• For investors seeking consistent returns in a variety of market cycles with more moderate volatility than would be characteristic of an all-equity portfolio
• Long-short stock strategy isolates the potential outperformance of Enhanced RAFI—a fundamentals-based stock index
• Actively managed high-yield municipal bond portfolio offers additional diversification and total return opportunities
• An opportunity to improve after-tax performance

Exposure to equity return potential with volatility more typical of bonds

The Fund seeks incremental return (alpha) while reducing sensitivity to the general direction of the stock market. This is because the Fund uses a simultaneous long position in derivatives linked to the Enhanced Research Affiliates Fundamental 1000 Index (Enhanced RAFI) and a short position in derivatives linked to the S&P 500 Index to capture the potential outperformance of the Enhanced RAFI. The derivatives can be purchased with a fraction of the assets needed to purchase the equity securities directly, so PIMCO invests the remainder of the Fund’s assets mainly in high-yield municipal bonds. A second source of return potential is derived from a PIMCO-managed portfolio of high-yield municipal bonds that are typically rated just below investment grade.

Possible cushioning against stock market declines

The Fund seeks to be a counterweight against stock market declines. During periods of market stress, overvalued stocks –which tend to be heavy components in market-cap weighted indexes such as the S&P 500 -- may experience the greatest price drops. Because Enhanced RAFI ranks stocks by economic size – using fundamentals such as sales, free cash flow, book value and dividends – it may benefit from lower weightings in the hardest hit stocks. Diversification can further moderate the effects of stock market volatility. The fixed-income portfolio and the Enhanced RAFI alpha relative to the S&P 500 both have low correlations to the stock market; they may also exhibit low correlations to each other. Of course, diversification cannot ensure against loss or eliminate the risks of investing.

The Benefits of an Open-End Structure

PIMCO's Fundamental Advantage Funds may be similar to some funds in the "alternative" category in that they seek consistently positive, or "absolute", returns, provide diversification benefits and use derivatives and short-selling. However, as open-end funds the Fundamental Advantage Funds are highly liquid (although when redeemed, shares may be worth more or less than their original cost). They also have prospectuses and disclosure policies which make their objectives and strategies transparent and straightforward. In addition, a portion of the two equity index exposures are through derivatives that result in long-term capital gains treatment.

Tax efficiency

Interest income from the high-yield municipal bond portfolio is fully exempt from federal taxes, and in some cases, state taxes. In addition, a portion of the two equity index exposures are through derivatives that result in long-term capital gains treatment.

PIMCO’s Fundamental Advantage Strategy draws on PIMCO’s established expertise in bond portfolio management, as well as the firm’s 20 years of enhanced index strategy experience through its StockPLUS strategy. In managing the fixed-income portfolio, PIMCO employs a Total Return approach, which focuses both on income and capital appreciation. The process begins with the firm’s three- to five-year outlook for the global economy and interest rates, formulated at the firm’s annual Secular Forum. This long-term outlook helps set basic portfolio parameters, including duration, yield curve positioning, sector weightings and credit quality. These top-down strategies are then combined with a bottom-up focus on issue selection, credit analysis and quantitative research. Credit analysis of municipal bonds focuses on specific projects rather than broad industry groups or sectors, evaluating such characteristics as the quality of the collateral, call structures and the ability to meet interest payments.

Enhanced RAFI is a proprietary basket of stocks selected by strategy sub-advisor Research Affiliates LLC.

John Cummings, an Executive Vice President and portfolio manager within PIMCO's municipal bond team, joined PIMCO in 2002. He began his investment career in 1983 and holds an MBA in finance from Rutgers University.

Newport Beach, California

Led by Founder and 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.