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PIMCO Introduces GIS StocksPLUS Absolute Return Fund

StocksPLUS Absolute Return Fund portfolio managers discuss the strategy’s unique investment approach and history of outperformance.

Investors today face increasing hurdles when looking to achieve consistent outperformance in their equity allocations. With 90% of active U.S. large cap equity blend funds failing to beat their passive counterparts over the last 10 years (according to Morningstar), many investors are looking for more reliable sources of equity alpha – a need that PIMCO StocksPLUS Absolute Return Strategy aims to meet. In the following Q&A, portfolio managers Mohsen Fahmi, Jing Yang and Bryan Tsu discuss the strategy’s unique investment approach and its long-term record of outperforming the S&P 500.

Q: WHAT IS PIMCO GIS STOCKSPLUS® ABSOLUTE RETURN FUND, AND WHY HAVE YOU DECIDED TO LAUNCH IT NOW?

A: PIMCO has been managing StocksPLUS strategies for more than three decades, delivering value to equity investors across a variety of market environments. In 1986, PIMCO launched the first StocksPLUS strategy with the goal of providing consistent outperformance and modest tracking error relative to the S&P 500. Given its success, we expanded the suite in 2002 to include StocksPLUS Absolute Return (AR) Strategy, which uses the same StocksPLUS approach, but targets higher excess returns and taps into a broader opportunity set. We are expanding StocksPLUS AR Strategy into the PIMCO GIS (Global Investors Series) fund suite to offer more investors the potential for meaningful and consistent excess returns.

Q: HOW DOES THE STRATEGY AIM TO MEET OR EXCEED ITS GOALS?

A: Unlike traditional active equity strategies that attempt to outperform by picking stocks, the StocksPLUS approach provides passive exposure to an equity index while seeking to deliver outperformance through PIMCO’s expertise in active fixed income management. While the approach may be nontraditional, PIMCO has successfully managed StocksPLUS portfolios for more than 30 years and today manages more than $30 billion in assets across StocksPLUS strategies.

Given broad underperformance of traditional active equity funds, we decided to launch GIS StocksPLUS Absolute Return Fund because we saw a clear need for an equity strategy that offers investors the potential for meaningful and consistent excess returns.

stockplus investment approach

Q: WHAT ARE THE SIMILARITIES AND DIFFERENCES BETWEEN THE EXISTING PIMCO GIS STOCKSPLUS FUND AND PIMCO GIS STOCKSPLUS ABSOLUTE RETURN FUND?

A: First, both strategies benefit from the same investment philosophy and process that drives all PIMCO portfolios. PIMCO’s investment process has evolved over decades and been tested in virtually every market environment. By integrating insights from our Cyclical Forums, which evaluate and seek to anticipate market and economic scenarios over the coming 12 months, and our annual Secular Forum, which forecasts potential risks and opportunities over the coming three to five years, PIMCO’s forums provide a framework for how to position portfolios. These top-down views are complemented by bottom-up insights from PIMCO’s specialist portfolio managers. PIMCO’s Investment Committee – of which Mohsen is a permanent member – is composed of senior investment professionals and provides insight and guidance to portfolio managers based on forum views and current market developments.

The key differences between the two strategies are that PIMCO GIS StocksPLUS Absolute Return Strategy targets higher excess returns and tracking error, and it has broader investment guidelines to invest across rates, spreads and currency markets globally. In comparison, PIMCO StocksPLUS aims to deliver consistent outperformance with modest tracking error by focusing on structural return opportunities in short-term fixed income markets.

While the strategies have different return targets, both have delivered consistent outperformance over time using the StocksPLUS approach. As seen in Figure 1, PIMCO StocksPLUS has delivered 125 basis points (bps) of alpha and outperformed the S&P 500 in 96% of rolling five-year periods since inception in 1986. Similarly, PIMCO StocksPLUS Absolute Return has delivered 242 bps of alpha and outperformed in 92% of rolling five-year periods since its inception in 2002.

StocksPLUS and StocksPLUS Absolute Return composite returns since inception

Q: WHY SHOULD CLIENTS CONSIDER STOCKSPLUS FOR THEIR EQUITY ALLOCATIONS?

A: Equity investors typically desire excess returns and diversification. With the vast majority of active equity managers having underperformed their benchmarks over the past decade, investors have increasingly sought to identify more reliable sources of excess returns. PIMCO StocksPLUS offers an innovative yet time-tested approach to equity investing, and a non-traditional diversifying source of potential excess returns: bonds. Unlike traditional active equity managers that attempt to outperform benchmarks by picking stocks, PIMCO StocksPLUS pursues alpha from the global bond market – a large and historically reliable opportunity set from which to extract potential excess returns. For investors seeking meaningful and consistent outperformance, StocksPLUS may serve as an attractive solution.

StocksPLUS Absolute Return Strategy also offers unique diversification benefits. First, the strategy captures the returns of the S&P 500 index via passive exposure to index-linked instruments, thereby providing investors with exposure to some of the largest, most dynamic companies in the world. Accounting for over half of the global stock market, this is an important allocation for most investors. Next, because the strategy’s excess returns are driven by a bond alpha strategy, excess returns tend to be largely uncorrelated (or even negatively correlated) with those of traditional active equity managers, potentially providing additional diversification benefits. Lastly, while the StocksPLUS strategies may experience higher volatility than passive S&P 500 exposure, this occurs in the context of targeting more attractive risk-adjusted returns: The chart below shows that while the StocksPLUS strategies have had slightly higher volatility than the S&P 500, this has been compensated for in the form of excess returns. 

10-year historical returns vs. volatility

Q: HOW DOES PIMCO GIS STOCKSPLUS ABSOLUTE RETURN FUND DIFFER FROM OTHER PIMCO STRATEGIES?

A: While StocksPLUS Absolute Return Strategy is in harmony with PIMCO’s investment philosophy and process, it is a distinct strategy within PIMCO given its explicit objective to be uncorrelated with equities in its portfolio construction. The StocksPLUS portfolio management team works closely with PIMCO’s analytics team in an iterative process that involves stress-testing portfolios and adjusting risk exposures to reduce the bond alpha strategies’ expected correlation to equities. The team seeks to balance the risks of assets that are typically positively correlated with equities (e.g., corporate credit and emerging market assets) with those that are less correlated (U.S. Treasuries, agency mortgages or relative value and short exposures).

Further, while traditional bond strategies may be driven by a benchmark, StocksPLUS Absolute Return’s bond alpha strategy has a flexible mandate, providing the ability to invest in what we believe are the best macro and bottom-up ideas around the globe.

Q: HOW DOES PIMCO MANAGE THE INVESTMENT RISKS IN THE STOCKSPLUS STRATEGIES?

A: While it is clear that we take on risk above the passive equity benchmark risk, we do so in a thoughtful way that pays close attention to portfolio construction. While the concept of StocksPLUS is relatively simple, the key is to deliver excess returns with a bond portfolio that is largely uncorrelated with equities. We benefit from our deep risk management and portfolio analytics teams, which support us in taking a disciplined approach to tapping investment opportunities. And we do not look to add alpha through gross equity leverage or market timing. Because of the way we manage the bond strategy, we seek to deliver a risk profile that is in line with that of an equity index.

Q: WHAT IS THE POTENTIAL TAX ADVANTAGE OF PIMCO STOCKSPLUS STRATEGIES?

A: For non-U.S. investors, StocksPLUS may offer a more tax-efficient solution to gaining exposure to U.S. equities. In general, non-U.S. investors are subject to a withholding tax on dividend payments when investing in U.S. stocks, mutual funds and ETFs, creating a drag on after-tax returns. Unlike traditional equity funds, StocksPLUS obtains exposure to the S&P 500 using futures and/or swaps, which are not currently subject to withholding taxes. This is because futures and swap contracts do not pay dividends. Instead, the values of the dividends are incorporated into the price of the futures and swap contracts. Consequently, StocksPLUS strategies may provide an advantage to non-U.S. investors who are subject to dividend withholding taxes.

The Author

Jing Yang

Portfolio Manager

Bryan Tsu

Portfolio Manager

Disclosures

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