Investing and business success can often depend on one BIG idea and its timing. The peaking of short-term interest rates at 20% in the early 1980s and the bursting of the DotCom and NASDAQ bubble 20 years later were excellent examples of big ideas that made or broke investment portfolios. A similar tale was told by the late Peter Bernstein as he recalled his early career in the 1950s when investing for income was rapidly becoming old hat, appropriate perhaps for widows and orphans, but not for red-blooded business executives focusing on a new era of growth. He writes that one client told him, Please remember, I just cant stand more income. Back then, Bernstein suggests, income was for sissies.
In 2014, the tide may be turning again as demographics, fear of another Lehman, or just income-starved insurance companies and similarly structured liability-influenced institutions, reach for anything they can get. The era of income may be, at the margin, replacing the era of capital gains, despite artificially low current yields.
If so, the proper analysis of where to find high, yet relatively safe, income should be one of the top priorities of any investment management company. In addition to bottom-up credit analysis, the timing and ultimate destination of PIMCOs New Neutral short-term interest rate thesis will be critical.