Income Matters

Income Strategy Update:
Building Resiliency in Volatile Markets

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Balance higher quality and higher yielding assets

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Favor housing-related investments

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Take advantage of dislocations in the markets

Q: What were the key drivers of performance for the Income Strategy during the fourth quarter?
Murata:
The Income Strategy's combination of top-down economic views and bottom-up trade ideas worked well in 2018. Coming into the year, we thought economic growth would be relatively strong in the near term, but we were concerned about the possibility of a slowdown in the intermediate term. Because of that, we had reduced credit risk in the Income Strategy, and in the fourth quarter, we were able to go on offense and add credit positions at attractive prices.

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Fixed Income Playbook

Resiliency in a Challenging Year

PIMCO Income and Low Duration Funds delivered strong performance through continued market volatility

The markets rode a wave of volatility into the end of 2018, as Federal Reserve policy, trade, geopolitical frictions, and concerns about peak economic and earnings growth weighed on risk assets, particularly equities. After being up more than 11% at its peak on September 20th, the S&P 500 Index fell -13.52% during the fourth quarter and posted a full-year return of -4.38%. International equities fared worse; the MSCI ACWI ex-U.S. Index returned -14.20% in 2018.

In contrast, the bond markets provided a haven through the stormy end-of-year period, delivering on their traditional role as an equity diversifier. The Bloomberg Barclays U.S. Aggregate Index ended the year flat. As seen below, PIMCO Income Fund and PIMCO Low Duration Income Fund proved resilient during the volatile fourth quarter and challenging year, delivering both strong performance and diversification potential.

Playbook Income Investing Chart - Average Annual Returns
Playbook Income Investing Chart - Average Annual Returns
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. Total expense ratio for PIMCO Income Fund: 0.74%. Total expense ratio PIMCO Low Duration Income Fund: 0.55%.

Portfolio Insights & Performance: 4Q 2018

PIMCO
Income Fund

  • Morningstar Rating
Portfolio Performance

Over the quarter, the Income strategy generated positive returns as the higher quality portion and currency positioning contributed. The higher yielding portion detracted over the quarter.

Average Annual Returns (At NAV)

As of 03/31/2019

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: 0.74%.
View Quarterly Investment Report
Overall Morningstar Rating for PIMCO Income Fund Institutional Class, as of 03/31/2019 rated against 291 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 positive returns as the higher quality portion and currency positioning contributed. The higher yielding portion detracted over the quarter.

Average Annual Returns (At NAV)

As of 03/31/2019

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: 0.55%.
View Quarterly Investment Report
Overall Morningstar Rating for PIMCO Low Duration Income Fund Institutional Class, as of 03/31/2019 rated against 476 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: Past performance is not a guarantee or a reliable indicator of future results. 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 the current low interest rate environment increases this risk. Current 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. 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. 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.

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.

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.

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.

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 31 March 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 (291 funds rated); 3 Yrs. 5 Stars (291 funds rated); 5 Yrs. 5 Stars (225 funds rated); 10 yrs. 5 stars (131 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 (476 funds rated); 3 Yrs. 5 Stars (476 funds rated); 5 Yrs. 5 Stars (415 funds rated); 10 Yrs. 4 Stars (266 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.

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. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission.

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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