Income Matters

Income Strategy Update:
Taking a Patient Approach as Growth Slows

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Mortgage-related credit have attractive valuations relative to corporate credit

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Liquidity is a key tenet of our portfolio management process

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We think good defense will lead to the ability to go on offense

Q: WHERE DOES PIMCO SEE THE GLOBAL ECONOMY HEADING?
Ivascyn: We are cautious on economic growth over the next year. Our base case forecast is for lower global growth on the order of 2%−2.5%, and we would not be surprised to see U.S. GDP growth down around 1% during the first half of next year.

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Ask the Income Team

Q: Where are you finding opportunities in the current low-yielding environment?

A: An important point to make here, which investors should be mindful of, is yield compensation for taking interest rate exposure has never been lower. In the chart below, you’ll see that the yield on the Bloomberg Barclays Global Aggregate Index, a popular global index, is down to a little above 1%, and based on the significant issuance we’ve seen over the course of the last several years, the duration of that index has extended all the way out to about seven years. That means that investors are only earning about 1% yield on seven years of duration or interest rate risk. The story is very similar in the U.S. While the Bloomberg Barclays U.S. Aggregate Index isn’t as stretched as the global version of the index; it’s only yielding about 2% with duration or interest rate risk extended out to about five and a half years.



* Bloomberg Barclays U.S. Aggregate Index

Because Income Fund utilizes a multi-sector, benchmark-agnostic* approach it has greater flexibility to source ideas from the entire global fixed income market. The team is focused on areas within the bond markets where we can find value and maintain portfolio flexibility. We still like housing-related exposure, with more recent allocations to agency mortgage-backed securities, which have been the highest in credit quality and liquidity, and offer historically attractive compensation potential relative to corporate bonds and other alternatives. Additionally, we’ve recently looked to diversify the portfolio in other areas. These include select emerging market bonds in areas of the market where we see attractive credit fundamentals. And, we’ve also added small exposures to some of the higher-yielding emerging market currencies.

Ask the Income Team
Ask the Income Team 

Portfolio Insights & Performance: Q3 2019

PIMCO
Income Fund

  • Morningstar Rating
Portfolio Performance
Over the quarter, the Income Fund generated a modest negative return. The higher quality portion of the portfolio contributed, as U.S. duration benefited from a global rally in interest rates. The higher yielding portion detracted from performance; corporate credit exposure generally aided results while emerging market positioning in debt and currency markets was a detractor.
Average Annual Returns (At NAV)

As of 09/30/2019

12
8
4
0
1 Year
3 Year
5 Year
10 Year
Since Inception
Performance is shown for the Institutional Share Class. Performance quoted represents past performance and is not a guarantee or a reliable indicator of future results. Investment return and the principal value of an investment will fluctuate. Shares may be worth more or less than original cost when redeemed. Current performance may be lower or higher than average annual returns shown. Performance quoted does not reflect any sales charges, if applicable, and performance would be lower if it did. For performance current to the most recent month-end, visit pimco.com or call 888.87.PIMCO. Inception date: 3/30/2007. Total expense ratio: 1.05%.
View Quarterly Investment Report
Overall Morningstar Rating for PIMCO Income Fund Institutional Class, as of 09/30/2019 rated against 273 funds based on risk-adjusted returns. Category: Multisector Bond.

PIMCO Low Duration
Income Fund

  • Morningstar Rating
Portfolio Performance
Over the quarter, the Low Duration Income Fund generated a negative return. The higher quality portion of the portfolio contributed, as U.S. duration benefited from a global rally in interest rates. The higher yielding portion detracted from performance; corporate credit exposure generally aided results while emerging market positioning in debt and currency markets was a detractor.
Average Annual Returns (At NAV)

As of 09/30/2019

12
8
4
0
1 Year
3 Year
5 Year
10 Year
Since Inception
Performance is shown for the Institutional Share Class. Performance quoted represents past performance and is not a guarantee or a reliable indicator of future results. Investment return and the principal value of an investment will fluctuate. Shares may be worth more or less than original cost when redeemed. Current performance may be lower or higher than average annual returns shown. Performance quoted does not reflect any sales charges, if applicable, and performance would be lower if it did. For performance current to the most recent month-end, visit pimco.com or call 888.87.PIMCO. Inception date: 7/30/2004. Total expense ratio: 0.59%.
View Quarterly Investment Report
Overall Morningstar Rating for PIMCO Low Duration Income Fund Institutional Class, as of 09/30/2019 rated against 491 funds based on risk-adjusted returns. Category: Short-Term Bond.

Disclosures

Investors should consider the investment objectives, risks, charges and expenses of the funds carefully before investing. This and other information are contained in the fund’s prospectus and summary prospectus, if available, which may be obtained by contacting your investment professional or PIMCO representative or by visiting www.pimco.com. Please read them carefully before you invest or send money.

A word about risk: Absolute return portfolios may not fully participate in strong positive market rallies. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates rise, and low interest rate environments increase this risk. Reductions in bond counterparty capacity may contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the original cost when redeemed. Corporate debt securities are subject to the risk of the issuer’s inability to meet principal and interest payments on the obligation and may also be subject to price volatility due to factors such as interest rate sensitivity, market perception of the creditworthiness of the issuer and general market liquidity. Investing in foreign denominated and/or domiciled securities may involve heightened risk dredeue to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Mortgage and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and their value may fluctuate in response to the market's perception of issuer creditworthiness; while generally supported by some form of government or private guarantee there is no assurance that private guarantors will meet their obligations. 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. Equities may decline in value due to both real and perceived general market, economic and industry conditions. Derivatives 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. Diversification does not ensure against loss.

10+ years of meeting the income challenge based on the Fund has issued a dividend distribution for each month since inception. No guarantee is being made that a future dividend will be issued.

The performance figures presented reflect the total return performance and reflect changes in share price and reinvestment of dividend and capital gain distributions. All periods longer than one year are annualized. The minimum initial investment for Institutional class shares is $1 million; however, it may be modified for certain financial intermediaries who submit trades on behalf of eligible investors.

Investments made by a Fund and the results achieved by a Fund are not expected to be the same as those made by any other PIMCO advised Fund, including those with a similar name, investment objective or policies. A new or smaller Fund’s performance may not represent how the Fund is expected to or may perform in the long-term. A Fund may be forced to sell a comparatively large portion of its portfolio to meet significant shareholder redemptions for cash, or hold a comparatively large portion of its portfolio in cash due to significant share purchases for cash, in each case when the Fund otherwise would not seek to do so, which may adversely affect performance.

Differences in the Fund’s performance versus the index and related attribution information with respect to particular categories of securities or individual positions may be attributable, in part, to differences in the pricing methodologies used by the Fund and the index.

It is important to note that differences exist between the fund’s daily internal accounting records, the fund’s financial statements prepared in accordance with U.S. GAAP, and recordkeeping practices under income tax regulations. It is possible that the fund may not issue a Section 19 Notice in situations where the fund’s financial statements prepared later and in accordance with U.S. GAAP or the final tax character of those distributions might later report that the sources of those distributions included capital gains and/or a return of capital. Please see the fund’s most recent shareholder report for more details.

Although the Fund may seek to maintain stable distributions, the Fund’s distribution rates may be affected by numerous factors, including but not limited to changes in realized and projected market returns, fluctuations in market interest rates, Fund performance, and other factors. There can be no assurance that a change in market conditions or other factors will not result in a change in the Fund’s distribution rate or that the rate will be sustainable in the future.

For instance, during periods of low or declining interest rates, the Fund’s distributable income and dividend levels may decline for many reasons. For example, the Fund may have to deploy uninvested assets (whether from purchases of Fund shares, proceeds from matured, traded or called debt obligations or other sources) in new, lower yielding instruments. Additionally, payments from certain instruments that may be held by the Fund (such as variable and floating rate securities) may be negatively impacted by declining interest rates, which may also lead to a decline in the Fund’s distributable income and dividend levels.

There is no assurance that any fund, including any fund that has experienced high or unusual performance for one or more periods, will experience similar levels of performance in the future. High performance is defined as a significant increase in either 1) a fund’s total return in excess of that of the fund’s benchmark between reporting periods or 2) a fund’s total return in excess of the fund’s historical returns between reporting periods. Unusual performance is defined as a significant change in a fund’s performance as compared to one or more previous reporting periods.

Morningstar Rating™ as of 30 September 2019 for the institutional share class; other classes may have different performance characteristics. A rating is not a recommendation to buy, sell or hold a fund. The PIMCO Income Fund was rated against the following numbers of Multisector Bond funds over the following time periods: Overall 5 Stars (273 funds rated); 3 Yrs. 5 Stars (273 funds rated); 5 Yrs. 5 Stars (224 funds rated); 10 yrs. 5 stars (117 funds rated). The PIMCO Low Duration Income Fund was rated against the following numbers of Short-Term Bond funds over the following time periods: Overall 5 Stars (491 funds rated); 3 Yrs. 5 Stars (491 funds rated); 5 Yrs. 5 Stars (439 funds rated); 10 Yrs. 4 Stars (277 funds rated). Past performance is no guarantee of future results. The Morningstar Rating™ for funds, or "star rating", is calculated for managed products (including mutual funds, variable annuity and variable life subaccounts, exchange-traded funds, closed-end funds, and separate accounts) with at least a three-year history. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. It is calculated based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a managed product's monthly excess performance, placing more emphasis on downward variations and rewarding consistent performance. The top 10% of products in each product category receive 5 stars, the next 22.5% receive 4 stars, the next 35% receive 3 stars, the next 22.5% receive 2 stars, and the bottom 10% receive 1 star. The Overall Morningstar Rating for a managed product is derived from a weighted average of the performance figures associated with its three-, five-, and 10-year (if applicable) Morningstar Rating metrics. The weights are: 100% three-year rating for 36-59 months of total returns, 60% five-year rating/40% three-year rating for 60-119 months of total returns, and 50% 10-year rating/30% five-year rating/20% three-year rating for 120 or more months of total returns. While the 10-year overall star rating formula seems to give the most weight to the 10-year period, the most recent three-year period actually has the greatest impact because it is included in all three rating periods. Morningstar, Inc.® 2018. All rights reserved. The information contained herein: (1) is proprietary to Morningstar (2) may not be copied or distributed and (3) is not warranted to be accurate, complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.

Correlation is a statistical measure of how two securities move in relation to each other. The correlation of various indexes or securities against one another or against inflation is based upon data over a certain time period. These correlations may vary substantially in the future or over different time periods that can result in greater volatility.

The 3 Month USD LIBOR (London Interbank Offered Rate) Index is an average interest rate, determined by the ICE Benchmark Administration, that banks charge one another for the use of short-term money (3 months) in England's Eurodollar market. Bloomberg Barclays 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. FTSE 3-Month Treasury Bill Index is an unmanaged index representing monthly return equivalents of yield averages of the last 3 month Treasury Bill issues. It is not possible to invest directly in an unmanaged index.

The Bloomberg Barclays Global Aggregate Index is a flagship measure of global investment grade debt from twenty-four local currency markets. This multi-currency benchmark includes treasury, government-related, corporate and securitized fixed-rate bonds from both developed and emerging markets issuers.

PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2019, PIMCO

PIMCO Investments LLC, distributor, 1633 Broadway, New York, NY 10019, is a company of PIMCO.

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