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PIMCO’s Approach to Asset Class ExposurePIMCO has a history of seeking to provide enhanced returns relative to the indices which measure basic asset class exposure. We do that by exercising two core competencies – management of derivatives and management of fixed income collateral. We gain exposure to an asset class by negotiating and managing derivatives that give index exposure to the asset class. We attempt to add value (enhance) by fully collateralizing those derivatives, and then managing the collateral in a way that seeks to outperform the financing rate built into the derivatives.
PIMCO first employed this approach in 1986, when we began to manage positions in the S&P 500 futures contracts, and managed collateral to outperform the Libor rate built into those futures contracts. This became our trademark StocksPLUS strategy. Next, we did the same thing with bond futures, as an additional tool for fixed income management, creating a BondsPLUS strategy. Our next foray into a different asset class was with commodities in January 2000. We negotiated swaps on a commodity index and backed those swaps with actively managed collateral, creating CommoditiesPLUS.® We then went one step further. Realizing that commodities were designed to provide real return, we backed commodity index swaps with a real return asset, TIPS, creating our Double Real® strategy. Enhanced exposure to equities without being a stock picker. Enhanced exposure to commodities without being a crude oil trader. We strive to offer efficient asset class exposure by sticking to what we do well. And we offer a similar capability in real estate.
PIMCO was one of the first to break new ground in the world of real estate investment by privately negotiating with counterparties to provide swaps on the Dow Jones U.S. REIT Index, a widely used benchmark for measuring returns to real estate as an investment class. We have taken this investment one step further, employing our trademarked Double Real strategy by backing our REIT swaps with TIPS. For investors buying real estate at least partially because they seek an inflation hedge, TIPS should provide a more efficient use of their capital. With a longer duration than money markets, TIPS also provide a closer match to the longer duration of liabilities of most investors. And an investor might consider, over a strategic timeframe, which could perform better – TIPS, or the LIBOR-based financing rate embedded in the REIT index swaps.
PIMCO uses derivatives linked to a real estate index to gain basic exposure to the asset class. This provides exposure to the investment returns of the REIT market, without investing directly in individual REIT securities. Investments in real estate-linked derivative instruments may subject the portfolio to greater volatility than investments in traditional securities.
PIMCO adjusts the notional amount of those derivatives as the market value of our accounts change, so that our notional exposure to an index is targeted at 100% of the account value. This exposure is monitored daily, and all derivative positions are marked to market daily. PIMCO also monitors its counterparties closely, ensuring that their credit is acceptable. We typically settle any derivatives at least once a month, and we exercise PIMCO’s normal diligence in management of collateral that backs the REIT index positions.
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. 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. 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. Commodities contain heightened risk including market, political, regulatory, and natural conditions, and may not be suitable for all investors. 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. Swaps are a type of derivative; while some swaps trade through a clearinghouse there is generally no central exchange or market for swap transactions and therefore they tend to be less liquid than exchange-traded instruments. 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.
Double Real® refers to a strategy that provides exposure to two asset classes (real estate and TIPS) that have historically had a positive correlation to inflation.
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. ©2014, PIMCO.
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