Strategy Overview
The PIMCO Real Income Strategy is a unique and innovative investment solution that seeks to provide retirees with efficient and systematic income from their savings. The strategy is a liquid investment that helps guard against the effects of inflation on purchasing power. In an effort to achieve these goals, the strategy invests primarily in U.S Treasury Inflation-Protected Securities (TIPS) with maturities structured to provide systematic real (inflation-adjusted) distributions of principal and interest so that all assets will have been distributed upon the designated maturity date.
TIPS are issued by the U.S. government, which guarantees their timely payment of interest and return of principal at maturity. Their face value is adjusted in step with changes in the rate of inflation, with interest paid on the adjusted amount. At maturity, a TIPS investor receives the original principal plus the sum of all the inflation adjustments since the bond was issued. Of course, the value of a TIPS investment is not guaranteed and can decline if inflation-adjusted interest rates rise.
| New Challenges, New Realities |
Savers often erroneously assume that interest and dividends from their investments will provide sufficient income to support their lifestyle in retirement. However, most retirees will need to utilize some of their assets to supplement other income sources. Meanwhile, many also believe that equity investments are a suitable hedge against inflation. While stocks have outpaced inflation over certain periods, especially periods that include low inflation and high growth, the volatility risk of stocks may be higher than many retirees can tolerate. Higher volatility could potentially lead to either a large increase or a large decrease in purchasing power, while many retirees would rather receive a more certain steady increase in purchasing power. TIPS are designed to provide just that when held to maturity – a steady increase in purchasing power at typically less than half the volatility risk as stocks.
Rather than strategies that put their savings at risk, retirees need a solution that will provide an anchor for their portfolio by generating systematic, real (inflation-adjusted) income to supplement traditional retirement sources such as social security, defined benefit plans, portfolio income or annuities. |
| Addressing the Spending Needs of Retirees |
The PIMCO Real Income Strategy was created to provide retirement income portfolios with a liquid vehicle that explicitly guards against inflation, while seeking to provide a steady source of income. Traditionally, most retirement investments have focused on the accumulation stage of retirement saving. The Real Income Strategy in contrast, is designed specifically to provide the orderly distribution of assets in retirement while seeking to preserve retirees’ purchasing power. - The strategy is structured efficiently to provide systematic monthly distributions adjusted for inflation until all assets are depleted at its final maturity date.
- Securities in “laddered” portfolios of TIPS, with maturities occurring at regular intervals, afford investors the opportunity to receive payouts of inflation-adjusted principal until the strategy’s final maturity, by which time all the assets will have been distributed.
- The strategy also may utilize a small amount of securities issued or guaranteed by the U.S. government or futures contracts on U.S. Treasuries.
- Because PIMCO’s Real Income Strategy offers a liquid investment in government-backed securities, they may allow investors to be more aggressive elsewhere in their portfolio.
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| A Truly Unique Solution |
The Real Income Strategy provides a distinct combination of key characteristics that are found in a range of retirement products, including annuities, laddered bond portfolios and managed payout funds. The strategy employs proprietary technology to facilitate systematic monthly payments over the life of a portfolio and can serve as an anchor of inflation-adjusted income in a comprehensive retirement portfolio. - The strategy provides regular distributions over time like an annuity. However, unlike fixed annuities, the distributions are not guaranteed and are made until their stated maturity dates rather than for life. Annuities offer a fixed rate of return backed by the claims-paying ability of the insurer, but involve insurance-related fees and charges and limited access to the investment.
- The Real Income Strategy distributes all of its assets to investors over the designated lifetime of the strategy, but because it is invested in TIPS it seeks to preserve a retirees’ purchasing power. Other managed payout strategies may not include sufficient inflation hedging and may maintain exposure to stocks, adding considerable risk to the portfolio.
- PIMCO employs a sophisticated “patent pending” investment process to construct the TIPS portfolio.
- PIMCO can provide a daily Real Distribution Rate (RDR) to give investors an indication of their payment level.
As a leading manager of TIPS with broad reach and execution capabilities in the market, PIMCO may be able to take advantage of certain economies of scale and efficiencies. |
| Real Income |
Preserving a person’s purchasing power is an important tool to help ensure that future income will be sufficient to sustain the lifestyle that person enjoys today. Ensuring that inflation does not eat away at sources of income over time should be the cornerstone of any retirement portfolio. - For today’s retirees it’s not unusual to live 20, 30 or even 40 years after leaving the work force and giving up a salary. Maintaining the purchasing power of the income and capital from investment portfolios is an essential component of a prudent retirement strategy.
- Defined benefit plans with guaranteed payments have become less prevalent and less robust. Retirees need solutions that can systematically distribute savings and investments, while managing risk and preserving purchasing power.
- In deflationary scenarios, TIPS have built-in downside protection, as securities held to maturity are guaranteed by the U.S. government to pay back at least the original or inflation adjusted principal, which ever is greater.
- PIMCO is a pioneer in “real” investing using TIPS and other inflation-linked investments. PIMCO has deep experience in this market since the U.S. Treasury first issued TIPS in 1997. And we have been an innovator in putting them to use to help preserve investors’ purchasing power.
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| PIMCO’s Experience |
| PIMCO, founded in 1971, is a global asset management firm that manages investments for an array of clients, including retirement and other assets that reach more than 8 million people in the U.S. and millions more around the world. Our clients include state, municipal and union pension and retirement plans whose beneficiaries come from all walks of life, from educators to healthcare workers to public safety employees. We are also advisors and asset managers to central banks, corporations, universities, foundations and endowments. With offices in North America, Europe, Asia and Australia, we manage investments across a full spectrum of global financial markets. PIMCO is owned by Allianz Global Investors, a subsidiary of the Munich-based Allianz Group, a leading global insurance company. |