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What is the All Asset Strategy?
The PIMCO All Asset Strategies (All Asset and All Asset All Authority) are highly diversified, tactical asset allocation solutions that have a simple goal: Deliver significant real returns (returns in excess of inflation) with modest volatility. The Strategies allocate across a broad range of underlying strategies in an effort to produce long-term returns consistent with their benchmarks: CPI+5% for All Asset and CPI+6.5% for All Asset All Authority (CPI is the Consumer Price Index, the primary measure of U.S. inflation). In so doing, the strategies seek to help investors with several critical goals:
The All Asset Strategies represent a joint effort between PIMCO and Research Affiliates, an investment advisory firm founded by Rob Arnott. PIMCO provides the broad range of underlying strategies, which spans global stocks, global bonds, commodities, real estate and other liquid alternative strategies. PIMCO also provides active management excess return (alpha) potential within each. Research Affiliates determines the appropriate asset allocation mix of the underlying strategies to target the stated return and volatility goals.
The All Asset Strategies are designed to fit a variety of investor needs and are therefore used by individuals and institutions to address a range of goals within a portfolio, including but not limited to the following:
Inflation Hedging Solution: If you’re seeking to increase the allocation to inflation hedging investments but are concerned with low yields offered by Treasury Inflation-Protected Securities (TIPS), the volatility of commodities and real estate or the illiquidity associated with other real assets, then the All Asset Strategies may offer a compelling opportunity to hedge inflation risk, capture high real return potential and do so with modest volatility.
Alternative to Traditional Fixed Income: If you’re seeking an investment that has bond-like characteristics in terms of total volatility and correlation to other assets, yet has greater flexibility to navigate changing global interest rates and yield spreads, then the All Asset Strategies may offer a compelling opportunity to replace traditional fixed income with a more diversified and adaptable allocation.
Equity Replacement/Diversifier: If you’re seeking a higher level of returns, one that has often been associated with equities, yet want to diversify – not amplify – the equity risk already in your portfolio, then the All Asset Strategies may offer a compelling opportunity to pursue equity-like returns with reduced volatility and downside risk, and with diversification benefits.
Tactical Asset Allocation Solution: If you’re evaluating multi-asset class strategies that offer outperformance potential through diversification and tactical allocation decisions, then the All Asset Strategies may offer a compelling solution in that they combine a truly broad opportunity set, active management alpha potential in each and a disciplined investment process to tactically manage the mix in a single investment.
In addition to the All Asset Strategies, PIMCO offers expertise across a range of other real return products that seek to provide consistent after-inflation returns and portfolio diversification to meet investor needs:
The PIMCO All Asset Strategies invest in a broad spectrum of underlying investment strategies, which include global bonds, global stocks, commodities and real estate. While the All Asset Strategies can invest in almost any PIMCO strategy in an effort to achieve their return and risk objectives, the following is a representative list of the opportunity set:
Short-Term StrategiesShort-TermLow DurationFloating Income
The asset allocation decisions within the PIMCO All Asset Strategies are actively managed by Research Affiliates, LLC, a sub-advisory firm founded by Rob Arnott that possesses demonstrated expertise in asset allocation. The investment process evaluates four essential “building blocks” of returns and is complemented by a qualitative fifth step to help ensure a robust outcome.
1) Potential for Long-Term Real Returns: Each underlying investment is evaluated for its long-term real return potential by assessing its current yield and expected income growth, net of inflation.
2) Potential Value Added by PIMCO: Since each underlying investment is actively managed by PIMCO, an adjustment is made to the return estimate for that asset class based on the consistency and level of excess return that the respective PIMCO portfolio manager has historically delivered.
3) Potential for Valuation Change: Key valuation metrics are evaluated for each underlying investment in order to assess absolute and relative value, the likelihood of a valuation change and to what extent that alters the near-term return potential for that investment.
4) Impact from Economic and Technical Factors: Additional inputs are considered to refine return and risk forecasts, such as the current stage of the business cycle, the transition probability to the next stage and, where relevant, select technical indicators such as lead, lag, momentum or mean reversion factors.
5) Subjective Considerations: Experts at PIMCO and Research Affiliates possess a wide depth and breadth of experience across various global asset classes. Formally once a month, and informally as required, key personnel at both firms engage in substantive dialogue to identify any factors that might have been missed by the quantitative process and if those warrant a modest subjective adjustment to the model-driven allocations.
Investors need high real returns in order to meet their return goals, hedge inflation risk and grow the purchasing power of their savings. Going forward, this level of real returns may not be achieved by conventional allocations centered on mainstream stocks and bonds.
With that in mind, the All Asset Strategies combine three sources of added value in an effort to achieve their CPI + 5% or CPI + 6.5% benchmarks. First, they expand the investment opportunity set far beyond mainstream stocks and bonds, so that investors can access a wider range of return-generating and inflation-hedging sectors. Second, they incorporate the potential for excess returns (alpha) above passive indexes in each underlying strategy through PIMCO’s active management expertise. Third, they incorporate the tactical asset allocation decisions of Research Affiliates, which uses a demonstrated, disciplined process aimed at both enhancing returns and mitigating risk by changing the mix of underlying strategies over time.
The All Asset Strategies are sub-advised by Research Affiliates, LLC, an advisory firm founded and majority-owned by Robert Arnott. He is author of more than sixty articles appearing in periodicals like the Financial Analysts Journal, the Journal of Portfolio Management, and the Harvard Business Review. He has served on the editorial boards of the Journal of Portfolio Management, Journal of Investing, and Journal of Wealth Management, as a founding member of the Chairman’s Advisory Council of the Chicago Board Options Exchange and on the product advisory boards of the Chicago Mercantile and Toronto Stock Exchanges. He co-edited the first and second editions of Active Asset Allocation (Probus Press; 1988, 1992) and Style Management (1996, 1998).
He has contributed chapters to numerous books, including some of the core readings for the CFA program. Mr. Arnott has a reputation as a practitioner for creating innovative investment products. He previously served as equity strategist at Salomon Brothers, and as president and chief investment officer at TSA Capital Management, and also served as chairman of First Quadrant. He graduated summa cum laude from UC Santa Barbara in economics, applied mathematics, and computer science.
PIMCO and Research Affiliates collaborate to help ensure that investors in the All Asset Strategies benefit from the significant commitment to risk management by both of these organizations. PIMCO, which has extensive asset management experience, controls the operational risk of the All Asset portfolios as well as the investment and operational risk of all underlying strategies. Research Affiliates, which serves as the asset allocation sub-advisor, controls the investment risk associated with asset allocation decisions.
A summary of key investment guidelines for the All Asset and All Asset All Authority Strategies is as follows:
1 The StocksPLUS® Short Total Return Strategy seeks a return that tracks and exceeds the inverse return of the S&P 5002 The strategy does not intend to invest in StocksPLUS Short Total Return Strategy.3 Leverage is obtained in the All Asset All Authority Strategy via a line of credit that may be used on a tactical basis to acquire additional exposure to targeted underlying strategies. Measured as a percent of gross assets.4 The All Asset Strategy does not intend to use leverage to amplify exposures of underlying strategies. However, certain transactions within the underlying strategies, such as the use of derivatives, where permitted, may give rise to leverage within those strategies, causing them to potentially be more volatile than if they had not been leveraged.
Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. The All Asset Strategies invest in other PIMCO products and performance is subject to underlying investment weightings which will vary. The cost of investing in the Strategies will generally be higher than the cost of investing in a strategy that invests directly in individual stocks and bonds. Investing in the bond market is subject to certain risks including market, interest-rate, issuer, credit, and inflation risk. Inflation-linked bonds (ILBs) issued by a government are fixed-income securities whose principal value is periodically adjusted according to the rate of inflation; ILBs decline in value when real interest rates rise. Treasury Inflation-Protected Securities (TIPS) are ILBs issued by the U.S. Government. Sovereign securities are generally backed by the issuing government, obligations of U.S. Government agencies and authorities are supported by varying degrees but are generally not backed by the full faith of the U.S. Government; portfolios that invest in such securities are not guaranteed and will fluctuate in value. Equities may decline in value due to both real and perceived general market, economic, and industry conditions. Commodities contain heightened risk including market, political, regulatory, and natural conditions, and may not be suitable for all investors. REITs are subject to risk, such as poor performance by the manager, adverse changes to tax laws or failure to qualify for tax-free pass-through of income. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. High-yield, lower-rated, securities involve greater risk than higher-rated securities; portfolios that invest in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. PIMCO Strategies utilize derivatives and may utilize commodity-linked derivatives which may involve certain costs and risks such as liquidity, interest rate, market, credit, management and the risk that a position could not be closed when most advantageous. Commodity-linked derivative instruments may involve additional costs and risks such as changes in commodity index volatility or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments. Investing in derivatives could lose more than the amount invested. The use of leverage may cause a portfolio to liquidate positions when it may not be advantageous to do so to satisfy its obligations or to meet segregation requirements. Leverage, including borrowing, may cause a portfolio to be more volatile than if the portfolio had not been leveraged. There is no guarantee that this investment strategy will work under all market conditions and each investor should evaluate their ability to invest for a long-term especially during periods of downturn in the market. Diversification does not ensure against loss.
The CPI + 500 and CPI + 650 Basis Points benchmark is created by adding 5% or 6.5% to the annual percentage change in the Consumer Price Index (“CPI”). This index reflects non-seasonably adjusted returns. The Consumer Price Index is an unmanaged index representing the rate of inflation of the U.S. consumer prices as determined by the U.S. Department of Labor Statistics. There can be no guarantee that the CPI or other indexes will reflect the exact level of inflation at any given time. It is not possible to invest directly in an unmanaged index.
This material contains the current opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposes only and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product.
No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660, 800-387-4626. ©2015, PIMCO.
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