PIMCO Total Return Fund

Transcription

1 Your Global Investment Authority QUARTERLY INVESTMENT REPORT PIMCO Total Return Fund 3Q15

2 Executive Summary Portfolio performance Over the quarter the Total Return strategy underperformed as detractions from interest rate and spread sector strategies outweighed gains from currency positioning. Contributors Long dollar positions against a basket of emerging markets currencies Exposure to European peripheral sovereign spreads Detractors U.S. interest rate strategies, particularly duration, yield curve positioning and instrument selection CM3 CY0 CM12 AY3 AY5 AY10 SIA Performance periods ended 30 September '15 3 mo YTD 1 yr 3 yrs 5yrs 10yrs SI Fund before fees Fund after fees Benchmark* Benchmark* 6.67 Performance quoted represents past performance. Past performance is not a guarantee or a reliable indicator of future results. Investment return and the principal value of an investment will fluctuate. Shares may be worth more or less than original cost when redeemed. Current performance may be lower or higher than performance shown. For performance current to the most recent month end, visit pimco.com or call PIMCO. Portfolio strategy Underweight duration: U.S. economy on solid footing and Fed signaling policy normalization is near Hold TIPS in place of nominal Treasuries: Embedded inflation expectations too low in light of reflationary central bank policies *Barclays U.S. Aggregate Index Treasury Inflation-Protected Securities (TIPS) held in lieu of nominal Treasuries Local interest rate exposure in Mexico and Brazil Selective credit holdings: Opportunistic in corporate credit, favoring housing-related credits, financials and municipals Overweight U.S. dollar: Monetary policy divergence continues as Fed approaches policy normalization Class: INST Inception date: 11 May '87 Fund assets (in millions): $95, Annual operating expense: 0.460% Net operating expense: 0.460% Summary information 30 Sep '15 SEC Summary 30-day information annual yield 1/0/ % Distribution SEC 30-day annual yield yield 2.98% 3.54% Distribution yield 3.54% Effective duration (yrs) 4.95 Effective duration (yrs) Benchmark duration Benchmark duration 5.60 provider (yrs) 5.6 provider* (yrs) Benchmark duration 5.26 PIMCO** (yrs) (yrs) Effective maturity (yrs) 7.80 Average Average coupon coupon 3.18% 3.18% Net currency exposure % Net currency exposure % Tracking error (5 yrs) 2.33% Tracking Information error ratio (10 yrs) (5 yrs) Information ratio (10 yrs) 0.48 Sector allocation Duration (yrs) Market value Government related % Mortgage % Investment grade credit % High yield credit % Non-U.S. developed % Emerging markets % Bonds and other long duration instruments % EM short duration instruments % Municipal/Other % Net other short duration instruments % Total % Your Global Investment Authority As of 30 September

3 Market Recap Yields fell as inflation expectations declined dramatically In the third quarter, a cascade of negative headlines soured global risk sentiment. Rising concern over the outlook for Chinese growth flattened yield curves and also sent commodity prices, inflation expectations and emerging market (EM) assets tumbling. The subsequent rise in global financial market volatility to multi-year highs drove developed market central banks to reiterate their commitment to accommodative policies and convinced the Federal Reserve (the Fed) not to hike rates at its September meeting. Despite the headlines and financial market turmoil, economic growth in the U.S. remained robust. Yield curves flattened as global growth concerns accelerated and inflation expectations fell. The rally in Treasuries was outpaced by the move in swap rates. Source: Bloomberg Crude oil prices shifted lower in part due to global growth concerns accentuated by China's unfolding slowdown. Fears rose that struggles in emerging markets could spill over into developed markets, which pulled inflation expectations and global growth projections lower. Your Global Investment Authority As of 30 September

4 Portfolio Summary Falling yields and declining inflation expectations weighed on returns while policy uncertainty led to increased volatility The Total Return strategy underperformed as detractions from interest rate and spread sector strategies outweighed gains from currency positioning. Long dollar positions against a basket of currencies were among the leading contributors. Still, detractions from U.S. interest rate strategies and U.S. Treasury Inflation-Protected Securities weighed more heavily on returns. U.S. Duration U.S. yields broadly fell over the quarter as the Federal Reserve decided against hiking rates during its September meeting, citing global and economic financial developments. Nonetheless, fundamentals remained resilient as retail sales and housing strength underscored the ongoing recovery. Inflation-Linked Securities Sinking commodity prices coupled with China woes weighed heavily on global inflation expectations over the quarter, leading inflation-linked bonds (ILBs) to sharply underperform nominal bonds. Treasury Inflation-Protected Securities were among the hardest hit ILB markets, with breakeven inflation levels hitting multi-year lows on falling oil prices and softer inflation readings. Currencies The surprise mid-quarter devaluation of the Chinese yuan shook global markets, driving risk-off sentiment that led to broad EM currency weakness, most directly throughout emerging Asia. The U.S. dollar generally outperformed its EM counterparts but was mixed against developed market currencies. Source: Bloomberg, Barclays, JPMorgan Your Global Investment Authority As of 30 September

5 PIMCO s Global Outlook PIMCO expects the global economy to expand at a 2.5%-3.0% pace over the next 12 months, with inflation of 2% to 2.5%. Within this baseline view, there are some significant and widening divergences among the world s major economies. For example, growth in the U.S., eurozone, U.K. and Japan over the next year should modestly improve, while growth prospects in China are deteriorating and other major emerging economies face uncertain prospects for recovery. We see the balance of risks to the global economy tilted somewhat to the downside, due in part to China-related market volatility and the diminishing returns of unconventional monetary policy. On the upside, stimulus from low oil prices has yet to fully flow through to the global economy. Americas: North doing well, South more challenged U.S. on steady, but two-speed path as consumer and housing remain well supported, while exports and investment are constrained by lower global growth. Modest acceleration in wages will underpin inflation toward Fed s 2% target, but rate hikes will be gradual. Mexico well positioned to benefit from U.S. strength, while Brazilian growth will remain weak until political uncertainty and reform agenda are clarified. Europe: Expect modest pick-up in growth & inflation Eurozone growth will expand steadily under tailwind of low oil prices and weaker euro; rising confidence and more jobs underpin credit cycle and consumer spending. U.K. supported by strong labor market, rising house prices, and healthier outlook for exports to eurozone, but inflation will remain modest. Emerging Europe will benefit from low oil, relative insulation from China, but politics weigh for some. Asia: Lower oil, cheaper currencies offset to China drag In Japan, near-term supported by cheaper oil, weaker yen and policy supports; additional quantitative and qualitative easing possible as long-term goals still elusive. Chinese policies geared toward cushioning downside and reducing uncertainty may gradually bear fruit and avoid a hard-landing, but more policy support may be forthcoming. China will weigh on Asia, but many will benefit from lower oil, more competitive currencies, and reform-minded governments. Global: Cautious optimism The ongoing and cumulative benefits of global monetary policy accommodation, reduced fiscal austerity and lower oil prices will allow the global expansion to continue. The modest pace of growth suggests inflationary pressures will remain contained. This persistent trend will allow the U.S. Fed to normalize rates at a moderate pace, especially as easing efforts outside the U.S. will remain or expand. Underweight U. S. duration. Selective in corporates and find value in housing-related credits and financials. Long U.S. dollar bias, especially against the yen and euro. Remain tactical in Mexico and Brazil. European periphery and select financials still offer attractive relative value. Ongoing quantitative easing backs underweight in euro. Political risks (Turkey, Poland, Russia) may weigh on sentiment, require tactical approach. Underweight a basket of Asian currencies as China s yuan devaluation will pressure others lower. Underweight Japanese currency as inflation expectations and growth remain low. Relative strength of U.S. economy supports outlook for dollar, especially against those countries still deploying monetary ease. Macro headwinds bring volatility, but increasingly divergent domestic policy choices will drive valuations. Your Global Investment Authority As of 30 September

6 Portfolio Outlook Strategic Outlook PIMCO expects the global economy to expand at a 2.5%-3.0% pace over the next 12 months, with inflation of 2% to 2.5%. Within this baseline view, there are some significant and widening divergences among the world s major economies. In the U.S., projected employment and wage gains should continue to support consumption, while historically low mortgage rates and a pent-up demand for housing are likely to boost residential construction. Lower oil prices and a weaker euro should support growth in the eurozone while fiscal policy is no longer projected to be a drag on GDP. We expect dispersion across emerging markets to continue, especially given the ongoing volatility in commodity markets. Key strategies U.S. Interest Rate Strategies The potential for volatility as the Fed s first rate hike approaches could adversely impact the front-end of the yield curve. The long-end of the curve may steepen as inflation expectations rise. The intermediate portion continues to offer attractive carry characteristics. Position Inflation Market inflation expectations appear depressed given the Fed s goal to reflate the economy. The impact of the decline in oil prices is likely to be transitory and TIPS can protect against any future surprises in inflation. Credit Opportunities We find attractive opportunities in specific credits that benefit from U.S. growth and a resurgent housing sector. We see value in banks and select financial companies, housing-related credits, and taxable municipals (primarily Build-America Bonds, or BABs ). Dollar Strength Dollar-strength positions--designed to benefit from an appreciation in the dollar relative to the euro, Japanese yen, and a basket of EM currencies--remain attractive amid continued divergence in central bank policies around the world. SOURCE: PIMCO **For spread sectors, the relevant spread duration contribution is used *Non-agency may include non-agency mortgage backed securities, asset backed securities, and commercial mortgage backed securities Your Global Investment Authority As of 30 September

7 Sector Exposure Sector exposure Portfolio Benchmark % of Market value Duration in years % of Market value Duration in years 30 Jun '15 30 Sep '15 30 Jun '15 30 Sep '15 30 Sep '15 30 Sep '15 Government - Related Government - Treasury Government - Agency Swaps and liquid rates Mortgage Investment grade credit High yield credit Non-U.S. developed Emerging markets Bonds and other long duration instruments EM short duration instruments Municipal/Other Net other short duration instruments* Commingled cash vehicles Certificate of deposit/commercial paper/stif Government related MBS/ABS Credit Other Short duration derivatives and derivative offsets Net unsettled trades Total *Net Other Short Duration Instruments includes securities and other instruments (except instruments tied to emerging markets by country of risk) with an effective duration less than one year and rated investment grade or higher or, if unrated, determined by PIMCO to be of comparable quality, commingled liquidity funds, uninvested cash, interest receivables, net unsettled trades, broker money and derivatives offset. With respect to certain categories of short duration securities, the Adviser reserves the discretion to require a minimum credit rating higher than investment grade for inclusion in this category. Your Global Investment Authority As of 30 September

8 Portfolio Characteristics Interest rate exposure Portfolio (yrs) Benchmark (yrs)** 30 Jun '15 30 Sep '15 30 Sep '15 Effective duration Bull market duration Bear market duration Spread duration Mortgage spread duration Corporate spread duration Emerging markets spread duration Swap spread duration Covered bond spread duration Sovereign related spread duration Derivative exposure (% of Duration) *Credit default swaps are shown as a percentage of market value to reflect potential default risk **Benchmark duration is calculated by PIMCO. 30 Jun '15 30 Sep '15 Government Futures Interest Rate Swaps Credit Default Swaps* Purchased Swaps Written Swaps Options Purchased Options Written Options Mortgage Derivatives Money Market Derivatives Futures Interest Rate Swaps Other Derivatives Your Global Investment Authority As of 30 September

9 Country and Currency Exposure Country exposure by currency of settlement 30 Jun '15 30 Sep '15 Duration (yrs) FX (%) Duration (yrs) FX (%) United States Japan European Union Euro Currency France Germany Greece Italy Netherlands Portugal Slovenia Spain 0.03 Eurozone United Kingdom Denmark Switzerland Europe non-emu Australia Canada New Zealand Dollar Block Hong Kong 0.02 Israel Saudi Arabia Singapore South Korea Taiwan Other Industrialized Countries China India Malaysia Philippines Thailand EM - Asia Brazil Mexico EM - Latin America Russia EM - CEEMEA Total Emerging markets exposure by country of risk 30 Jun '15 30 Sep '15 % of MV short duration instruments % of MV bonds Duration (yrs) % of MV short duration instruments % of MV bonds Duration (yrs) Brazil China Colombia EM Index Product India Indonesia Malaysia 0.02 Mexico Peru Philippines Russia South Africa Thailand Turkey Total Your Global Investment Authority As of 30 September

10 Additional Share Class Performance PIMCO Total Return Fund (Net of Fees Performance) Gross expense Performance periods ended: 30 Sep '15 ratio Net expense ratio NAV currency Class Inception date 3 mo YTD 1 yr 3 yrs 5 yrs 10 yrs SI Class A USD 13 Jan ' Class ADMIN USD 08 Sep ' Class C USD 13 Jan ' Class D USD 08 Apr ' Class INSTL USD 11 May ' Class P USD 30 Apr ' Class R USD 31 Dec ' Barclays U.S. Aggregate Index Performance quoted represents past performance. Past performance is not a guarantee or a reliable indicator of future results. Investment return and the principal value of an investment will fluctuate. Shares may be worth more or less than original cost when redeemed. Current performance may be lower or higher than performance shown. For performance current to the most recent month end, visit pimco.com or call PIMCO. Certain classes may have an inception date which is different than the inception date of the fund. For the periods prior to the inception date of the oldest class shares, performance information is based on the performance of the oldest class shares, adjusted to reflect the actual distribution and/or service (12b-1) fees and other expenses paid by the other class shares. Your Global Investment Authority As of 30 September

11 Appendix This material is authorized for use only when preceded or accompanied by the current PIMCO funds prospectus or summary prospectus, if available. Past performance is not a guarantee or a reliable indicator of future results. The performance figures presented reflect the total return performance for the following class shares, as applicable, institutional, administrative, A, D, P, and R (after fees) and reflect changes in share price and reinvestment of dividend and capital gain distributions. All periods longer than one year are annualized. The minimum initial investment for institutional, administrative, and P class shares is $1 million; however, it may be modified for certain financial intermediaries who submit trades on behalf of eligible investors. 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 suitable 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. The SEC yield is an annualized yield based on the most recent 30 day period. The average distribution yield is the average of the last four quarterly distribution yields. The quarterly distribution yield is calculated by annualizing the quarter's distribution and dividing by the NAV on the last business day of the period. It does not include long- or short-term capital gains distributions. Average coupon is the average of the coupon payments of the underlying bonds within the portfolio. Average effective maturity is a weighted average of all the maturities of the bonds in a portfolio, computed by weighting each bond s effective maturity by the market value of the security. Duration is the measure of a bond's price sensitivity to interest rates and is expressed in years. Effective duration is the duration for a bond with an embedded option when the value is calculated to include the expected change in cash flow caused by the option as interest rates change. Information ratio is a ratio of portfolio returns above the returns of a benchmark to the volatility of those returns. Tracking error measures the dispersion or volatility of excess returns relative to a benchmark. Tracking error measures the dispersion or volatility of excess returns relative to a benchmark. Barclays U.S. Aggregate Index represents securities that are SEC-registered, taxable, and dollar denominated. The index covers the U.S. investment grade fixed rate bond market, with index components for government and corporate securities, mortgage pass-through securities, and asset-backed securities. These major sectors are subdivided into more specific indices that are calculated and reported on a regular basis. A word about risk: 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. Mortgage and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and their value may fluctuate in response to the market s perception of issuer creditworthiness; while generally supported by some form of government or private guarantee there is no assurance that private guarantors will meet their obligations. 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. 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. 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. 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 and YOUR GLOBAL INVESTMENT AUTHORITY are trademarks or registered trademarks of Allianz Asset Management of America L.P. and Pacific Investment Management Company LLC, respectively, in the United States and throughout the world. PIMCO Investments LLC, distributor, 1633 Broadway, New York, NY, is a company of PIMCO PIMCO. 700_QIR-3Q15 Your Global Investment Authority As of 30 September