The Lipper Awards 2018 recognized the PIMCO Income Fund, Institutional, for the 3 and 5 year performance periods out of 61 and 40 funds,

Transcription

1 The Lipper Awards 2018 recognized the PIMCO Income Fund, Institutional, for the 3 and 5 year performance periods out of 61 and 40 funds, respectively, under the Multi- Sector Income Funds Classification.

2 Portfolio performance Over the quarter, the Income strategy generated negative returns as the higher quality portion detracted from performance. The higher yielding portion of the portfolio contributed to performance. Currency positioning also contributed over the quarter. Class: Inception date: Fund assets (in millions): Annual operating expense: INST 30 Mar '07 $111, % CONTRIBUTORS Holdings of securitized credit, primarily non-agency MBS Exposure to local emerging market duration, primarily in Brazil and Mexico Long exposure to a basket of emerging market currencies, primarily to the Mexican peso Portfolio strategy DETRACTORS U.S. interest rate exposure Hedge against Japanese interest rates Long U.S. dollar versus the Japanese yen Performance periods ended 31 Mar '18 3 mos. 6 mos. 1 yr. 3 yrs. 5 yrs. 10 yrs. SI Fund before fees Fund after fees Benchmark* 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. Broad U.S. Credit: Steady and improving U.S. growth should be supportive of high quality credit sectors Emerging Market Opportunities: High quality emerging market debt can help diversify duration exposure while also adding additional yield Downside protection: Favor duration in the U.S. and Australia, focused on intermediate maturities Tactical Currency Positioning: Remain tactical with currency positioning, favoring the U.S. dollar versus developed markets and long a basket of high carry EM currencies for additional diversification Summary information Effective duration (yrs) Benchmark duration provider (yrs) Benchmark duration PIMCO (yrs) Effective maturity (yrs) Average coupon Net currency exposure Tracking error (10 yrs) 31 Mar ' % 0.46% 4.13 Information ratio (10 yrs) 1.27 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 % *Bloomberg Barclays U.S. Aggregate Index 1

3 Change in 10yr yield (bps) since 31 Dec '17 OAS (bps) A challenging market environment featured higher yields and lower equities as volatility rose Risk asset returns started higher, but reversed first on concerns about rising rates spurred by expectations for higher inflation, increased Treasury supply and more Fed hikes and then on fears of a global trade war. Equities ended the quarter lower, credit spreads wider, and the dollar weaker. Meanwhile, central banks remained on course for diminished monetary support as the fundamental backdrop remained solid. In the U.S., the Fed raised its policy rate and the dot plot shifted higher for 19/ 20. U.S. Japan UK Germany HY spreads (LHS) IG spreads (RHS) Q OAS (bps) Dec '17 Jan '18 Feb '18 Mar '18 Dec '15 Jun '16 Dec '16 Jun '17 Dec '17 Broad-based growth trends coupled with expectations of higher inflation and greater supply pressured global rates higher. However, the increase in yields partially reversed by the end of the quarter amid escalating trade tensions and increased volatility. Source: Bloomberg Credit spreads, both investment-grade and high yield, widened in Q1 as market volatility shifted higher. Still, mortgage credit, specifically non-agency mortgage-backed securities, performed well as housing fundamentals remained strong. Source: Bloomberg; HY spreads are represented by Bloomberg Barclays U.S. High Yield Average OAS index; EM Spreads are represented by Bloomberg Barclays EM USD Index; IG spreads are represented by Bloomberg Barclays U.S. Aggregate Credit Average OAS index 2

4 Change in yield Change in spread Returns (%) Q1 18: Risk assets sold off as global rates adjusted higher The Income strategy generated negative returns as the higher quality portion detracted from performance. The higher yielding portion of the portfolio contributed to performance. Currency positioning also contributed over the quarter. High quality duration Developed market yields rose for most of the quarter as broad-based growth trends coupled with expectations of higher inflation and greater supply pressured rates higher. However, growing fears of a global trade war sparked a risk-off rally in March and contributed to bond prices partially recovering. In the U.S., the 10 year yield ended the quarter 33bps higher at 2.74%. Higher yielding sectors Global investment grade credit spreads widened 12bps in Q1, underperforming by -0.54% relative to like-duration global government bonds. Despite supportive fundamentals and global synchronized growth, spreads widened in the second half of the quarter, driven by the sell-off in equity markets, waning foreign demand, and higher market volatility. Currencies Despite a hawkish tilt from the Fed, the dollar weakened against most G10 currencies as the Trump administration floated proposals for protectionist policies. The yen surged as investors piled into safe havens. Fears of inflation plagued the Eurozone, but strong economic performance and hints of an end Brexit tempered losses in the euro and the British pound. Yields Q4'17 Q1' U.S. 10yr Australia 10yr -2 0 Japan 10yr EM Local Spreads Q4'17 Q1' yr Breakeven U.S. investment grade credit U.S. high yield credit 3 15 EM external Currencies and commodities Q4'17 Q1'18 12% 10% 8% 6% 4% 2% 0% -2% -4% -6% -8% 2.7% 1.6% Euro 6.0% -0.2% -0.3% Japanese yen -1.7% Australian dollar 8.9% 1.8% 10.7% -6.2% Energy Industrial metals 3.1% -2.0% Agriculture Source: EM local (JPMorgan GBI-EM Global Diversified Composite Yield to Maturity Index); 10yr breakeven (Bloomberg); U.S. investment grade credit (Bloomberg Barclays U.S. Aggregate Corporate Average OAS Index); U.S. high yield credit (Bloomberg Barclays U.S. Corporate High Yield Average OAS Index); EM external (JPMorgan Emerging Bond Index Global Sovereign Spread); Energy (Bloomberg Energy Subindex Total Return Index); Industrial metals (Bloomberg Industrial Metals Subindex Total Return Index); Agriculture (Bloomberg Agriculture Total Return Index) 3

5 U.S. GDP: 2.25% 2.75 % CPI: 2.00% 2.50% RUSSIA GDP: 1.50% % CPI: 2.75% % U.K. GDP: 1.50% % CPI: 2.25% % EUROZONE GDP: 2.25% % HICP: 1.25% % JAPAN GDP: 1.00% % CPI: 0.75% % MEXICO GDP: 1.50% % CPI: 4.00% % CHINA GDP: 6.00% % CPI: 2.00% % BRAZIL GDP: 2.00% % CPI: 3.00% % -- INDIA GDP: 6.75% % CPI: 4.50% % % of world GDP Change relative to 2017 data PIMCO forecast ranges as of March Real GDP and inflation projections reflect the midpoints of PIMCO s forecast ranges for Forecasts GDP Inflation Developed Markets Emerging Markets World

6 Strategic Outlook PIMCO expects world GDP growth to remain above-trend at 3.0% 3.5% in 2018, in a Goldilocks environment of synchronized global growth and low but gently rising inflation. Compared with our December forecast, we now see marginally higher 2018 GDP growth in developed regions. The causes of the stronger expansion are more uncertain favorable shorter-term financial conditions versus a possible longer-term increase in productivity and these could affect its durability beyond Our inflation forecasts for 2018 have also risen slightly since our December forecast in response to a higher oil price trajectory. Key strategies Improving U.S. growth and fundamentals Steady and improving U.S. growth should be supportive of credit sectors. High quality securitized debt and corporate credit offer attractive income generating opportunities. Emerging market opportunities We are cautiously optimistic on EM due to a combination of improved fundamentals, tailwinds from continued synchronized growth in global developed markets and continued disinflation. Slowing growth in China Globally, we see Australian duration as a attractive high quality hedge to the portfolio, especially if there is a slowdown in China. Tactical dollar positioning We expect to remain long U.S. dollar versus DM currencies as a way of expressing our views on relative growth and the path of rates. We are also long a basket of EM currencies as they offer attractive carry and additional diversification. 5

7 % of Market value Duration in years 31 Dec '17 31 Mar '18 31 Dec '17 31 Mar '18 Government - Related Government - Treasury Government - Agency Swaps and Liquid rates Mortgage Agency MBS Non-agency MBS Home equity ABS CMBS Other Investment grade credit High yield credit Non-U.S. developed Emerging markets Bonds and other long duration instruments Emerging markets 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. 6

8 Key rate duration exposure Dec '17 31 Mar '18 Benchmark (yrs)** 0-3 yrs 3-10 yrs 10+ yrs Portfolio (yrs) Benchmark (yrs)** 31 Dec '17 31 Mar '18 31 Mar ' yrs yrs yrs Total ** Benchmark duration is calculated by PIMCO Benchmark: Bloomberg Barclays U.S. Aggregate Index Interest rate exposure Portfolio (yrs) Benchmark (yrs)** 31 Dec '17 31 Mar '18 31 Mar '18 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 (duration in yrs) 31 Dec '17 31 Mar '18 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 * Shown as a percentage of market value 7

9 Country exposure by country of risk 31 Dec '17 31 Mar '18 % of Market value Duration (yrs) % of Market value Duration (yrs) United States Japan Eurozone Belgium Cyprus Euro Currency France Germany Greece Ireland Italy Luxembourg Netherlands Portugal Slovenia Spain United Kingdom Europe non-emu Denmark Norway Sweden Switzerland Dollar Block Australia Canada Other Industrialized Countries Cayman Islands Hong Kong Israel Kuwait Macao Puerto Rico Saudi Arabia South Korea State of Qatar Supranational United Arab Emirates EM - Asia China India Indonesia Sri Lanka EM - Latin America Argentina Brazil Colombia Mexico Panama Peru Venezuela EM - CEEMEA Nigeria Russia Serbia & Montenegro South Africa Turkey Zambia EM - Other EM Index Product Liabilities Total

10 PIMCO Income Fund (net of fees performance) Performance periods ended: 31 Mar '18 Annual operating expense NAV currency Class Inception date 3 mos. 6 mos. 1 yr. 3 yrs. 5 yrs. 10 yrs. SI Class A (at NAV) USD 30 Mar ' Class A (at MOP) USD 30 Mar ' Class ADMIN USD 30 Mar ' Class C (at NAV) USD 30 Mar ' Class C (at MOP) USD 30 Mar ' Class INST USD 30 Mar ' Class I USD 30 Apr ' Class R USD 30 Mar ' Bloomberg Barclays U.S. Aggregate Index Effective April 27, 2018, the name of Class P shares changed to I-2. 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. The maximum offering price (MOP) returns take into account the Class A maximum initial sales charge of 3.75%. The maximum offering price (MOP) returns take into account the contingent deferred sales charge (CDSC) for Class C shares, which for this fund is 1.00%. Interest expense results from the Fund's use of certain investments such as tender option bond floating rate certificates. Such expense is required to be treated as a Fund expense for accounting purposes and is not payable to Pacific Investment Management Company LLC ("PIMCO"). Any interest expense amount will vary based on the Fund's use of those investments as an investment strategy best suited to seek the objective of the Fund. Total Annual Fund Operating Expenses After Fee Waiver and/or Expense Reimbursement excluding interest expense are 0.900%, 0.750%, 1.650%, 0.500%, 0.600%, and 1.150% for the A Class, ADMIN Class, C Class, INST Class, I2 Class, and R Class, respectively. 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. 9

11 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, 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. There is no assurance that any fund, including any fund that has experienced high or unusual performance for one or more periods, will experience similar levels of performance in the future. High performance is defined as a significant increase in either 1) a fund s total return in excess of that of the fund s benchmark between reporting periods or 2) a fund s total return in excess of the fund s historical returns between reporting periods. Unusual performance is defined as a significant change in a fund s performance as compared to one or more previous reporting periods. Investments made by a Fund and the results achieved by a Fund are not expected to be the same as those made by any other PIMCO-advised Fund, including those with a similar name, investment objective or policies. A new or smaller Fund s performance may not represent how the Fund is expected to or may perform in the long-term. New Funds have limited operating histories for investors to evaluate and new and smaller Funds may not attract sufficient assets to achieve investment and trading efficiencies. A Fund may be forced to sell a comparatively large portion of its portfolio to meet significant shareholder redemptions for cash, or hold a comparatively large portion of its portfolio in cash due to significant share purchases for cash, in each case when the Fund otherwise would not seek to do so, which may adversely affect performance. Differences in the Fund s performance versus the index and related attribution information with respect to particular categories of securities or individual positions may be attributable, in part, to differences in the pricing methodologies used by the Fund and the index. Portfolio allocations and other information in the charts in this Quarterly Investment Report are based on the fund's net assets. These percentages may differ from those used for the fund's compliance calculations, including the fund's prospectus, regulatory, and other investment limitations and policies, which may be based on total assets of the fund or other measurements, may include or exclude various categories of investments from those covered in the portfolio allocation categories shown in this report, and may be based on different classifications and measurements of the fund's investments and other criteria. All funds are separately monitored for compliance with prospectus and regulatory requirements. 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. Equities may decline in value due to both real and perceived general market, economic, and industry conditions. 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. It is important to note that differences exist between the fund s daily internal accounting records, the fund s financial statements prepared in accordance with U.S. GAAP, and recordkeeping practices under income tax regulations. It is possible that the fund may not issue a Section 19 Notice in situations where the fund s financial statements prepared later and in accordance with U.S. GAAP or the final tax character of those distributions might later report that the sources of those distributions included capital gains and/or a return of capital. Please see the fund s most recent shareholder report for more details. Although the Fund may seek to maintain stable distributions, the Fund s distribution rates may be affected by numerous factors, including but not limited to changes in realized and projected market returns, fluctuations in market interest rates, Fund performance, and other factors. There can be no assurance that a change in market conditions or other factors will not result in a change in the Fund s distribution rate or that the rate will be sustainable in the future. For instance, during periods of low or declining interest rates, the Fund s distributable income and dividend levels may decline for many reasons. For example, the Fund may have to deploy uninvested assets (whether from purchases of Fund shares, proceeds from matured, traded or called debt obligations or other sources) in new, lower yielding instruments. Additionally, payments from certain instruments that may be held by the Fund (such as variable and floating rate securities) may be negatively impacted by declining interest rates, which may also lead to a decline in the Fund s distributable income and dividend levels. The Bloomberg 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. It is not possible to invest directly in an unmanaged index. 10

12 The Lipper Awards 2018 recognized the PIMCO Income Fund, Institutional, for the 5 and 10 year performance periods out of 61 and 40 funds, respectively, under the Multi-Sector Income Funds Classification. The calculation periods extend over 36, 60, and 120 months. The highest Lipper Leader for Consistent Return (Effective Return) value within each eligible classification determines the fund classification winner over three, five, or 10 years. For a detailed explanation, please review the Lipper Leaders methodology document on lipperalpha.financial.thomsonreuters.com/lipper. From Thomson Reuters Lipper Awards, 2018 Thomson Reuters. All rights reserved. Used by permission and protected by the Copyright Laws of the United States. The printing, copying, redistribution, or retransmission of this Content without express written permission is prohibited. The following defined terms are used throughout the report. Emerging market short duration instruments includes an emerging market security or other instrument economically tied to an emerging market country by country of risk with an effective duration less than one year and rated investment grade or higher or if unrated, determined to be similar quality by PIMCO. 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. Short duration derivatives and derivatives offsets include: 1) derivatives with an effective duration less than one year and where the country of risk is not an emerging market country (for example, Eurodollar futures) and 2) offsets associated with investments in futures, swaps and other derivatives. Such offsets may be taken at the notional value of the derivative position which in certain instances may exceed the actual amount owed on such positions. Municipals/Other may include convertibles, preferred and yankee bonds. 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. 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 performance figures presented reflect the performance for the institutional class unless otherwise noted. A note about Sector exposure: Other indicates swaps and securities issued in euros. A note about Emerging markets exposure by country of risk: country of risk reflects the country of incorporation of the ultimate parent company. PIMCO uses an internal model for calculating effective duration, which may result in a different value for the duration of an index compared to the duration calculated by the index provider or another third party. 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 is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. PIMCO Investments LLC, distributor, 1633 Broadway, New York, NY, is a company of PIMCO 2018 PIMCO. 766_QIR-1Q18 11