Pacific Investment Management Company LLC ("PIMCO"), founded in 1971, and was one of the first investment managers to specialize in the field of active fixed income management. Today, PIMCO is a leading institutional money manager.

What Is Total Return?
PIMCO's Total Return portfolios seek maximum current income and price appreciation consistent with the preservation of capital and prudent risk taking. We use all major sectors of the bond market. We manage the portfolio's duration within a moderate range (between 3 and 6 years) around the broadest bond market indices. In brief, we seek to consistently add value while maintaining an overall risk level similar to a benchmark index.

Total Return Investment Philosophy
Our Total Return philosophy revolves around the principle of diversification. We believe that no single risk should dominate returns. By diversifying strategies, or relying on multiple sources of value, we are confident that we will be able to generate a solid track record with a high degree of consistency. Our multiple sources of value-added are illustrated in Figure 1. We seek to add value through the use of "top down" strategies such as our exposure to interest rates, or duration, changing volatility, yield curve positioning and sector rotation. We also employ "bottom up" strategies involving analysis and selection of specific securities. By combining perspectives from both the portfolio level and the security level, we have consistently added value over time while incurring acceptable levels of portfolio risk.

Top Down Process Driven By Secular Emphasis
PIMCO's investment process is driven by a top down approach. All investment professionals participate in formal strategy meetings, which develop the macroeconomic forecasts used to determine the overall risk targets for our portfolios. Annually, this group gathers for a week-long Secular Forum during which we discuss the long-term forces likely to influence the economy and financial markets. The purpose of this forum is to arrive at a 3 - 5 year outlook for the direction of interest rates, as well as to identify other important themes that will effect valuations within the bond market. Shorter-term, or cyclical, trends are discussed every three months in Quarterly Economic Forums. At these sessions, the investment professionals at PIMCO analyze, discuss and forecast more immediate (2 - 4 quarters) trends that will effect the markets. Taken together, these sessions help determine series of risk statements designed to provide the optimal exposure to changes in interest rates across all of PIMCO's Total Return portfolios.

• Avoid Extreme Durations - Striving to build consistent results, we avoid extreme duration shifts. Major shifts in portfolio strategy are driven by our secular and cyclical outlooks as opposed to short-term market events or aberrations in interest rates. Operating within a moderate duration range, typically one-and-a-half years above or below that of the index, increases the opportunity of achieving above-market returns while limiting client exposure to drastic swings in interest rates.
• Thorough Volatility Analysis - In addition to forecasting the direction of interest rates, a volatility forecast is crucial to the management of a bond portfolio because volatility impacts the relative performance of the various bond market sectors. Increases in volatility benefit non-callable bonds such as Treasuries, whereas declining volatility will favor callable instruments such as corporates and mortgages. Volatility also impacts proper portfolio structure. For a given duration target, volatility will effect a portfolio consisting of a mixture of long and short bonds differently than a pure intermediate portfolio. In addition, volatility influences the coupon choice, the credit quality, the use of futures and options, and the analysis of more complex securities.
• Rotate Among Sectors - Our universe includes all sectors of the bond market: governments, corporates, mortgages, asset-backed, money markets, emerging markets, inflation-linked and hedged international. We make sector shifts, or rotations, depending upon changes in relative valuations among the different classes of bonds. Sophisticated proprietary analytics assist in the evaluation of sector opportunities and in the pricing of specific securities within sectors.
• Incorporate Yield Curve Positioning - Yield curve exposure, or a portfolio's exposure across the maturity spectrum, is important since proper positioning can add value by impacting the overall yield of the portfolio and by generating price gains as the yield curve changes shape. (Typically, the yield curve flattens when the economy slows and steepens when the economy strengthens.)

Bottom Up Process Identifies Undervalued Securities
Our security specific analysis is essential in building a portfolio. After the major macro or "top down" strategies are determined, our portfolios are structured with individual securities which, in the aggregate, optimally achieve the target characteristics. In order to accomplish this, we employ state-of-the-art technology and expertise in all of the major fixed income sectors.

• Quantitative Research - Due to the complexities of the fixed income markets, PIMCO has developed a proprietary set of quantitative tools designed to more fully understand how securities will react to changes in interest rates and market conditions and to identify relative value opportunities.
• Credit Fundamentals - We place a great deal of importance on independent analysis when evaluating corporate credits. PIMCO never relies on the rating agencies alone. Our senior portfolio managers, who each have many years of experience trading corporate bonds and analyzing their credit, work with a team of credit analysts who evaluate individual issues.
  
  PIMCO's size gains us access to corporations' top management which is integral to the evaluation process. We meet with management as necessary to remain current on the financial and operating conditions of a company. We concentrate our efforts on companies who have strong underlying businesses, a strong competitive position within their industries, and financial flexibility. We focus our investments in those issues that show improving credit profiles, the potential for upgrade by the rating agencies and, therefore, greater potential for capital appreciation.
  
  Our typical portfolios have averaged AA credit ratings over the past several years, although overall portfolio quality may vary from A to AAA depending upon our outlook for interest rates and quality spreads. Clients may establish their own guidelines, but fully discretionary accounts generally permit from 10% to 20% below investment grade exposure.
• Issue Selection - PIMCO has developed expertise across a variety of fixed income sectors via specialists who focus in each major fixed income arena. By understanding the relative value between individual securities, we can capture incremental value for our clients.
• Cost-Effective Trading - As one of the largest bond managers in the U.S., we are able to use our size to keep transaction costs as low as possible. Transaction costs are minimized through competitive execution on all trades and are factored into all of our analyses to ensure the potential benefit of each trade outweighs the cost.