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What is Fundamental IndexPLUS AR?
PIMCO’s Fundamental IndexPLUS® AR Strategies are designed to capture the best of both passive indexing and active management: broadly diversified liquid equity market exposure and meaningful outperformance potential with equity-index-like risk. Introduced in 2005, the strategies use the StocksPLUS portable alpha concept pioneered by PIMCO in 1986. Fundamental IndexPLUS AR Strategies use swaps to gain exposure to one of several Enhanced Research Affiliates Fundamental Indexes (RAFI); the remaining capital – the PLUS component – is invested in an absolute return-oriented bond portfolio. The Fundamental IndexPLUS AR Strategies are available in U.S. large company, U.S. small company, international and emerging markets equity versions.
Fundamental IndexPLUS AR Investment Philosophy
Our investment philosophy stems from the belief that derivatives are an efficient way to gain exposure to equity markets. The total return swaps used to capture Enhanced RAFI returns can be financed at money market rates. Thus, the vast majority of the cash that an investor allocates can be invested in an absolute return-oriented fixed income portfolio that – to the extent it outperforms the money market rates used to finance the index derivatives – will enhance returns from the equity index.
Research Affiliates’ fundamental indexes offer another source of potential excess return relative to traditional capitalization-weighted indexes. These patented, innovative indexes weight companies by fundamental factors – including sales, cash flows, dividends and book value, with additional screens for quality of earnings, financial distress and other parameters – in an effort to reduce risk and enhance returns. Traditional indexes, in contrast, weight companies by their market capitalization (outstanding shares times current price). By removing price from the index-construction process, these fundamental indexes attempt to eliminate the long-term performance drag caused by the systematic overweighting of overpriced stocks and underweighting of underpriced stocks – an inherent shortcoming of cap-weighted indexes. The Research Affiliates indexes are reconstituted annually and rebalanced quarterly.
Potential Sources of Added Value
The Fundamental IndexPLUS AR Strategies incorporate two independent sources of excess return potential relative to a cap-weighted equity index:
1. The return potential of Enhanced RAFI – which seeks to outperform capitalization-weighted indexes by weighting companies by fundamental factors and applying additional quantitative screens.
2. An actively managed absolute return bond portfolio – which has a flexible duration range of -3 to +8 years, allowing PIMCO to navigate a variety of interest rate environments.
Applications for Fundamental IndexPLUS AR
The Fundamental IndexPLUS AR Strategies may be attractive for the equity component of an investor’s asset allocation. By design, they seek a meaningful source of equity market outperformance with benchmark-like volatility.
Past performance is not a guarantee or a reliable indicator of future results. In managing the strategy’s investments in Fixed Income Instruments, PIMCO utilizes an absolute return approach; the absolute return approach does not apply to the equity index replicating component of the strategy. Absolute return portfolios may not necessarily fully participate in strong (positive) market rallies. Investing in the bond market is subject to certain risks including market, interest-rate, issuer, credit, and inflation risk; investments may be worth more or less than the original cost when redeemed. 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. Mortgage and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and their value may fluctuate in response to the market’s perception of issuer creditworthiness; while generally supported by some form of government or private guarantee there is no assurance that private guarantors will meet their obligations. 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. Investing in securities of smaller companies tends to be more volatile and less liquid than securities of larger companies. Equities may decline in value due to both real and perceived general market, economic, and industry conditions. Derivatives 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. Diversification does not ensure against loss.
This material contains the 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. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission. PIMCO and YOUR GLOBAL INVESTMENT AUTHORITY are trademarks or registered trademarks of Allianz Asset Management of America L.P. and Pacific Investment Management Company LLC, respectively, in the United States and throughout the world. ©2013, PIMCO.
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. ©2014, PIMCO.
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