• Helps investors concerned about rising taxes by providing income from investment grade, or high-quality municipal bonds; this income is generally exempt from federal and some state income taxes
• Helps investors maintain purchasing power using inflation-indexed securities, which provide the potential to combat cost-of-living increases in the “new normal” economic environment
• Gives investors access to PIMCO’s proven expertise managing municipal bond portfolios and real return strategies

The environment that is likely to result from the ongoing financial crisis and government response is what PIMCO has termed the “new normal”—a forecast of slower growth, narrower profit margins and smaller asset returns than in decades past. In this environment, PIMCO expects that massive government expenditures will lead to higher tax burdens and contribute to higher inflation over the long term. PIMCO Tax Managed Real Return Fund is designed to present a high-quality solution to the many investors who are concerned about rising taxes and want to preserve their purchasing power against long-term inflationary pressures.

A high-quality tool to fight rising taxes

The Fund is an actively managed portfolio that invests at least half of its assets in municipal bonds, which offer income that is generally exempt from federal income tax, and in some cases state income tax. The Fund also intends to avoid exposure to municipal bonds subject to the AMT (alternative minimum tax). As a result, the Fund may present an attractive alternative to taxable funds—particularly for investors in higher tax brackets. The Fund focuses on high-quality municipal debt and does not allow investment in any security below investment-grade quality.

A true inflation hedge

Because inflation can seriously erode purchasing power over time, inflation-hedging “real return” assets can form an important part of an investor’s overall strategy. The Fund complements its municipal bond exposure with an inflation “overlay” of inflation-indexed securities, generally through the use of Consumer Price Index (CPI) “swaps.” These CPI swaps are common derivative contracts that enable the Fund to receive higher payments when inflation rises. Of course, CPI swaps involve inflation and counterparty risk.

PIMCO’s proven expertise

PIMCO, one of the world’s leading asset managers, has extensive experience managing both municipal bond portfolios and real return strategies. In fact, PIMCO is the largest manager of inflation-linked TIPS and launched PIMCO Real Return Fund on the day the first TIPS were issued by the U.S. Treasury. PIMCO’s proprietary portfolio management systems and the portfolio managers’ expertise give this Fund a distinct edge in navigating the municipal bond and inflation-indexed securities markets.

The top-down investment process begins at PIMCO's annual Secular Forum, where the firm develops a 3- to 5-year outlook for the global economy and interest rates. This helps set the basic portfolio parameters, including duration, yield-curve positioning, sector weightings and credit quality. PIMCO’s municipal bond team seeks to add value by maximizing total return as opposed to simply reaching for maximum yield. As a result, the municipal bond component is scrutinized using a process that models the potential changes in yield and price as the underlying variables of the marketplace change. Yield-to-worst measures are carefully examined, as are the impact of a shifting municipal yield curve and the influence of yield volatility and credit spreads on the portfolio. The Fund’s inflation-indexed component seeks to protect the shareholder’s purchasing power over time from the eroding impact of inflation. The manager’s primary inflation-indexed “overlay” strategy includes rigorous counterparty risk management, which benefits from PIMCO’s broad credit research capabilities and thorough legal and operational capabilities, a result of PIMCO’s history of prudent innovation. The manager may at times use other inflation-hedging strategies—such as long positions in Treasury Inflation-Protected Securities (TIPS) offset with short positions in nominal Treasuries—when these alternatives may provide greater advantages than CPI swaps.

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.

Gang Hu is a senior vice president and a member of PIMCO’s global real return team. He holds a Ph.D. in applied mathematics from the California Institute of Technology and an undergraduate degree from Tsinghua University in Beijing.

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.