Institutional investors should consider allocating as much as a third of their fixed-income portfolio to emerging market bonds to properly reflect the changes in the global economic environment, according to PIMCO.

In PIMCO's new normal vision, emerging markets will continue to deliver an important part of global economic growth and investors should adjust their allocations to reflect this fact.

"The question we asked ourselves at PIMCO, when we look at our own portfolios and when we look at how our clients are allocating capital, is whether portfolios really embed the extent to which the world has changed, and one clear way in which they don't is asset allocation," PIMCO portfolio manager Ramin Toloui said.

"I think Australians have always been more linked to the emerging markets story than any other industrialised country investors, but if you look at Australian investor allocations, they are also probably lower than optimal in this world where the role of emerging markets has expanded so much."

Toloui said a weighting based on a country's five-year average global domestic product would reflect a better balance of allocations, and that would give emerging markets a weighting of between 34 and 36 per cent.

He said he did not expect investors would radically change their allocations overnight, but the team did not want to water down their views out of fear of being regarded as too aggressive.

"We had exactly those discussions internally," he said.

"Some within PIMCO said: 'Well, this is pretty radical; it will be something that is difficult to get people to accept. Maybe we should try something which is a little bit less aggressive.'

"We eventually decided that this was the best reflection of where we saw fixed-interest markets going.

"We tried not to self-censor ourselves."

Toloui's argument for a higher emerging market exposure does not mean the company is overly bullish on China.

In fact, PIMCO expects China's economic growth to come in at the lower range of the general expectation for 2012 at about 7.5 per cent.
Toloui said the Chinese government would continue to navigate the economy towards a soft landing.

This means the government will not commit to either a path of fast growth or heavy policy tightening.

"We think that China's authorities are likely to keep turning the dials of their policy instruments in response to the economic and financial indicators," Toloui said.