• Offers higher current income potential through investments in high yield municipal bonds that are exempt from federal income tax.
• Provides access to PIMCO's considerable municipal bond management expertise.
• Can complement other income-producing investments.
• May enhance overall portfolio diversification and total return potential.

Attractive After-Tax Income Potential

As with the broader municipal market, high yield municipal bonds provide income that is exempt from federal, and sometimes state, income taxes. In addition, because these bonds are typically below investment grade, they offer the potential for higher current income, albeit with some additional risk.

Expert Municipal Bond Management

PIMCO has been investing in the municipal bond market for more than a decade, and had approximately $13.6 billion in municipal bond assets under management, including 13 open- and closed-end mutual funds. The firm's municipal bond team includes two senior portfolio managers, two tax-sensitive product managers and analysts with an average of 19 years of experience. Importantly, the Fund's manager and primary credit analyst have spent most of their careers in high yield municipal bonds.

Extensive Research and Analysis

While high yield municipal bonds have an average credit quality of Ba (Moody's) or BB (Standard & Poor's), which is just below investment grade, approximately half of these securities are not rated. This makes credit research and analysis all the more important when investing in the sector – an ideal environment for an experienced municipal bond manager such as PIMCO.

Enhanced Portfolio Diversification

High yield municipal bonds have a relatively low correlation to stocks, bonds, as well as other asset classes. In fact, between September 1995 and June 2007, high yield municipal bond returns had only a 0.15 correlation to returns of the S&P 500 Index. High yield corporate bond returns, on the other hand, had a 0.50 correlation with S&P 500 returns in the same time period. (One indicates perfect correlation, while 0 indicates no correlation). As a result, an allocation to this sector can help investors enhance portfolio diversification and manage overall risk.

Unique Asset Class

The rate of defaults – one of the primary risks of investing in high yield securities – is far lower for high yield municipal bonds compared with high yield corporate bonds. This is true even when comparing bonds with the same credit rating. Recovery rates (the percentage of money recouped in case of a default) are also 50% higher for high yield municipal bonds. This may be because high yield municipal bonds typically finance projects with relatively stable revenue streams, and many may use hard assets as collateral.

The top-down investment process begins with PIMCO's annual Secular Forum, at which the firm develops a 3- to 5-year outlook for the global economy and interest rates. This helps set basic portfolio parameters, including duration, yield-curve positioning, sector weightings and credit quality. PIMCO portfolios all utilize multiple top-down and bottom-up strategies to seek to enhance returns and reduce portfolio risk. Within the high yield municipal bond sector, PIMCO's credit analysis focuses on specific projects, rather than broad industry groups or sectors. The Fund assesses credit worthiness based on the specific financial characteristics of each project, such as the quality of the collateral, call structures and the ability to meet interest payments. Overall, the Fund focuses on bonds that provide attractive yield with price appreciation potential.

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.