In July, we rebutted the narrative that liability-driven investing (LDI) portfolios are best managed with less discretion and lower alpha targets. We believe the opposite: When risk, return and costs are properly defined, active management of LDI assets should handily beat further allocations to return-seeking assets on the efficiency scale, and thus a higher active risk LDI approach potentially leads to better risk-adjusted outcomes. (See "When More Is Less: Dialing Up Active Management in LDI Portfolios May Reduce Risk.")

But how best to implement this strategy in LDI? In the following Q&A, portfolio managers Mike Cudzil and Mohit Mittal, and the leader of pension solutions in the Americas, Rene Martel, outline PIMCO's investment approach and its potential for generating alpha.

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The Author

Mike Cudzil

Portfolio Manager

Mohit Mittal

Portfolio Manager, Multi-Sector

Rene Martel

Head of Retirement

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Disclosures

Past performance is not a guarantee or a reliable indicator of future results. The “gross of fees” performance figures above are presented before management fees (for Pacific Investment Management Company LLC described in Part 2 of its Form ADV) and custodial fees (in the case of both separate accounts and mutual funds), but do reflect commissions, other expenses and reinvestment of earnings.   The “net of fees" performance figures reflect the deduction of actual investment advisory fees but do not reflect the deduction of custodial fees. All periods longer than one year are annualized. Separate account clients may elect to include PIMCO sector funds in their portfolio; sector funds may be subject to additional terms and fees.

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 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.  Currency rates may fluctuate significantly over short periods of time and may reduce the returns of a portfolio. 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. 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.

There is no guarantee that these investment strategies will work under all market conditions or are suitable 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.

The Bloomberg Barclays U.S. Long Credit Index includes both corporate and non-corporate sectors with maturities equal to or greater than 10 years. The corporate sectors are Industrial, Utility, and Finance, which include both U.S. and non-U.S. corporations. The non-corporate sectors are Sovereign, Supernatural, Foreign Agency, and Foreign Local Government. Benchmark returns were not examined and are not covered by the report of independent accountants. The PIMCO Long Duration Asset-Weighted Index is a blended benchmark, rebalanced monthly, combining the individual account benchmarks at the same weights as the account weights in the composite. As of December 2016, the benchmark consisted of 28.3% Bloomberg Barclays U.S. Long Credit Index; 26.9% Bloomberg Barclays Long Government/Credit Index; 14.3% a blend of 75% Bloomberg Barclays U.S. Long Credit Index and 25% Bloomberg Barclays U.S. Long Government Index; 6.9% Bloomberg Barclays U.S. Long Corporate Index; 2.1% a blend of 75% Bloomberg Barclays U.S. Long Corporate Index and 25% Bloomberg Barclays U.S. Long Government Index; with the remainder comprised of various other long duration indices, each representing less than 2% of the total blend. The breakdown of the custom benchmark for different time periods is available upon request. Benchmark returns were not examined and are not covered by the report of independent accountants. It is not possible to invest directly in an unmanaged index.

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