Earlier this week, Pacific Investment Management Company (PIMCO), one of the world's biggest money managers, publicly stated that they are reducing their exposure to high yield corporate debt (aka junk bonds) in their mutual fund portfolios because they are not confident the European crisis will improve and global economic conditions do not look favorable over the long-term. Should investors take this as a signal to reduce risk in their investment portfolios?
2012 to 2013 Economic Forecast: PIMCO vs Blackrock
In The Wall Street Journal online article, Pimco Cuts Junk Debt, Sees Risks for Longer Bull Run, Mark Kiesel, global head of corporate bond portfolio management at Pimco, told WSJ that he started cutting exposure to the so-called junk debt market several weeks ago. The article contrasts this economic and market sentiment with that of Blackrock Inc., which sees room for more gains in the junk debt market, which is up approximately 10% year-to-date this week, compared to 1.2% for Treasury Bonds.
PIMCO's co-founder, chief investment officer, and manager of more bond assets than any other person in the world, Bill Gross, believes Europe's economy is "extremely fragile" although European banks have been in a "significant deleveraging" (debt reduction) mode.
So Which Is It? Economic Weakness or Strength?
In the opinion of your humble mutual funds guide, the contrasting views of PIMCO and Blackrock should not be influences on the asset allocation of your mutual fund portfolio. My intuitive conclusion is that the truth about current and long-term economic conditions lies somewhere between PIMCO's and Blackrock's. As I observed this time last year, Bill Gross and most bond managers lost to index funds in 2011 because, in hindsight, they were too conservative and began shortening their maturities in anticipation of a decline in bond prices, which has yet to materialize.
Assuming Gross and other bond fund managers are still too conservative, Blackrock could be correct in their forecast that riskier assets still have room to run. Either way you choose to look at it, I don't suggest market timing. However, you may want to consider building your own bond portfolio, which can help insulate you from the risk of falling bond prices, which move in opposite direction of interest rates.