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
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.