Income

PIMCO Income Strategy intends to offer a high level of current income in an effort to meet the needs of investors for whom income is the primary goal. The strategy seeks to surpass other income-generating investments like Treasury ladders by targeting a more competitive distribution yield and monthly dividends with a focus on assuming only a minimal increase in risk.

PIMCO is recognized as a leading institutional money manager with a significant balance of its assets under management in core bond portfolios that utilize multiple sources of additional value with a focus on risk management.. Though PIMCO Income Strategy utilizes this time-tested total-return approach, the strategy focuses on income first and capital appreciation second.

The strategy employs many of the same investment strategies used in other PIMCO strategies, such as the Total Return Strategy, and reflects the macroeconomic and asset-allocation views of the PIMCO investment committee. However, the Income Strategy also uses unique investment strategies in an effort to maximize income.

• A competitive yield. Income Strategy yield intends to be competitive with many savings vehicles such as bank accounts, money markets and CDs.
  
  
• Diversification. The strategy can provide diversification and may help reduce volatility for an overall portfolio that includes equity and other fixed-income investments.
  
  
• High credit quality. The strategy primarily invests in high-quality instruments issued across a broad range of fixed-income sectors.
  
  
• Liquidity. The strategy structure is designed to provide liquidity when needed.

•  Exposure to global bond-market sectors that offer attractive income potential.
  
  
• A stable, high, and consistent dividend-income level.
  
  
• High average credit quality. To pursue high-quality yield sources, we limit how much of the strategy may be invested in below-investment-grade securities.
  
  
• An intermediate-average portfolio duration, emphasizing a combination of income and capital appreciation.
  
  
• Low correlation with the overall bond market.

Managed to pursue efficient income generation, the Income Strategy also focuses on PIMCO total-return ideas in an effort to maximize capital appreciation and risk-adjusted returns relative to its peers. Although the strategy has an income orientation that produces sector allocations that may be slightly more concentrated than the Total Return Strategy, the Income Strategy reflects the central asset-allocation views of the PIMCO investment committee.

The strategy is considered a core bond strategy, benchmarked against the Barclays Capital U.S. Aggregate Index, and utilizes the full range of bond sectors available, including U.S. Treasuries, federal agencies, commercial paper, banker’s acceptances, certificates of deposits, short-term corporate debt, and variable- and floating-rate debt, and is managed opportunistically using sector rotation, yield-curve positioning and duration.

The strategy capitalizes on PIMCO strengths:

• It combines total-return management with techniques that seek to maximize distributable income.
  
  
• The strategy relies on the same macroeconomic themes developed in our secular and cyclical processes as other core PIMCO products.
  
  
• Strong depth and expertise across all bond-market sectors gives PIMCO the experience its portfolio managers need to utilize a full range of fixed-income tools.
  
  
• Proprietary risk-management controls.

Because the strategy’s multi-sector approach gives it the flexibility to adapt to changing economic conditions, it may be well suited for a long-term income allocation and should be considered a complement to an investor’s core bond holdings.

Consistent with the PIMCO process and philosophy used for more than 35 years across all our strategies, the Income Strategy is founded on the principle of diversification. It is a multi-sector strategy, in which no single sector or strategy should dominate. By relying on multiple sources of value that arise from a diversified portfolio, we seek to generate a solid, consistent track record. This process utilizes both “top-down” and “bottom-up” strategies.

Top-down strategies focus on duration, yield-curve positioning, volatility, and sector rotation with the potential to maximize current income. They are deployed from a macro view of the portfolio driven by our secular outlook of the forces likely to influence the economy and financial markets over the next three to five years and our cyclical views of two- to four-quarter trends. We implement it within Income Strategy portfolios by selecting securities that achieve the designated objectives.

Bottom-up strategies drive our security-selection process and help identify and analyze undervalued securities and securities that pay high income. Here, we employ advanced proprietary analytics and expertise in all major fixed-income sectors. By combining perspectives from both the portfolio and security levels, we attempt to add value consistently over time within acceptable levels of portfolio risk.

PIMCO portfolio managers work as a team. Generalist portfolio managers receive input from specialists in each market sector. Sector specialists relay information, ideas and trading strategies, and assist with trade execution. PIMCO seeks to generate high, consistent income and add value while maintaining overall risk characteristics similar to the benchmark index. These techniques seek to produce a record of high, consistent income and above-market returns:

Credit analysis
When evaluating corporate-debt issues, we place a great deal of importance on independent analysis. PIMCO never relies on credit agencies alone. Our senior portfolio managers work with a team of credit analysts who evaluate individual issues. Our size helps give us access to management and this is an integral part of the credit-analysis process. We meet with a company’s managers as often as necessary to remain current on the firm’s financial and operating conditions. Each security is assigned an internal PIMCO rating.

Quantitative research
Due to the complexities of the fixed-income markets, PIMCO has developed a set of proprietary quantitative tools designed to assess how securities will react to changes in interest rates and market conditions. This may give us a distinct advantage relative to our competitors in evaluating investment decisions.

Cost-effective trading
As one of the largest bond managers in the world, economies of scale allow us to keep transaction costs very low. Transaction costs are factored into all of our analyses to ensure that each trade’s benefit outweighs its opportunity cost.

Issue selection
Specialists in a wide variety of fixed-income sectors focus on evaluating the relative value between individual securities within each sector. By understanding and exploiting these differences, we seek to capture value for our clients.

Avoiding extreme durations
Duration, or the sensitivity of a bond to a change in interest rates, is extremely important in structuring a portfolio. By actively managing our portfolios and maintaining a broad market focus, we strive to provide consistent income and total returns with minimal risk.

Risk management has been a major emphasis at PIMCO since our inception in 1971. As new technologies and financial instruments develop, we strive to ensure that our risk management procedures remain effective and that we stay ahead of our competition. We dedicate significant financial and intellectual resources to address risk management.

Risk manifests itself in two main forms – investment and operational. Effective investment-risk management begins by identifying client objectives and the level of risk aversion. From there, we develop a set of appropriate investment guidelines and effective risk measures. Advanced proprietary analytics allow us to model securities under a multitude of scenarios including best and worst cases. We believe the decision to hold a security is just as important as the decision to buy. As a result, we price and re-evaluate portfolio holdings on a regular basis.

Operational risk is equally important. Operational risk deals with problems or errors that may arise during day-to-day operations of the firm. Because we segregate responsibilities for portfolio management, account management, and investment support, and an independent compliance group monitors investment activity, our organizational structure is designed to address this risk. At PIMCO, we have embraced this methodology from our inception and it has benefited both our clients and the organization as a whole. Our system has clearly defined checks and balances to provide reasonable assurance that all risk exposures are handled in an appropriate manner.