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 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 in bonds. A second source of return potential is derived from investments in a very broad universe of low- to intermediate-duration bonds, actively managed by PIMCO.
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 securities and the Enhanced RAFI alpha relative to the S&P 500 both have had 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.
Expert Management from PIMCO
Bill Gross, co-founder and co-CIO of PIMCO, serves as the Fund’s portfolio manager. Widely acknowledged as one of the country’s premier bond managers, Bill Gross and his fixed-income team were named by Morningstar as “Fixed-Income Manager of the Year” an unprecedented three times, in 1998, 2000 and 2007. PIMCO, one of the country’s largest investment managers, has pioneered a number of market innovations, including fundamentals-based equity index investing and the Total Return approach to bond investing.
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