• Potential to protect long-term purchasing power
• The country's premier bond manager
• May enhance diversification in conjunction with stocks and traditional bonds
• Access to PIMCO's proven bond management and specialized expertise

PROTECT PURCHASING POWER

Over time, rising consumer prices can cut into an investor's purchasing power-a dollar invested today will be worth less tomorrow. That is why many investors should consider an allocation to inflation-indexed securities: the only investments specifically designed to keep pace with, or even exceed, the rate at which costs are rising. And because inflation-indexed securities have a low correlation, or tendency to move in tandem, with stocks and traditional bonds, adding them to a portfolio can help reduce risk through diversification.

In particular, TIPS are issued by the U.S. government with a face value that adjusts in step with changes in the rate of inflation, as measured by the Consumer Price Index (CPI). If inflation is rising, principal and interest payments will increase at the same rate as the CPI.

PIMCO'S EXPERT MANAGEMENT

Pacific Investment Management Company (PIMCO) is one of the largest and most respected bond managers in the country, with a client list that includes many of the largest corporations in the United States.

A LEADER IN REAL RETURN INVESTING

PIMCO has been investing in inflation-indexed securities since the early 1990s and has taken a leading role in developing products and investment strategies that focus on them. In fact, the firm launched its Real Return strategy in 1997-the same year that TIPS were introduced.

PROVEN INVESTMENT PROCESS

PIMCO is committed to active bond management within a long-term framework, beginning with the firm's annual Secular Forum, where management develops a 3-5 year outlook for the global economy, inflation and interest rates. Through its quarterly cyclical forums, PIMCO applies its long-term outlook to the next 3-12 months to forecast specific influencing factors, including rate volatility and credit trends. PIMCO uses this shorter-term outlook along with proprietary analytical tools to make specific investment decisions for the portfolios.

Portfolios have two components: a core segment of individual bonds that act as a foundation; and a specialized, commingled vehicle. The core segment represents approximately 55% of the overall portfolio and focuses on TIPS and other high-quality, liquid fixed-income securities. The commingled vehicle represents approximately 45% of the overall portfolio and invests in bonds of varying duration and credit quality-wherever portfolio management finds attractive risk-adjusted real return potential.

PIMCO REAL RETURN PORTFOLIO IN TODAY'S MARKET

There has been considerable investor interest in Treasury Inflation-Protected Securities (TIPS), largely because of their strong performance in the past few years in comparison to the rest of the financial markets. Without doubt, a long-term allocation to TIPS can offer a number of important benefits to a portfolio-namely, inflation protection and diversification. However, as with any investment, these benefits do not come without risks.

INFLATION PROTECTION—NOT INTEREST RATE PROTECTION

TIPS preserve purchasing power because their principal and interest payments are adjusted to changes in the Consumer Price Index (CPI), a widely-used measure of inflation. But TIPS are not specifically designed to protect investors from rising interest rates, which cause bond prices to fall. TIPS, like all bonds, are affected by changes in interest rates.

Of course, TIPS should do better in a rising interest rate environment than other types of bonds because the inflation adjustments provide better price protection. But this is only when rates are rising as a result of increasing inflation. If rates were to rise in an environment of low or no inflation, TIPS prices could decline in the short term.

MAINTAINING REALISTIC EXPECTATIONS

TIPS, as measured by the Lehman U.S. TIPS Index, have earned average annual returns of 6.47% since they were first introduced in 1997 (as of 06/30/07), outpacing the broader bond market and narrowly behind the broader equity market. However, it is important to remember that TIPS have a relatively short track record and have not been tested in a wide variety of market environments. The strong performance in the past few years was a result of declining interest rates and other factors which created a unique market environment. Investors should not expect a repeat of those returns in the future.

THE ROLE OF TIPS IN A PORTFOLIO

While it is important to understand these potential risks, it is also important to note the significant benefits that TIPS can provide to long-term investors. Not only do TIPS provide a hedge against inflation, they offer an enhanced level of diversification. That is because TIPS have a low correlation with other asset classes, which helps reduce overall portfolio volatility. These unique qualities have led many experts to consider TIPS a distinct asset class. In fact, many institutional investors are increasingly adding TIPS exposure as a structural part of their asset allocation plans.

Newport Beach, California

Led by Founder and Co-Chief Investment Officer Bill Gross, PIMCO is widely recognized as one of the premier bond managers in the world. PIMCO applies this expertise to a range of core and specialized investment portfolios.