PIMCO | Unconstrained Tax Managed Bond Strategy

Unconstrained Tax Managed Bond Strategy

What is Unconstrained Tax Managed Bond Strategy?
The PIMCO Unconstrained Tax Managed Bond Strategy is an absolute return–oriented, fixed income strategy that embodies PIMCO’s secular thinking, global themes, and integrated investment process without the constraints of a benchmark or significant sector/instrument limitations. The strategy represents the full expression of PIMCO’s investment expertise in a tax-efficient portfolio.

The strategy is designed to offer the traditional benefits of a core bond approach – capital preservation, liquidity and diversification – but with higher alpha potential and the opportunity to mitigate downside risk to a greater degree than what is reasonably possible from traditional active fixed income management approaches.

The Unconstrained Tax Managed Bond Strategy Provides Investors with the Opportunity for:

Attractive after-tax risk-adjusted return
High current income and capital preservation
Material diversification benefits

PIMCO’s Experience

The PIMCO Unconstrained Tax Managed Bond Strategy capitalizes on PIMCO’s almost four decades of active bond management experience, extraordinary breadth and depth of global fixed income expertise and over ten years of active investing in the municipal bond market. The strategy also directly benefits from the innovation and rigorous focus on risk management that has been a hallmark of the firm’s success.

Investment Philosophy and Process

The PIMCO Unconstrained Tax Managed Bond Strategy is governed by PIMCO’s investment philosophy and unique, disciplined secular investment process, which focuses on long-term economic, social and political trends that may have lasting impacts on investment returns. Over shorter cyclical time frames, the unconstrained nature of the strategy allows PIMCO to take on more risk when PIMCO identifies tactical opportunities, and it allows for reduction and diversification of risk at times when the outlook may be more challenging for traditional fixed income benchmarks. The strategy has the discretion to invest in a broad range of fixed income instruments which may include up to 40% of its assets in high yield bonds, up to 50% of its assets in non-U.S. dollar denominated securities and may have a duration as short as negative three years or as long as ten years.

The strategy will invest at least 50% of its assets in municipal bonds, and employs tax management techniques that attempt to minimize the capital gain realization rate of each portfolio and the level of taxable current income. PIMCO employs a diversified mix of strategies when building tax-efficient total return portfolios; all major sectors of the municipal bond market are utilized in addition to sector rotation, yield curve positioning, and duration management, and each trade is carefully analyzed for its overall tax-efficiency at both the security and portfolio level. Additionally, short versus long-term capital gain/loss utilization rates and levels of tax-exempt versus taxable income are also factored into portfolio management decisions.

The PIMCO investment process starts with the PIMCO annual secular forum during which the firm develops its 3- to 5-year outlook for the global economy and interest rates. Quarterly meetings are then held to discuss how the outlook applies to upcoming 3- to 12-month periods and to forecast specific influencing factors, including but not limited to interest rate volatility., yield curve movements and credit trends. Taken together, these sessions set the firm’s basic views on duration, yield-curve positioning, sector weighting and credit quality. Bottom-up strategies, including credit analysis, quantitative research and individual issue selection are then taken into account in conjunction with the top-down strategies in actively selecting the portfolio positions, with careful consideration given to the dual objective of providing an attractive after-tax risk-adjusted return and mitigating the risk of capital losses over the long-term.

Applications for the PIMCO Unconstrained Tax Managed Bond Strategy

The PIMCO Unconstrained Tax Managed Bond Strategy is, by design and objective, an absolute return strategy and may be considered an alternative investment approach in the sense that the active management discretion and alpha potential may be materially greater than that associated with traditional active fixed income management strategies. The strategy is also likely to provide diversification at the portfolio level as it should not exhibit a materially positive correlation with the equity market, which is the other key benefit that investors associate with alternatives. From a risk perspective, however, the PIMCO Unconstrained Tax Managed Bond Strategy is most closely related to core fixed income. The Strategy manages its exposures geared towards after-tax total return while distributing income of which a significant portion may be exempt from federal and, in some cases, state tax.

How is PIMCO Unconstrained Tax Managed Bond Strategy Different From PIMCO Total Return?

The PIMCO Total Return Strategy is designed to generate “index plus” returns, is governed by guidelines that reference the benchmark index and is managed within the confines of an implicit or explicit tracking error target. In contrast, the PIMCO Unconstrained Tax Managed Bond Strategy is not constrained by either low tracking error expectations or guidelines that are tied to the benchmark and is managed tax-efficiently. As such, PIMCO has greater discretion to vary the risk positions, including but not limited to duration, curve, sector and currency exposures.

Reasons for Investing in this Strategy

Attractive Risk-adjusted Return Potential
The PIMCO Unconstrained Tax Managed Bond Strategy seeks to deliver attractive risk-adjusted return by investing in a broad range of fixed-income securities, without significant sector or instrument limitations, except for 50% or more invested in municipal bonds. This less restrictive approach allows the strategy to fully capitalize on PIMCO’s market views, drawing upon the expertise of specialist teams across all fixed income sectors and our globally oriented secular investment process. Over the long-term, this approach may allow PIMCO to achieve materially higher returns than what is traditionally associated with a core bond approach, while maintaining the liquidity, capital preservation and diversification benefits investors typically associate with fixed income. By carefully reviewing trading activity to help ensure tax efficiency, the strategy seeks to provide attractive after-tax returns.

Active Risk Mitigation
The extra investment discretion that is afforded to the Unconstrained Tax Managed Bond approach allows PIMCO additional flexibility to help minimize the potential for negative returns over periods of reasonable length by defensively positioning the portfolio as warranted based on PIMCO’s secular and cyclical views. For example, during an anticipated rising rate environment the strategy may substantially eliminate interest rate exposure or even tactically move to a negative duration exposure. In addition, consistent with all PIMCO strategies, the Unconstrained Tax Managed Bond Strategy is built on PIMCO’s strong culture of risk management and focus on the long-term without ever losing sight of the risks.

Tax Advantage
The minimum municipal bond exposure helps to assure that the Unconstrained Tax Managed Bond Strategy will seek to provide attractive tax-adjusted income, and since more than 50% of the holdings will be in municipal bonds, some of the potential income distributed to investors will be federally and, in some cases, state tax exempt. Further, trading in the portfolio will be carefully reviewed so as to maximize the after-tax total return of the portfolio. For investors facing higher marginal income tax rates, municipals can potentionally offer significantly greater after-tax yields than similar maturity taxable debt securities, such as Treasuries and corporate bonds, with similar credit ratings and maturities. PIMCO’s proprietary analytics are customized for municipal-specific factors, such as yield volatility, call option costs and tax exposures.

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. Income from municipal bonds may be subject to state and local taxes and at times the alternative minimum tax. 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 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. 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. Please consult your tax and/or legal counsel for specific tax questions and concerns.

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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