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Investment Strategies

PIMCO RAE Strategies: Redefining Active Value Investing

Dive into the innovative PIMCO RAE approach to value investing with Robert Arnott, chairman of Research Affiliates. Learn how it differs from traditional methods by prioritizing a company's fundamental economic footprint over market capitalization, offering a unique edge in active equity management.

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Text on screen: Prashant Pandey, PRODUCT STRATEGIST

Pandey: I'm Prashant Pandey, equity strategist at Pimco. I'm joined today by Robert Arnott, founder and chairman of research affiliates and portfolio manager of the Pimco RAE Strategies, our value oriented active equity approach.

Pandey: Rob, what makes value investing such a compelling approach to equity markets?

Text on screen: Robert Arnott, FOUNDER AND CHAIRMAN, RESEARCH AFFILIATES

Arnott: Ben Graham famously observed that in the short run, the market is a voting machine and in the long run, it's a weighing machine. The markets in the short run are driven by narratives, narratives that tell us what the markets and the collective psyche of investors think will happen in the long-term future.

But that view changes and that view changes, as the view changes, so do the prices in the market, so does the opportunity set.  

Graphic on screen: Three circles green, red and blue, representing in green Value, in red Quality, and in Blue Momentum; Text on screen: List graphic: Value: Exploit market mispricing, Quality: Avoid value traps, Momentum: Avoid stock in freefall

So, as a result of that value investing,

which anchors on the underlying fundamentals of a business, seeks to take advantage of the mispricings that are created by a market that's driven in the short run by emotion.

Pandey: Thanks, Rob. Can you describe the RAE approach to value investing and what makes it different from other active value strategies?

Arnott: RAE is I think very special in two ways.

Firstly, it uses quality filters and momentum filters to weed out value traps. And if you weed those companies out, you'll weed out some good bargains too, but you'll potentially weed out the value traps. Value investing all too often involves buying more and more of a stock all the way to zero. Now, the second key advantage of RAE is that it doesn't anchor on capitalization weighting.

Text on screen: TITLE – Fundamental economic footprint: BULLETS – Sales as a percentage of all publicly traded companies, Profits as a percentage of total profits in the economy, Dividends and buybacks as a percentage of all dividend distributions

It weights companies in accordance to their fundamental economic footprint in the macro economy.

Measures like how big are its sales as a percentage of all publicly traded company sales, how big are its profits, again as a percentage of total profits in the economy.

How big are its dividends and buybacks as a percentage of all dividend distributions in the economy? And when you use these fundamental measures to set the target size of your investment, then if a company tanks and its fundamentals don't, you're going to be buying more. If it rebounds sharply and its fundamentals don't follow suit. You're going be saying thank you for those lovely gains in trimming it. This potentially creates a rebalancing alpha.

This is the only value strategy in the world that I'm aware of that anchors on the fundamental size of a business for its weight rather than anchoring on its market value, its market capitalization and hence its price.

Pandey: How do you think about including RAE in equity allocation?

Arnott: The strategy has been live in the US, in US small companies in international, in emerging markets, in developed XUS, in global strategies.

The ways people use RAE are most typically as part of the value sleeve in their portfolio. Investors will allocate to growth managers and to value managers.

There are segments of the market where investors won't typically have a value sleeve. Small cap companies and emerging markets are two examples where people often won't have a dedicated sleeve for value. But in the less efficient markets like small cap and emerging markets, we find that the value added is historically even larger and historically even more consistent.

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Disclosure


Past performance is not a guarantee or a reliable indicator of future results.

Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. 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 for the long term, especially during periods of downturn in the market. Outlook and strategies are subject to change without notice.

All investments contain risk and may lose value. 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 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. 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. Diversification does not ensure against loss.

PIMCO as a general matter provides services to qualified institutions, financial intermediaries and institutional investors. Individual investors should contact their own financial professional to determine the most appropriate investment options for their financial situation. 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 LLC in the United States and throughout the world. ©2024, PIMCO.

Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660 is regulated by the United States Securities and Exchange Commission.

CMR2024-0402-3486265

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