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Improving Asset Allocations for Retirement PlansIndividuals and plan sponsors alike face a great deal of uncertainty when determining the optimal asset allocation for retirement savings plans. Traditionally, asset allocations have focused on three key asset classes: stocks, bonds and cash. While stocks and bonds have provided substantial total returns over different historical periods, investors can not afford to simply assume that future returns will match selected historical experience. In addition, when we consider that the macroeconomic conditions that characterized the last 20 to 30 years – persistently declining inflation and interest rates – may be meaningfully different and potentially the opposite of what defines the next few decades, investors may benefit by seeking investments that improve the overall diversification and inflation hedging characteristics of their portfolios. This is relevant particularly in the context of retirement savings, in which individuals often cannot afford a shortfall in the future value of their savings, net of inflation. As the global investment landscape continues to evolve, so too must the asset allocations for retirement savings plans. Diversified Real Asset may play an important role in improving retirement asset allocations by providing the following:
Diversified Real Asset provides actively managed, strategic exposure to these real return asset classes (Triple Real® approach) by tracking a benchmark that is comprised of equal one-third weights of the following:
Diversified Real Asset, or PIMCO’s Triple Real® approach, represents a synthesis of PIMCO expertise in managing portfolios dedicated to TIPS, commodities and real estate. In each of these real return asset classes, PIMCO’s approach relies on our longstanding core competency in fixed-income and derivative management. As with all PIMCO portfolios, our investment process incorporates “top-down” global macroeconomic views and “bottom-up” sector-specific views that seek to provide multiple concurrent sources of added value. This process enables PIMCO’s Real Return team to draw from PIMCO’s global macroeconomic forecasting process, sector-specific teams and regional-specific teams in order to optimally structure real return portfolios.
Within Diversified Real Asset we seek to add value within each asset class by outperforming its respective market index, and also by opportunistically tilting the exposures of the asset classes above or below their equal one-third weights. Our strategies for adding value within each asset class include:
In addition to adding value within each of the underlying asset classes, Diversified Real Asset also seeks to add value by employing modest tactical overweights and underweights around the equal one-third exposure to each asset class. The PIMCO portfolio management team regularly performs this relative value assessment and incorporates views on a variety of fundamental, technical, quantitative and economic factors.
TIPS, commodities, and real estate display the characteristics of a distinct asset class:
These characteristics have provided opportunities for an improved efficient frontier, while also providing better hedge from the ultimate inflation-related liabilities of retirees.
Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and may lose value. 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. Government securities are backed by the full faith of the issuing government; portfolios that invest in them are not guaranteed and will fluctuate in value. Commodities contain heightened risk including market, political, regulatory, and natural conditions, and may not be suitable for all investors. The value of real estate and portfolios that invest in real estate may fluctuate due to: losses from casualty or condemnation, changes in local and general economic conditions, supply and demand, interest rates, property tax rates, regulatory limitations on rents, zoning laws, and operating expenses. 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. The All Asset strategy invests in other PIMCO products and performance is subject to underlying investment weightings which will vary. PIMCO strategies utilize 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. Investing in derivatives could lose more than the amount invested. 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 Double Alpha™ refers to a strategy that should provide excess return under the active management of collateral backing the commodity index. In addition, this strategy seeks to derive alpha from the structural commodity relative to the index.
The Barclays Capital U.S. TIPS Index is an unmanaged market index comprised of all U.S. Treasury Inflation Protected Securities rated investment grade (Baa3 or better), have at least one year to final maturity, and at least $250 million par amount outstanding. The Dow Jones UBS Commodity Total Return Index is an unmanaged index composed of futures contracts on 19 physical commodities. The index is designed to be a highly liquid and diversified benchmark for commodities as an asset class. Dow Jones U.S. Select Real Estate Investment Trust (REIT) Total Return Index, a subset of the Dow Jones U.S. Select Real Estate Securities Total Return Index, is an unmanaged index comprised of U.S. publicly traded Real Estate Investment Trusts. This index was formerly known as the Dow Jones Wilshire REIT Index. 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, 840 Newport Center Drive, Newport Beach, CA 92660, 800-387-4626. ©2014, PIMCO.
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