PACIFIC FUNDS SM DIVERSIFIED ALTERNATIVES

Transcription

1 PACIFIC FUNDS SM DIVERSIFIED ALTERNATIVES AN ALTERNATIVE ASSET CLASS SOLUTION AS OF 12/31/17 MFC

2 DIVERSIFY TO HELP MANAGE MARKET VOLATILITY AND GENERATE SMOOTHER RETURNS Many investors are looking for funds to add to their portfolios that can increase diversification beyond the traditional mix of equity and fixed-income investments. When added to an investor s portfolio, Pacific Funds Diversified Alternatives seeks to improve diversification by utilizing asset classes and strategies that do not typically move in tandem with equities or fixed income. Including alternatives as part of your diversification strategy may be more important in today s market for two reasons: first, a new era of volatility and second, the potential end to a 36-year tailwind for fixed income. A New Era of Equity Volatility Typically, equities account for approximately 90% 1 of the risk in a traditional portfolio. 2 Investors using equities to generate returns have experienced more days of extreme market movements during the past decade than has been typical during the previous 67 years, as illustrated in the chart below. Daily movement of at least 2%, which is considered high volatility for equities, was not uncommon, indicating how crucial diversification across asset classes has been in recent years to help dampen equity volatility. 75 One-Day Movement of at Least 2% in the S&P 500 Index Number of One-Day Movements Source: FactSet, as of December 31, Kazemi, Hossein. Research Review: An Introduction to Risk Parity. CAIA Association, Q A traditional portfolio is composed of an investment of 60% to equity and 40% to fixed income. Risk refers to standard deviation, which is a common statistical measure of the volatility of an investment; it measures the probability an investment s actual returns will differ from expected returns. No bank guarantee May lose value Not FDIC insured

3 End of a Historic Bond Run Fixed income has traditionally been considered a hedge against equity market ups and downs. During the past 36 years, a consistent decline in U.S. Treasury yields, a proxy for interest rates, has generated bond returns of about 6 8% annually. 1 However, given the historical low level of interest rates reached in 2016, as indicated in the chart below, paired with the expectation of rising interest rates, future bond returns are likely to be meaningfully lower. In a low-yield environment, the addition of alternative asset classes to a portfolio is even more important to consider and can help generate smoother, less volatile returns. 15% 36-Year Tailwind for Fixed Income 10% 10-Year U.S. Treasury Yield 5% Average Annual 10-Year U.S. Treasury Yield 0% Source: Federal Reserve Bank of St. Louis, as of December 31, Represented by rolling five-year annualized returns of every five-year period from the Bloomberg Barclays U.S. Aggregate Bond Index from 1/1/1980 to 12/31/

4 PACIFIC FUNDS DIVERSIFIED ALTERNATIVES Smoother Returns Constructed to seek improved returns with lower risk as compared to a traditional portfolio comprised of equities and fixed income. All Weather Dynamically balanced for consistent diversification across market cycles. Multi-Manager Designed as a complete alternative solution utilizing investment managers across different strategies. Smoother Returns with Less Risk Alternative asset classes do not typically move in tandem with equities or fixed income, so they may provide an opportunity to generate smoother returns with less risk than a traditional portfolio. The Fund is designed to help improve returns and lower risk over time when added to an investor s portfolio consisting of a more traditional allocation. Returns for a Traditional Portfolio versus a Portfolio with Alternative Asset Classes Traditional Portfolio with Alternatives Return 5.65% Risk 7.64% 20% Traditional Portfolio Return 5.58% Risk 8.69% Return % % 32% 60% 40% Legend * : Fixed Income Equity Alternatives Source: Morningstar, as of December 31, Risk % * Fixed income is represented by the Bloomberg Barclays U.S. Aggregate Bond Index, which is composed of investment-grade U.S. government and corporate bonds, mortgage pass-through securities, and asset-backed securities and is commonly used to track the performance of U.S. investment-grade bonds. Equity is represented by the S&P 500 Index, a market capitalization-weighted index of 500 widely held equities often used as a proxy for the U.S. equity market. Alternatives are represented by the Credit Suisse Hedge Fund Index, which is a fully-diversified, asset-weighted index that is often used as a proxy for multialternative asset class exposure. Portfolio is rebalanced monthly. Data is shown from January 1, 2000 to December 31, Indexes are unmanaged and cannot be invested in directly. 2

5 A Fund Designed for All Market Cycles Markets tend to move in phases from expansion to inflation, and through recession to falling rates. Traditional asset classes tend to perform well only at specific points in the cycle, leaving the possibility for lower returns and higher volatility or risk during other phases of the cycle. Pacific Funds Diversified Alternatives is built with asset classes and strategies that perform well in different phases and is dynamically balanced to deliver consistent diversification and a lower level of volatility. Asset Classes that Perform Well in Different Market Phases Expansion International Small-Cap Emerging Markets Equity Long/Short Inflation Real Estate Inflation Managed Floating Rate Income Falling Rates Emerging Markets Debt Absolute Return Recession Currency Strategies Global Absolute Return Multi-Manager Approach The Fund s experienced portfolio management team selects investment managers across different alternative investment strategies or nontraditional asset classes to provide broadly diversified alternative exposure in a single fund-of-funds. Thus, the Fund may complement and/or serve to further diversify an investor s portfolio of traditional equity and fixed-income investments. Fund Holdings as of December 31, 2017 Underlying Fund (Manager) (%) PF Global Absolute Return (Eaton Vance) 24.8 PF Currency Strategies (UBS AM/MCG) 23.0 PF Equity Long/Short (AQR) 11.6 PF Emerging Markets Debt (Ashmore) 10.2 Underlying Fund (Manager) (%) Pacific Funds SM Floating Rate Income (Pacific Asset Management) 8.8 PF Emerging Markets (Oppenheimer) 7.9 PF International Small-Cap (QS Investors) 5.6 PF Inflation Managed (PIMCO) 4.9 PF Real Estate (Morgan Stanley) 3.1 Total allocation percentages may not equal 100% due to rounding or omissions of holdings of less than 1%. Each Underlying Fund has its own investment goal, strategy, and risks and may not be available for individual purchase. The prospectuses for the underlying funds are available at 3

6 INVESTMENT APPROACH Diversification is critical, no matter what stage of life you are in. While an investor nearing retirement may have different financial objectives than one just embarking on a career, both should consider employing diversification. But what is also critical is choosing the asset classes in which to diversify, which is known as asset allocation. Pacific Life Fund Advisors LLC (PLFA) relies on three core principles to guide its investment decisions, which include a balanced process, an integrated team, and a diversified approach. Through these principles, it provides one-step diversification solutions for a range of investor needs and objectives. PLFA s process relies on the integration of the following teams that each have a specific role in the investment process. Asset Allocation An asset class model is developed that reflects a risk/return profile consistent with the Fund s investment goal. The asset class model incorporates PLFA s views and consists of a diversified mix of asset classes and strategies. Manager Research The team then constructs an allocation to the selected underlying funds that best represent the asset class model. Underlying fund managers are evaluated using quantitative screening to narrow the list of potential managers. Qualitative due diligence meetings are then conducted with the selected management firms to assess firm stability, performance repeatability, and investment-style adherence. Investment Risk Management Using the asset class model as a framework, fund risks are identified and evaluated, and if necessary, allocations are adjusted accordingly. In-depth risk analysis of portfolio construction and portfolio management is conducted by evaluating managers at the individual security level. Independent analysis and stress testing are performed to identify and evaluate fund risks and, if necessary, allocations are adjusted accordingly.

7 Experienced Portfolio Management Established in 2007, PLFA is an SEC-registered investment adviser and a wholly owned subsidiary of Pacific Life Insurance Company. As of December 31, 2017, PLFA managed approximately $37 billion in total assets under management. Howard T. Hirakawa, CFA 23 years of investment experience Carleton J. Muench, CFA 19 years of investment experience Max Gokhman, CFA 11 years of investment experience Samuel S. Park 18 years of investment experience PACIFIC FUNDS DIVERSIFIED ALTERNATIVES DECEMBER 31, 2017 Ticker PLALX Class A Class C Advisor Class Fund Number 147 Ticker PLCLX Fund Number 347 Ticker PLDLX Fund Number 047 Overall Morningstar Rating as of 12/31/17 Out of 286 Multialternative funds based on risk-adjusted returns Advisor Class For ratings and performance data current to the most recent month-end, call Pacific Funds at (800) , option 2, or go to Performance data quoted represents past performance, which does not guarantee future results. Current performance may be lower or higher than the performance quoted. The investment return and principal value of an investment will fluctuate so that shares, when redeemed, may be worth more or less than the original cost. Overall Morningstar Rating: For each fund with at least a three-year history, Morningstar calculates a Morningstar Rating based on a Morningstar Risk-Adjusted Return measure that accounts for variation in a fund s monthly performance, placing more emphasis on downward variations and rewarding consistent performance. Exchange-traded funds and open-ended mutual funds are considered a single population for comparative purposes. The top 10% of funds in each category receive five stars, the next 22.5% receive four stars, the next 35% receive three stars, the next 22.5% receive two stars, and the bottom 10% receive one star. The Overall Morningstar Rating calculation uses the weighted average of the three-, five-, and ten-year Morningstar Ratings, if applicable, and is only calculated using Morningstar Ratings for periods with actual share class returns Morningstar Investment Management, LLC. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) may not be copied or distributed; and (3) is not warranted to be accurate, complete, or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. The Fund s Advisor Class also received a three-year Morningstar Rating as of 12/31/17 of 5 stars among 286 funds. Morningstar Ratings for other share classes may have different performance characteristics. For Morningstar Ratings for other share classes, visit

8 Speak with your financial advisor today about investing in Pacific Funds Diversified Alternatives. For additional information, call us at (800) , option 2, or visit About Risk There is no guarantee that the Fund s investment strategies will achieve the Fund s investment goal. All investing involves risk, including the possible loss of the principal amount invested. Nontraditional or alternative investment performance may be correlated with traditional equity and fixed-income investments over short- or longer-term periods, resulting in a lessened diversification effect and increased volatility when included in a portfolio as part of an asset allocation strategy. Asset allocation and diversification do not guarantee future results, ensure a profit, or protect against loss. Better results could be achieved by investing in an individual fund or funds representing a single asset class rather than using asset allocation. Derivatives can be complex instruments that may experience sudden changes in price, and liquidity, may be difficult to value, sell, or unwind and may be leveraged, which can cause very large swings in value. A fund-of-funds is subject to its own expenses along with the expenses of the underlying funds. It is typically exposed to the same risks as the underlying funds in which it invests in proportion to the allocation of assets among those underlying funds, among other risks. Debt securities with longer durations or fixed interest rates are generally more volatile than debt securities with shorter durations or floating or adjustable interest rates. The views presented herein represent the opinions of the portfolio managers at Pacific Life Fund Advisors LLC (PLFA) and are presented for informational purposes only. PLFA, a wholly owned subsidiary of Pacific Life Insurance Company, is the investment adviser to the Pacific Funds. PLFA also does business under the name Pacific Asset Management and manages certain funds under that name. Pacific Life Insurance Company is the administrator for Pacific Funds. It is not a fiduciary and therefore does not give advice or make recommendations regarding insurance or investment products. You should consider a fund s investment goal, risks, charges, and expenses carefully before investing. The prospectus and/or applicable summary prospectus contain this and other information about the fund and are available from your financial advisor or The prospectus and/or summary prospectus should be read carefully before investing. Third-party trademarks and service marks are the property of their respective owners. Mutual funds are offered by Pacific Funds. Pacific Funds are distributed by Pacific Select Distributors, LLC (member FINRA & SIPC), a subsidiary of Pacific Life Insurance Company (Newport Beach, CA), and are available through licensed third parties. Pacific Funds refers to Pacific Funds Series Trust. MFC Mailing address: P.O. Box 9768, Providence, RI (800) , Option 2