Fundamental Advantage Absolute Return Strategy​

Strategy Overview
PIMCO’s Fundamental Advantage is an innovative absolute return oriented strategy that seeks to provide investors an attractive source of diversified return and a low probability of materially negative performance across most market cycles.

The stock market alpha is derived from the combination of long exposure to a portfolio of stocks selected and weighted according to the Enhanced Research Affiliates Fundamental Index 1000, and short exposure to the market-cap weighted S&P 500 index. Through this combination, the strategy looks to isolate the potential outperformance of the Fundamental Index while maintaining an equity market neutral profile. Because the long and short equity market exposure does not require a significant capital investment, the majority of the capital invested in Fundamental Advantage is available to be invested in an actively managed fixed income portfolio that seeks to provide a second source of return potential and diversification.

Enhanced RAFI is a proprietary basket of stocks selected by Research Affiliates, based on the fundamental factor-based stock selection process underlying Research Affiliates’ fundamental indexation research. Enhanced RAFI seeks to outperform the S&P 500 by eliminating the performance drag associated with market-cap weighted indices that systematically overweight overpriced stocks and underweight underpriced stocks.

Research Affiliates takes into account each company’s gross sales, free cash flow, net book value, and gross dividends in formulating the weighting of stocks in the portfolio. Several other proprietary screens are also applied in the construction of the portfolio in an effort to further enhance risk-adjusted return. Selecting and weighting stocks according to fundamental factors captures the economic size of companies and specifically eliminates the influence of stock prices from the portfolio construction process.

As the long and short equity exposures require minimal capital, the majority of the cash that an investor allocates to the Fundamental Advantage strategy is available to be invested in a fixed income portfolio that capitalizes on PIMCO’s nearly four decades of active management experience.

The assets are invested in a diversified absolute return style portfolio that is not constrained by a traditional fixed income benchmark. The fixed income strategy takes a diversified approach to adding value, seeking to provide greater potential for consistent outperformance by employing multiple concurrent strategies and taking modest risk in each, thereby reducing the risk of poor performance from any single source. The portfolio has the flexibility to expand beyond government securities, mortgage-backed securities, and corporate bonds to include an extensive global fixed-income opportunity set, and actively manages interest rate exposures, invests in non-benchmark sectors, and targets long-term structural premiums in the bond market.

The Fundamental Advantage strategy seeks to capture two independent sources of structurally-based potential return for every dollar invested: The incremental return, or alpha, from a stock selection approach based on the concepts that underlie Fundamental Indexation and the return from an actively managed fixed income portfolio.

Equity market risk diversification is also one of the key benefits that Fundamental Advantage looks to offer investors.


Past performance is not a guarantee or a reliable indicator of future results. In managing the strategy’s investments in Fixed Income Instruments, PIMCO utilizes an absolute return approach; the absolute return approach does not apply to the equity index replicating component of the strategy. All investments contain risk and may lose value. Absolute return portfolios may not necessarily fully participate in strong (positive) market rallies. Investing in the bond market is subject to certain risks including market, interest-rate, issuer, credit, and inflation risk. Equities may decline in value due to both real and perceived general market, economic and industry conditions. Sovereign securities are generally backed by the issuing government, obligations of U.S. Government agencies and authorities are supported by varying degrees but are generally not backed by the full faith of the U.S. Government; portfolios that invest in such securities are not guaranteed and will fluctuate in value. Mortgage and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and while generally supported by a government, government-agency or private guarantor there is no assurance that the guarantor will meet its obligations. 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. 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.

The Enhanced RAFI 1000 is a performance recalibrated version of the FTSE RAFI 1000 Index that incorporates additional factors, such as the quality of corporate earnings and the risk of financial distress, and recalibrates existing factors utilized in the FTSE RAFI 1000 Index that affect a company’s fundamental drivers of value. Enhanced RAFI 1000 may also be rebalanced more frequently than the FTSE RAFI 1000 Index. The S&P 500 Index is an unmanaged market index generally considered representative of the stock market as a whole. The index focuses on the Large-Cap segment of the U.S. equities market. It is not possible to invest directly in an unmanaged index.

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.