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In the next five years, the global economy will likely follow a more uncertain, volatile, and divergent growth and inflation path than in the decade leading up to the pandemic. In this “Age of Transformation” (detailed here in our recent Secular Outlook), investors will likely see lower and more volatile returns across asset classes.

Fixed income investors in particular face four major challenges in their ongoing search for yield – low and rising interest rates, the potential for higher long-term inflation, relatively tight credit spreads, and the risk that volatility could rise (for more details, see our Featured Solution on flexible fixed income). The prospect of higher interest rates from the Fed’s tightening cycle and ongoing geopolitical risks also have many advisors concerned about their clients’ fixed income allocations.

These conditions could lead to a wider dispersion of returns across sectors and make it difficult for advisors and their clients to generate income responsibly, as stepping out further on the risk spectrum may derail a client’s long-term goals. We believe PIMCO Model Portfolios are well positioned to meet the challenges ahead due to their broad diversification, ability to span a range of objectives, and their actively managed duration exposure.

PIMCO fixed income model portfolios: flexibility and a broad toolkit

Having flexibility and a broad toolkit are essential in today’s fixed income markets, as low yields and tight spreads cannot be overcome by a one-size-fits-all approach. To that end, PIMCO offers a range of outcome-oriented fixed income model portfolios designed to address specific client objectives, such as preserving capital, diversifying exposure to equities, and generating attractive levels of income.

We also offer both Taxable and Tax-Aware Fixed Income Models for different levels of tax sensitivity.

These Models primarily draw on our flagship funds as their core and core complement, and are supplemented by sector-specific strategies to seek broader diversification and the opportunity to source attractive yields across global bond markets. Both the allocation decisions across the funds as well as the underlying strategies leverage our active investment process, which combines PIMCO’s forward-looking economic views and rigorous credit research in seeking to help clients address their goals even in challenging environments.

To counter the risk of further increases in rates and inflation, our Models have the flexibility to reduce duration, while certain Models may be able to add inflation-related and/or floating-rate securities and take more-focused positions at points on the yield curve we believe are most attractive.

Additionally, to address the potential for elevated volatility, we can prioritize high quality bonds where possible in order to tilt our model portfolios toward higher-quality “bend but don’t break” positions.

PIMCO fixed income model portfolios: more options for advisors

While advisors work with clients to navigate this difficult environment, they’re also being asked to provide a broader suite of services and find new client relationships to build their businesses. As many advisors have revamped their business models to broaden their value proposition and focus more on holistic financial planning services, the support systems offered to them have also expanded.

Asset managers are helping advisors transition to a models- based practice by providing practice management content and marketing collateral. Additionally, asset managers have ramped up product development efforts, placing a greater emphasis on launching more outcome-oriented models that can complement traditional risk-based multi-asset portfolios.

As a result, model portfolios have evolved from an “all or nothing” concept to a resource that advisors can flexibly use to address a variety of specific client needs while retaining the level of discretion that’s most appropriate for their practice. For example, advisors can pair a PIMCO Fixed Income Model with their own selection of equity managers to create multi-asset portfolios tailored to a client’s risk tolerance.

PIMCO Fixed Income Models can be used to address a number of objectives, ranging from capital preservation to income generation, so having a diverse mix of potential building blocks is essential for advisors to address unique client needs.

For advisors wishing to maintain discretion, PIMCO Models can be used as a tool to visualize our investment outlook and provide prescriptive guidance on the number of line items and position-sizing of strategies across different client objectives. In other words, rather than simply listing potential ingredients, asset manager models now detail the suggested recipe for seeking specific outcomes.

Conclusion

The more uncertain, volatile, and divergent growth and inflation path we see ahead will likely create an even more difficult environment for fixed income investors, who already face low interest rates and tight credit spreads. Yet we believe PIMCO Models are well positioned to capitalize on disruption- driven investment opportunities and help advisors deliver on the full range of client objectives.

For advisors seeking to add value for clients in this challenging environment, PIMCO’s flexible Fixed Income Models allow advisors to maintain control over their clients’ portfolios while freeing them up to provide financial planning and other services. As a partner to advisors who use models as an investment solution or as a tool to make more informed investment decisions, PIMCO Models and the support we offer will continue to evolve as needs change.


1 A Tax Aware Model Portfolio allocates to a minimum of 50 percent municipal bond funds. A portfolio managed to a Tax Aware Model will experience a taxable event. PIMCO does not provide legal or tax advice. Please consult your tax and/or legal counsel for specific tax or legal questions and concerns.

2 Model asset class exposure is obtained though the Underlying Fund holdings. The Models do not allocate directly to individual securities. Each Model has a defined opportunity set and asset class exposure will be limited to the investment strategies of the Underlying Funds as defined within its prospectus. Please refer to each Fund’s prospectus or summary prospectus, if available, prior to investing in a PIMCO Model.

3 “Bend-but-not-break” refers to credits that PIMCO would not expect to default in a credit-stressed environment.

The Author

Justin Blesy

Asset Allocation Strategist

Ryan McMahon

Global Wealth Management

Mark Thomas

Account Manager, Global Wealth Management

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Disclosures

The PIMCO Models described in this material are available exclusively through investment professionals.

PIMCO Models are created based on what Pacific Investment Management Company LLC (together with its affiliates, “PIMCO”) believes to be generally accepted investment theory. In adjusting PIMCO models PIMCO considers, among other things, the results of quantitative modeling. Such quantitative modeling is designed to optimize each Model’s allocation and align with the Model’s investment objective, and takes into account various factors or “inputs”, determined by PIMCO, including third party data, to generate a suggested allocation for the PIMCO Models. PIMCO’s investment team then reviews the quantitative output and adjusts the output to reflect variables, which may include, among other things, the anticipated trade size, target total expense ratio for the Model, and qualitative investment insights. PIMCO Model allocations are ultimately subject to the discretion of PIMCO’s investment team. PIMCO Models are for illustrative purposes only and may not be appropriate for all investors. PIMCO Models are provided to your financial professional not based on any particularized financial situation, or need, and are not intended to be, and should not be construed as, a forecast, research, investment advice or a recommendation for any specific PIMCO or other strategy, product or service. Individuals should consult with their own financial advisors to determine the most appropriate allocations for their financial situation, including their investment objectives, time frame, risk tolerance, savings and other investments. Volatility is historical and is likely to change over time. PIMCO has not undertaken, and will not undertake, any analysis to determine any specific models’ suitability for specific investors.

The risks of a PIMCO Model’s allocations will be based on the risks of the PIMCO affiliated and unaffiliated funds (each, a “Fund”) included in the PIMCO Model’s allocation (“Underlying Fund”). The PIMCO Model’s allocations are subject to the risk that the Underlying Funds and the allocations and reallocation (or “rebalancing”) of the PIMCO Model among the various Underlying Funds may not produce the desired result. The PIMCO Model allocations to Underlying Funds have changed over time and are expected to change in the future. As described above. the selection and weighting process across Underlying Funds is informed based on return estimates driven by PIMCO’s quantitative models and forecasts for key risk factor inputs and forward looking view and risk estimates informed by PIMCO’s analytic infrastructure (“Systems”). These Systems rely heavily on the use of proprietary and nonproprietary data, software, hardware, and intellectual property, including data, software and hardware that may be licensed or otherwise obtained from third parties. The use of such Systems has inherent limitations and risks. Although we take reasonable steps to develop and use Systems appropriately and effectively, there can be no assurance that we will successfully do so. Errors may occur in the design, writing, testing, monitoring, and/or implementation of Systems, including in the manner in which Systems function together. The effectiveness of Systems may diminish over time, including as a result of market changes and changes in the behavior of market participants. The quality of the resulting analysis, including the PIMCO Model allocations depends on a number of factors including the accuracy and quality of data inputs into the Systems, the mathematical and analytical assumptions and underpinnings of the Systems’ coding, the accuracy in translating those analytics into program code or interpreting the output of a System by another System in order to facilitate a change in market conditions, the successful integration of the various Systems into the portfolio selection and trading process and whether actual market events correspond to one or more assumptions underlying the Systems. Management risk is the risk that the investment techniques and risk analyses applied by PIMCO will not produce the desired results, and that certain policies or developments may affect the investment techniques available to PIMCO in connection with managing the strategy.

PIMCO Model allocations are licensed or otherwise made available to investment professionals. PIMCO Models’ allocations are updated on a defined production cycle. The Underlying Funds are available by prospectus only. Implementing investment professionals may or may not implement the PIMCO Model’s allocation as provided, and actual allocations to Underlying Funds may vary. There are expenses associated with the Underlying Funds in addition to any fees charged by implementing investment professionals. Additionally, the implementing investment professional may include cash allocations, which are not reflected herein.

All investments contain risk and may lose value. 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.

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There is no guarantee that these investment strategies will work under all market conditions or are appropriate for all investors and each investor should evaluate their ability to invest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.

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For end investors: The implementation of, or reliance on, a model portfolio allocation is left to the discretion of your financial professional. PIMCO is not responsible for determining the securities to be purchased, held and sold for your account(s), nor is PIMCO responsible for determining the suitability or appropriateness of a model portfolio allocation or any securities included therein. PIMCO does not place trade orders for your or any of your financial professionals clients’ accounts. Information and other marketing materials provided to you by PIMCO concerning a model portfolio allocation - including holdings, performance and other characteristics -may not be indicative of a client’s actual experience from an account managed in accordance with the model portfolio allocation. This material has been created by PIMCO and the information included herein has not been verified by your financial professional and may materially differ from information provided by your financial professional. Investors should consult their financial professional prior to making an investment decision.

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