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All data as of 10.31.09, unless otherwise indicated. 
Allianz RCM Global Water Fund
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Allianz RCM Global Water Review
Management Firm Commentary
09/30/2009
Market Review

The performance of global water stocks was positive for the third quarter as measured by the S&P Global Water Index. Basic construction and Asian water companies appreciated due to stronger than expected growth in China and high demand for water and waste water services as China addresses its water pollution.

 

China is increasingly entrusting private companies with its raw water and waste water operations, as local municipalities need to comply with stricter quality standards but lack the knowledge to meet them at reasonable costs. Companies like China Water Affairs, along with the global water companies like Suez and Veolia Environnement are continuing to gain contracts in this field and performed well in the third quarter.

 

In the US, the yet to be spent stimulus money for new infrastructure projects has had a mixed effect. Planned projects were put on hold to await the final allocation decision of the funds and it is taking longer than anticipated. Engineering and consultancy companies active in the design of large water and remediation projects like Tetra Tech saw their stock performance under pressure because of this.

 

Utilities also lagged, as investors gained more confidence in a recovery and shifted from the more defensively perceived utilities sector into the more growth leveraged industrials and materials companies. Companies engaged in the basic construction and new housing sector like Mueller Water, Uponor or Watts Water belonged to the best performing stocks in Q3.
Performance Commentary

The Allianz RCM Global Water Fund delivered a strong absolute return during the third quarter but underperformed the S&P Global Water Index. Companies such as Watts Water Technology, Severn Trent and United Utilities Co attributed to positive performance, allocations to Worleyparsons LTD, Kemira Oy and Hera Spa detracted from relative returns.

 

The Allianz RCM Global Water Fund has missed some of the recent market increase because the Fund had not been invested in companies like Kemira, a Finnish water chemical company, or Layne Christensen which offers well drilling and mining exploration services, both which belonged to the best performing stocks in Q3. We also did not own companies engaged in basic construction materials like Uponor or Mueller Water. Both stocks rebounded during the quarter, but we decided not to hold either stock because of long term concerns regarding the competitiveness of their business model.
Outlook

We continue to like consultancy and engineering-related water companies and further added to them during the quarter by initiating a position in Stantec. We believe Stantec will be amongst the first beneficiaries of a recovery. We believe their expertise in the field of designing and engineering solutions for companies seeking to comply with increasingly strict environmental standards and governments trying to handle the increasingly complex planning criteria when issuing new infrastructure projects provides them with an excellent market position going forward.

 

We also bought Rotork, a company selling safety relevant flow control actuators and initiated a position in China Water Affairs, a fast growing company managing waste water treatment facilities throughout China.

Investors should consider the investment objectives, risks, charges and expenses of this Fund carefully before investing. This and other information is contained in the Fund´s prospectus and summary prospectus, if available, which may be obtained by contacting your financial advisor, or by calling 888-877-4626. Click here for the Fund´s prospectus or summary prospectus. Please read them carefully before you invest or send money.

Past performance is no guarantee of future results. Current and future portfolio holdings are subject to risk. This is not an offer or solicitation for the purchase or sale of any financial instrument. It is presented only to provide information on investment strategies and opportunities. The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Portfolio holdings are subject to change. There is no guarantee that these investment strategies will work under all market conditions, and each investor should evaluate their ability to invest for the long-term.

 

The Fund’s investments in non-U.S. securities may be subject to rapid and more extreme changes in value. The securities markets of many foreign countries may be smaller than the U.S. market. Equity issuers in such countries may not be subject to the same degree of securities regulation as U.S. issuers, and accounting and financial reporting standards may differ from those in the U.S. Government interference in the economy may be prevalent for many non-U.S. securities markets. These risk factors are pronounced with emerging markets securities. The Fund may also invest in initial public offerings (IPOs), which can be highly volatile. Stocks issued in IPOs have no trading histories, and information about the companies may be available for very limited periods.

 

The Fund may invest in derivatives (including options, futures, forward contracts and swap agreements) for purposes including risk management, for leverage (including borrowing), and to gain exposure to other types of investments. Derivatives involve the risk that a counterparty may not be able to comply with the derivatives contract; difficulties in liquidating a derivatives position advantageously; and the risk that the use of derivatives for leverage may increase the Fund’s volatility, with larger gains or losses possible; The successful use of derivatives depends on the buyer or seller being correct about the size and timing of market movements, which are inherently uncertain. Valuation uncertainties also exist with derivatives.

 

The S&P Global Water Index is composed of 50 of the largest publicly traded companies in water-related businesses that meet specific investability requirements. The index is designed to provide liquid exposure to the leading publicly listed companies in the global water industry, from both developed markets and emerging markets. The Morgan Stanley Capital International (MSCI) World Index is an unmanaged market-weighted index that consists of over 1,200 securities traded in 23 of the world’s most developed countries. Securities are listed on exchanges in the U.S., Europe, Canada, Australia, New Zealand, and the Far East. Unless otherwise noted, index returns reflect the reinvestment of income dividends and capital gains, if any, but do not reflect fees, brokerage commissions or other expenses of investing. It is not possible to invest directly in an index.

 

Allianz Funds are distributed by Allianz Global Investors Distributors LLC, 1345 Avenue of the Americas, New York, NY, 10105-4800, www.allianzinvestors.com . © 2009.

NOT FDIC INSURED / MAY LOSE VALUE / NOT BANK GUARANTEED

 

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All holdings are subject to change.
 

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