John Devir, who has been with PIMCO since 2011, recently assumed leadership of our Long/Short team and joined Ben Strom as portfolio manager for our EqS Long/Short Fund. In the following Q&A, John discusses his background, his approach to investing and, with Ben, the positioning of the fund in the current environment.

Q: John, you have long been a senior member of PIMCO’s credit team. What is your background in equities?

Devir: My experience prior to joining PIMCO was focused on equity investing. I began my career as a telecom analyst before moving to the buy side and managing equity portfolios. In fact, for 13 years I ran long/short equity strategies at proprietary trading desks, including at Credit Suisse, Lehman and Barclays. The Volcker Rule prompted me to seek new opportunities, and I was fortunate enough to have a conversation with PIMCO. I was immediately attracted to the incredible resources of the firm and felt my approach to investing would integrate well with PIMCO’s investment process. In addition, I thought that learning more about credit, technicals and macro themes – all of which are increasingly driving equity markets – would make me a better investor. At PIMCO, I oversee energy credit research and manage a fund outside the U.S. investing in master limited partnerships (MLPs). I am excited about the opportunity to lead EqS Long/Short and continue to build on the fund’s strong track record.

Q: How would you describe your approach as a long/short equity investor?

Devir: My investment process is fundamentally driven and opportunistic, stressing patience and discipline. I have always focused on finding value with a clear catalyst, or path to realization, and then constructing a concentrated portfolio with weights that reflect research conviction. As an equity investor, in-depth knowledge of companies and industries is essential, but as a long/short equity investor you need more than that. You need the ability to assess the market environment and economic cycles and to understand how the macro economy can impact stocks. This is where PIMCO’s broader research resources come into play.

My approach is also one of flexibility and humility. A good long/short investor needs to be flexible, taking risk when opportunities present themselves and reducing exposures when risks outweigh rewards. And humility is needed to remain committed to the process. It’s about maintaining intellectual honesty, sticking to what you know (and knowing what you don’t!) and doing what you said you would.

Q: Ben, you’ve been a member of the Long/Short team since 2013. How should we expect EqS Long/Short to be managed going forward?

Strom: Investors should expect continuity of the strategy with any changes being evolutionary in nature. Importantly, we will continue to seek to deliver on participating in equity market upside while preserving capital in periods of extended market declines. And we will continue that focus through two main drivers of returns: stock selection within a concentrated, high-conviction portfolio, and the ability to actively adjust equity market exposures.

The continuity of the strategy also comes from the team and the existing process. John and I are fortunate to be supported by a dedicated team of equity analysts, and we already have an infrastructure in place that allows for idea generation, research debates and portfolio reviews, all within a clearly defined risk framework.

Q: You mentioned evolutionary changes. Can you be more specific?

Devir: There are four areas where we expect to see some change over time. First, while the team has always sought to benefit from PIMCO’s broad research views, we are formalizing processes that will allow for an increase in the exchange of ideas with other specialist desks. If we’re regularly engaged with the more than 50 industry experts on PIMCO’s credit research team, and we create more structure that allows us to gain insight into the views of our other specialist desks, as well as the Investment Committee, then we’ll be more connected to PIMCO’s best thinking and this will only improve the quality of our research.

Second, the Long/Short team has historically had a generalist research coverage model with more informal sector coverage. We are moving to more of a sector specialist model, allowing our analysts to develop even deeper knowledge of industries and companies. I believe sector expertise will result in more idea generation from the team, which leads to the third expected change: a more consistent expression of short ideas. Raising cash is often a very important strategy to reduce downside risk in long/short investing, and we will continue to utilize cash as part of our toolkit. But in normal market environments, we want to put that cash to work in both high-conviction long ideas and in a more diversified short book to generate returns for our investors. Finally, I mentioned earlier that my approach is based on patience and discipline. That does not mean inertia – we need to constantly revisit and question our investment theses. But having a reasonable time horizon is important, and I expect that the strategy will exhibit lower turnover going forward.

Q: What are your views of the equity market today, and how is the portfolio positioned?

Devir: Year to date we’ve seen the U.S. equity market churn higher even as earnings expectations have been revised lower, resulting in a market P/E ratio above 18x. On the one hand, lower earnings expectations make it easier for companies to meet those targets, but on the other hand, lower interest rates are forcing investors to pay up for future growth. With this starting point of higher valuations, we believe investors should expect lower returns for equities going forward.

Additionally, about 35% of government debt in developed markets has negative interest rates, and as central banks continue down a path of unconventional policies, investors are being driven out on the risk curve to try to achieve reasonable risk-adjusted returns. While expectations for the Federal Reserve to raise rates have whipsawed this year, the economy continues to improve, and the health of the labor market and wage growth are trending higher. Therefore we believe investors should avoid overreacting to Fed policy and focus on economic and company-specific fundamentals. This means investors need to be more selective and consider reducing interest rate risk, which in equities is concentrated in the otherwise “safe-haven” sectors like utilities, staples and telecom that have benefitted from declining rates.

Strom: In the EqS Long/Short Fund, we recently lowered our exposures as some long positions have appreciated above fair value targets. We also reduced our short book as we remain constructive on the U.S. economy and recognize the cyclical re-positioning underway. We currently are finding attractive investment opportunities in technology, energy and select consumer discretionary companies. The positive outlook for the U.S. bodes well for equity assets in industries supported by high barriers to entry, widening competitive moats, above-trend growth and pricing power. In addition, we look for companies with management teams that can act in the best interests of shareholders. With a large research and analytics team, we are continually seeking companies with these characteristics – and to invest at attractive discounts to fair value.

The Author

John M. Devir

Portfolio Manager, Long/Short Equity Strategies

Benjamin Strom

Portfolio Manager, Long/Short Equity Strategies

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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:

Equities may decline in value due to both real and perceived general market, economic and industry conditions. Investments in value securities involve the risk the market’s value assessment may differ from the manager and the performance of the securities may decline. Investing in securities of smaller capitalization and mid-capitalization companies tend to be more volatile and less liquid than securities of larger companies. 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. 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. REITs are subject to risk, such as poor performance by the manager, adverse changes to tax laws or failure to qualify for tax-free pass-through of income. Entering into short sales includes the potential for loss of more money than the actual cost of the investment, and the risk that the third party to the short sale may fail to honor its contract terms, causing a loss to the portfolio. 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. The Fund is non-diversified, which means that it may invest its investments in a smaller number of issuers than a diversified fund.

This material contains the 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. ©2016, PIMCO.

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