offering investors access to an unprecedented universe of investments. PIMCO has invested across several decades, seeing ever major crisis since 1970, and therefore have both the data and experience to understand how to invest in what is becoming an increasingly difficult market for all asset classes.

PIMCO has become a world-leader in embracing the importance of ESG (Environment, Social and Governance) factors in their investment approach, which is utilised in the investment process for this fund.

Why Capital Stable Bucket?

The ESG Global Bond fund is a diverse, actively managed portfolio of global fixed income securities. The fund’s benchmark is the Bloomberg Barclay’s Global Aggregate Index which seeks to measure the returns of a diversified pool of bonds issues by companies around the globe. The fund meets the requirements of the Capital Stable Bucket, being to generate a return of CPI+3% per year and ensure that your investment will retain its value in difficult market conditions, as it invests primarily in investment grade bonds and actively manages the risk in the portfolio. The underlying assets include bonds and similar fixed income securities issued by developed and emerging market Government’s, Semi-Government institutions, Corporates and high yield issuers.

Performance & Top Holdings:

The ESG Fund option we are recommending has only been in operation since 2017 hence the performance data is limited. This fund does however replicate that of PIMCO’s core Global Bond Fund, which has been operating for over 20 years and has generated an annualised return of 7.14% over this period and 8.37% over the last 10 years.

More recently returns have slowed as bond markets adjust to the threat of continued increases in interest rates and the impact they will have on the yield curve. At present the ESG fund invests around 63% of the portfolio in AAA-rated securities and just 6.2% in sub-investment grade of high yield bonds. The managers are highly selective in the issuers they are willing to lend to, hence the longest duration positions within the portfolio are to Governments and investment grade corporates. The fund carries a current duration of 5.66 years and offers a yield to maturity of 4.04%.


We believe that the allocation between Capital Stable and Risk Bucket investments will become increasingly important as volatility continues to increase in both bond and equity markets. The PIMCO Fund offers a core global bond exposure, diversified across emerging and developed markets, corporates and governments. The nature of the underlying fixed income investments mean the fund will provide a hedge against sharemarket volatility and benefit from increasing demand for lower risk assets or a further compression in bond yields. The fund currently holds 54% of its investments in bonds of this maturity, meaning investors stand to benefit if their assessment is correct.

The fund also applies a number of ESG screens across the portfolio excluding companies involved in weaponry, pornography and tobacco and embracing those committed to improving environmental and social practices. The fund charges an MER of 0.69%, offers quarterly distributions and daily redemptions.