Next recession, how to prepare: Scott Mather of Pimco on market risks

Scott Mather, the chief investment officer of US core strategies at Pimco, says the current corporate market is the “riskiest we've ever had.” Mather, who oversees roughly $100 billion in assets, explains how investors should be positioning their portfolios so they're not blindsided by the next recession.Visit Business Insider's homepage for more stories.Scott Mather doesn't want to put a timeframe on the next recession.That doesn't mean he's overly bullish on the prospect of the economy expanding for another couple years. He's also not joining the chorus of doomsayers predicting an imminent collapse. He resides in the neutral zone characterized by a wait-and-see approach.“When we look out we say, yeah, over the next two or three years, there's a higher than normal risk of recession,” Mather, the chief investment officer of US core strategies at financial giant Pimco, told Business Insider in an exclusive interview at the recent Milken Institute Global Conference.He continued: “Any shock to confidence now, no matter where it comes from, would result in one. We just don't know when that will be.”But Mather refuses to sit idly by and wait for a major economic downturn to stare him in the face. He and his portfolio management team — which oversees roughly $100 billion in assets — are already positioning in a more conservative manner.Read more: The world's greatest investors and economists spent much of Milken dispelling 3 key misconceptions. Here's what they said to set the record straight.That defensive approach is the bedrock of Mather's approach right now. And it's driven by one unfortunate reality hanging around the edges of the overall market narrative: corporate debt levels are historically exorbitant right now.“We've described this as the riskiest corporate market we've ever had,” Mather told Business Insider. “A lot of people don't recognize that. But it is that way, because it's doubled in size in the past decade, because everybody's levered up.”In response to this dormant-yet-growing risk, Mather has one broad solution: Don't wait for the recessionary reckoning to hit and then react. Get defensive now, while doing so is still relatively inexpensive and straightforward.Allow him to elaborate. All the quotes below are attributable to Mather — emphasis ours:“We're stressing defensive themes. We don't think people have gone back to neutral, even though rates have somewhat normalized now. To us, that means, if you're a fixed-income investor, you really have to watch your credit exposure. You have to watch your exposure to high yield.”That means you're avoiding things like low-quality high yield and low-quality leveraged loans. If you're an investment-grade corporate investor, you're looking at maybe taking less duration — shortening the maturity and maybe moving up in quality a bit.“There'll be opportunities, but they'll only be for people who have thought about how to protect themselves on the journey there. They'll have the firepower and the ability to move down in quality, because they won't already be exposed, and that's why we're preaching the defensive message to people now. It's a prudent thing to do, and you're not giving up much.”We like securitized credit — mortgage-backed securities, asset-backed securities. Not to say these things don't get hurt during a recession — they do. But they're at least priced more attractively to begin with.“In a normal, garden-variety recession, if you're up on quality in those sectors, you're going to be just fine. You're not going to experience any true losses. The same can't be said in the credit market, when you get that transition to high-yield, where default rates are going to go up a lot.”