Pimco's Sonali Pier leans on corporate bonds and agency mortgages at home and abroad to produce winning results. By Amey Stone

Fixed-income investors got a one-two punch in mid-October: first, with the bankruptcy-protection filing of First Brands, a heavily indebted auto-parts company, and then, separately, when two regional banks had to write down losses on bad loans.

Fraud was alleged, credit spreads widened, bank stocks fell, and Sonali Pier, a portfolio manager at Pimco focusing on multisector credit, assembled her team. With characteristic understatement she tells Barron's, "We had some conversations about it."

The task at hand wasn't just to review holdings in the bond portfolios she oversees, including the $8.5 billion Pimco Multisector Bond Active exchange-traded fund, but to prepare for investment opportunities to emerge. She isn't looking for distressed bonds at bargain prices. Instead, she wants to be in a position to add more high-quality bonds -- the good stuff that other investors may have no choice but to sell when facing redemptions.

Credit markets have stabilized for now, but rocky times afford a defensively oriented fund like the Pimco ETF a chance to shine. The fund was up 8.4% in the past year, putting it in the top 7% of all U.S. multisector bond funds, according to Morningstar. The fund's 6.6% distribution yield has attracted notice, and assets have surged to $8.5 billion since its launch less than three years ago.

Barron's recently spoke with Pier, who has been on Barron's 100 Most Influential Women in U.S. Finance list for the past two years, about her economic outlook, Fed policy, and where her "go anywhere" bond fund is heading this year. An edited version of the conversation follows.

Barron's : Let's start with a topic weighing on many bond investors. Are you worried about the health of credit markets after the recent bankruptcies and bad bank loans?

Sonali Pier: Mostly, these events are about credit due diligence. There is no way around it. Having high underwriting standards and a well-resourced research team is important. At Pimco, we make sure we understand the company, its sources of cash, and how they use cash. Active credit selection is a key driver of our performance.

How does the economy look to you now?

Our view is for gross-domestic-product growth of about 1.6% this year and 1.8% next year. We think inflation will be around 3% -- still above the Federal Reserve's target. We are concerned about weakening labor data and think there is potential for a short window of economic weakness due to disruption around tariffs and artificial intelligence. In fact, there are a lot of potential nodes of volatility, but there is potential for the economy to reaccelerate next year.

What will lead to that rebound in economic growth?

The impact of tax cuts will be positive. And there is potential for AI to increase growth, as well. However, there are companies that could benefit from AI and those that could be disintermediated. Part of our role as credit investors is deciphering between the two.

How do you expect the Federal Reserve to manage through this period?

Overall, there is potential for the Fed to cut [interest rates] a couple more times into year end. We need to make sure tariffs don't lead to any medium-term acceleration in inflation, so the Fed can address the weaker labor market. We expect that Fed rate cuts can add to the total-return potential of a strategy like ours. [Bond prices move inversely to rates.]

Are you worried about Fed independence from political interference?

Fed independence is a reason for the strength of U.S. capital markets. There aren't a lot of countries where you can issue a low-rated triple-C bond and investors are willing to buy it, knowing capital markets will remain open and robust. If investors can't discern what is quality, or are in a country where the rule of law is unclear and they aren't sure there will be due process to get their capital back, they aren't willing to give up that capital. We think it is very important for the Fed to maintain independence.

Tell me about the Pimco Multisector Bond Active ETF. What is the strategy?

We launched PYLD in June 2023 because there was client interest in a multisector bond fund in a tax-efficient ETF wrapper. Pimco has a 22-year track record in multisector income investing, but this is a distinct offering. It isn't a clone of anything we have on the shelf.

It is benchmark agnostic and has broad latitude within credit. We can choose corporate bonds, securitized assets, emerging market debt, and bank loans. The benefit to clients is marrying our top-down macroeconomic view with the bottom-up credit selection. We have an 85-plus person research team and sophisticated portfolio analytics to support the selection.

Returns have been good. What are the main drivers?

I would highlight asset allocation, industry selection, regional selection, and security selection, as well as all the macroeconomic views that help us manage interest-rate sensitivity. Also, we have breadth and depth on the trading floor and a platform built to communicate across the globe, so we can bring in opportunistic areas to make sure we are building a really robust portfolio.

The fund has grown to more than $8 billion in assets in less than three years. Why has it been so popular?

With rates at these levels -- corporate bonds and agency mortgages yield around 5%, and emerging market bonds and high-yield bonds yield near 7% -- and our flexibility, we can produce a fair amount of income. Plus, with equities at relatively unprecedented valuation levels, fixed income looks attractive.

The fund stays mostly in investment-grade securities and has a defensive orientation. Is fear a reason the strategy is proving popular?

I don't want to say fear. The fact that it is benchmark agnostic and has a go-anywhere strategy is appealing. While we have a strategic long-term orientation, we are able to move quickly and change our asset allocation. For funds more tied to a benchmark, it's a little more difficult to take advantage of dislocations that can arise. In this type of strategy, we can, and we have.

The fund is diversified across asset classes. Diversification can subdue volatility, but we can still keep up with returns. For example, we can benefit from interest-rate sensitivity with investment-grade corporates and agency mortgages, but add some equitylike sensitivity with high-yield bonds.

What are some examples of portfolio shifts?

At inception, PYLD was more corporate-bond heavy, and today it's a little more securitized-heavy. Securitized assets can be residential mortgages, collateralized loan obligations, or asset-backed securities. They are often floating rate and add resilience to a portfolio.

Agency mortgages are an example of where we see good relative value. We are getting similar yields to investment-grade corporates, and we have the implicit government guarantee behind them, and strong liquidity.

Can your fund hold private-credit issues?

We can own public and private securities. If we go with private options, we look to make sure we're being compensated for the illiquid nature, and we pay close attention to credit structure. We want to make sure that we are being adequately compensated for the fact that generally we can't change our minds after issuance and we will probably be holding that debt to maturity. You won't find a significant percentage of our portfolio in private holdings, given that PYLD offers daily liquidity. Currently, illiquid securities make up less than 1% of assets.

Your fund can diversify globally. What is an example of that?

One way we aim to benefit from lower interest rates is by gaining exposure to the United Kingdom and Australia. Here in the U.S., we have 30-year fixed mortgages, which means the impact of monetary policy will lag because people with low mortgage rates tend not to move as much. Currently, more than 60% of homeowners in the U.S. have mortgages with rates below 4%. But in Australia and the U.K., mortgages are shorter term and floating rate, so monetary-policy transmission is more direct. We expect rate cuts there will be needed.

Where is the portfolio positioned in terms of interest-rate sensitivity, or duration? Which maturities are most attractive?

We find the belly of the yield curve -- the five- to 10-year space -- the most attractive right now. We have positioned the portfolio to benefit from higher rates on longer-term bonds and lower rates at the short end. Our portfolio's overall duration is under five years, however.

Do you worry that federal deficits will lead to higher long-term rates?

Issues with the deficit will need to be addressed over time, and at this stage there isn't a willingness to address them. That will cause some pressure. That's why we are positioned for a steepening yield curve, and we have seen that already this year.

What about inflation protection?

We have some exposure to Treasury inflation-protected securities, or TIPS. That's the fourth leg of implementing our view on the direction of interest rates.

It sounds like three-dimensional chess.

A little bit!

Let's turn to you. Tell me about your background.

I grew up in New Jersey and went to Princeton University. I knew well before college that I wanted to go into business. I had an internship after my sophomore year where I learned how dynamic the finance industry is, and I knew it would be an exciting career.

After college, I went to the credit-trading desk at J.P. Morgan, and after about nine years I moved to Pimco. I started on the leveraged-finance desk in 2013.

Did you relocate to California then?

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