PIMCO | Total Return Strategy

Total Return Strategy

What is Total Return?

Many bond portfolios focus solely on yield, but that is only part of the return of a bond portfolio. In addition to yield, bonds may also provide capital gains. The return calculation that takes into account both interest income and capital gains is known as total return. PIMCO’s Total Return portfolios are best described as a core bond strategy that seeks to maximize price appreciation and current income with index-like volatility. We utilize all major sectors of the bond market to implement a diversified set of strategies including sector rotation, yield curve positioning, and duration management. Duration is managed within a moderate range (between three and six years) around the broadest bond market indices

PIMCO’s Total Return Experience

PIMCO has been managing assets using our Total Return strategy since 1971, seeking to consistently outperform the market represented by the Barclays Capital U.S. Aggregate Index. PIMCO was one of the first investment managers to specialize in the field of active fixed income management. Today, PIMCO is a leading institutional money manager with a significant balance of its assets under management in “core” bond assignments utilizing the Total Return strategy.

Applications for Total Return

The Total Return strategy offers diversification, and the possibility of higher investment returns relative to money market instruments. It searches for value in every sector of the bond market with the objective of achieving high risk-adjusted returns. Thus, the strategy could be used as a “core” fixed income holding in any portfolio. Investors seeking to balance equity holdings in an aggressive investment portfolio with a more stable investment option should consider the Total Return strategy. History has shown that there is a relatively low correlation between the equity and fixed income markets. Therefore, employing the Total Return strategy in combination with an equity portfolio allows for greater diversification and potentially reduces the risk of swings in the portfolio’s value.

Investment Philosophy for Total Return

Our Total Return philosophy is founded on the principle of diversification. We believe that no single strategy should dominate returns. By relying on multiple sources of value that arise from a diversified portfolio, we seek to generate a solid, consistent track record. Our investment process utilizes both “top-down” and “bottom-up” strategies. Top-down strategies focus on duration, yield curve positioning, volatility, and sector rotation. These strategies 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. Implementation in portfolios is effected by selecting securities that achieve the designated objectives. Bottom-up strategies drive our security selection process and facilitate the identification and analysis of undervalued securities. Here, we employ advanced proprietary analytics and expertise in all major fixed income sectors. The objective is to combine perspectives from both the portfolio and security levels to consistently add value over time within acceptable levels of portfolio risk.

Sources of Added Value

PIMCO’s 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 add value consistently while maintaining an overall risk level that is similar to the benchmark index. The following strategies are intended to produce a performance record of consistent above-market returns:

Credit Analysis

We place a great deal of importance on independent analysis when evaluating corporate debt issues. PIMCO never relies on credit agencies alone. Our senior portfolio managers work with a team of credit analysts who evaluate individual issues. Each security is assigned an internal PIMCO rating.
As one of the largest bond managers in the world, PIMCO gains many advantages. Our size helps provide access to management and this becomes an integral element in the credit analysis process. We meet with management as often as necessary to remain current on the financial and operating conditions of a company.
Average portfolio credit quality may vary from A to AAA depending upon our outlook for interest rates and quality spreads.

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 might react to changes in interest rates and market conditions. We believe this gives 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 help us to keep transaction costs very low. Transaction costs are factored into all of our analyses to ensure the opportunity cost of each trade is outweighed by the benefit.

Issue Selection

We have specialists in a wide variety of fixed income sectors. These specialists are focused on evaluating the relative value between individual securities within a 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. In our effort to achieve consistent results, we avoid extreme duration shifts. We believe operating within a moderate duration range, typically between three and six years, increases the opportunity of achieving above-market returns while limiting the portfolio’s exposure to market swings. By actively managing our portfolios and maintaining a broad market focus, we strive to provide consistent returns with minimal risk.

Risk Management / Controls

PIMCO has focused on risk management since our founding 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.

We feel risk manifests itself in two main forms – investment and operational. Effective investment risk management begins with the identification of client objectives and their 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 as important as investment risk. Operational risk deals with problems or errors that may arise during day-to-day operations of the firm. Our organizational structure is designed to cope with this organizational risk. This is accomplished by segregating responsibilities for portfolio management, account management, and investment support monitored by an independent compliance group. 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.

How To Invest

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. 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. The credit quality of a particular security or group of securities does not ensure the stability or safety of the overall portfolio. 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.

Barclays Capital U.S. Aggregate Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. These major sectors are subdivided into more specific indices that are calculated and reported on a regular basis. 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.

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