Home > Insights > Investment Strategies > PIMCO Introduces GIS StocksPLUS Absolute Return Fund
Strategy Spotlight

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

Mohsen Fahmi

Portfolio Manager, Global Fixed Income

Jing Yang

Portfolio Manager, Structured Credit

Bryan Tsu

Portfolio Manager, CMBS and CLO

Related

Disclosures

London
PIMCO Europe Ltd
11 Baker Street
London W1U 3AH, England
+44 (0) 20 3640 1000

Dublin
PIMCO Europe GmbH Irish Branch,
PIMCO Global Advisors (Ireland)
Limited
3rd Floor, Harcourt Building 57B Harcourt Street
Dublin D02 F721, Ireland
+353 (0) 1592 2000

Munich
PIMCO Europe GmbH
Seidlstraße 24-24a
80335 Munich, Germany
+49 (0) 89 26209 6000

Milan
PIMCO Europe GmbH - Italy
Corso Matteotti 8
20121 Milan, Italy
+39 02 9475 5400

Zurich
PIMCO (Schweiz) GmbH
Brandschenkestrasse 41
8002 Zurich, Switzerland
Tel: + 41 44 512 49 10

PIMCO Europe Ltd (Company No. 2604517) is authorised and regulated by the Financial Conduct Authority (12 Endeavour Square, London E20 1JN) in the UK. The services provided by PIMCO Europe Ltd are not available to retail investors, who should not rely on this communication but contact their financial adviser. PIMCO Europe GmbH (Company No. 192083, Seidlstr. 24-24a, 80335 Munich, Germany), PIMCO Europe GmbH Italian Branch (Company No. 10005170963), PIMCO Europe GmbH Irish Branch (Company No. 909462), PIMCO Europe GmbH UK Branch (Company No. BR022803) and PIMCO Europe GmbH Spanish Branch (N.I.F. W2765338E) are authorised and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie- Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 32 of the German Banking Act (KWG). The Italian Branch, Irish Branch, UK Branch and Spanish Branch are additionally supervised by: (1) Italian Branch: the Commissione Nazionale per le Società e la Borsa (CONSOB) in accordance with Article 27 of the Italian Consolidated Financial Act; (2) Irish Branch: the Central Bank of Ireland in accordance with Regulation 43 of the European Union (Markets in Financial Instruments) Regulations 2017, as amended; (3) UK Branch: the Financial Conduct Authority; and (4) Spanish Branch: the Comisión Nacional del Mercado de Valores (CNMV) in accordance with obligations stipulated in articles 168 and 203 to 224, as well as obligations contained in Tile V, Section I of the Law on the Securities Market (LSM) and in articles 111, 114 and 117 of Royal Decree 217/2008, respectively. The services provided by PIMCO Europe GmbH are available only to professional clients as defined in Section 67 para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on this communication.| PIMCO (Schweiz) GmbH (registered in Switzerland, Company No. CH-020.4.038.582-2) . The services provided by PIMCO (Schweiz) GmbH are not available to retail investors, who should not rely on this communication but contact their financial adviser.

FOR PROFESSIONAL INVESTORS ONLY.


Past performance is not a guarantee or a reliable indicator of future results.


PIMCO Funds: Global Investors Series plc is an umbrella type open-ended investment company with variable capital and is incorporated with limited liability under the lawsof Ireland with registered number 276928. The information is not for use within any country or with respect to any person(s) where such use could constitute a violation ofthe applicable law. The information contained in this communication is intended to supplement information contained in the prospectus for this Fund and must be read inconjunction therewith. Investors should consider the investment objectives, risks, charges and expenses of these Funds carefully before investing. This and other informationis contained in the Fund’s prospectus. Please read the prospectus carefully before you invest or send money. Past performance is not a guarantee or a reliable indicatorof future results and no guarantee is being made that similar returns will be achieved in the future. Returns are net of fees and other expenses and include reinvestment ofdividends. The performance data represents past performance and investment return and principal value will fluctuate so that the PIMCO GIS Funds shares, when redeemed,may be worth more or less than the original cost. Potential differences in performance figures are due to rounding. The Fund may invest in non-U.S. or non-Eurozone securitieswhich involves potentially higher risks including non-U.S. or non-Euro currency fluctuations and political or economic uncertainty. For informational purposes only. Please notethat not all Funds are registered for sale in every jurisdiction. Please contact PIMCO Europe Ltd for more information. For additional information and/or a copy of the Fund’sprospectus, please contact the Administrator: State Street Fund Services (Ireland) Limited, Telephone +353-1-776-0142, Fax +353-1-562-5517. ©2019.


Benchmark - Unless otherwise stated in the prospectus or in the relevant key investor information document, the Fund referenced in this material is not managed against aparticular benchmark or index, and any reference to a particular benchmark or index in this material is made solely for risk or performance comparison purposes.


Additional information - This material may contain additional information, not explicit in the prospectus, on how the Fund or strategy is currently managed. Such information iscurrent as at the date of the presentation and may be subject to change without notice.


Investment Restrictions - In accordance with the UCITS regulations and subject to any investment restrictions outlined in the Fund’s prospectus, the Fund may invest over35% of net assets in different transferable securities and money market instruments issued or guaranteed by any of the following: OECD Governments (provided the relevantissues are investment grade), Government of Singapore, European Investment Bank, European Bank for Reconstruction and Development, International Finance Corporation,International Monetary Fund, Euratom, The Asian Development Bank, European Central Bank, Council of Europe, Eurofima, African Development Bank, International Bank forReconstruction and Development (The World Bank), The Inter American Development Bank, European Union, Federal National Mortgage Association (Fannie Mae), FederalHome Loan Mortgage Corporation (Freddie Mac), Government National Mortgage Association (Ginnie Mae), Student Loan Marketing Association (Sallie Mae), Federal HomeLoan Bank, Federal Farm Credit Bank, Tennessee Valley Authority, Straight-A Funding LLC.


Equities may decline in value due to both real and perceived general market, economic and industry conditions. Investments in value securities involve the risk the market’svalue assessment may differ from the manager and the performance of the securities may decline. Investing in foreign-denominated and/or -domiciled securities may involveheightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. Currency rates may fluctuate significantly overshort periods of time and may reduce the returns of a portfolio. REITs are subject to risk, such as poor performance by the manager, adverse changes to tax laws or failure toqualify for tax-free pass-through of income. Model Risk is the risk that the Fund’s investment models used in making investment allocation decisions may not adequately takeinto account certain factors and may result in a decline in the value of an investment in the Fund. Derivatives may involve certain costs and risks, such as liquidity, interest rate,market, credit, management and the risk that a position could not be closed when most advantageous. Investing in derivatives could lose more than the amount invested. TheFunds are non-diversified, which means that it may invest its assets in a smaller number of issuers than a diversified fund. For risks specific to a particular Fund, please referto the Fund’s prospectus.


There is no guarantee that these investment strategies will work under all market conditions or are suitable for all investors and each investor should evaluate their ability toinvest long-term, especially during periods of downturn in the market. Investors should consult their investment professional prior to making an investment decision.


PIMCO Europe Ltd (Company No. 2604517) and PIMCO Europe Ltd - Italy (Company No. 07533910969) are authorised and regulated by the Financial Conduct Authority (12Endeavour Square, London E20 1JN) in the UK. The Italy branch is additionally regulated by the Commissione Nazionale per le Società e la Borsa (CONSOB) in accordancewith Article 27 of the Italian Consolidated Financial Act. PIMCO Europe Ltd services are available only to professional clients as defined in the Financial Conduct Authority’sHandbook and are not available to individual investors, who should not rely on this communication. | PIMCO Deutschland GmbH (Company No. 192083, Seidlstr. 24-24a,80335 Munich, Germany), PIMCO Deutschland GmbH Italian Branch (Company No. 10005170963), PIMCO Deutschland GmbH Spanish Branch (N.I.F. W2765338E) and PIMCODeutschland GmbH Swedish Branch (SCRO Reg. No. 516410-9190) are authorised and regulated by the German Federal Financial Supervisory Authority (BaFin) (Marie- Curie-Str. 24-28, 60439 Frankfurt am Main) in Germany in accordance with Section 32 of the German Banking Act (KWG). The Italian Branch, Spanish Branch and Swedish Branchare additionally supervised by the Commissione Nazionale per le Società e la Borsa (CONSOB) in accordance with Article 27 of the Italian Consolidated Financial Act, theComisión Nacional del Mercado de Valores (CNMV) in accordance with obligations stipulated in articles 168 and 203 to 224, as well as obligations contained in Tile V, SectionI of the Law on the Securities Market (LSM) and in articles 111, 114 and 117 of Royal Decree 217/2008 and the Swedish Financial Supervisory Authority (Finansinspektionen)in accordance with Chapter 25 Sections 12-14 of the Swedish Securities Markets Act, respectively. The services provided by PIMCO Deutschland GmbH are available onlyto professional clients as defined in Section 67 para. 2 German Securities Trading Act (WpHG). They are not available to individual investors, who should not rely on thiscommunication. | PIMCO (Schweiz) GmbH (registered in Switzerland, Company No. CH- 020.4.038.582-2), Brandschenkestrasse 41, 8002 Zurich, Switzerland, Tel: + 41 44 51249 10. The services provided by PIMCO (Schweiz) GmbH are not available to individual investors, who should not rely on this communication but contact their financial adviser.


Notice to investors in Switzerland: The distribution of shares in Switzerland will be exclusively made to, and directed at, qualified investors (the “Qualified Investors”), as definedin the Swiss Collective Investment Schemes Act of 23 June 2006, as amended (“CISA”) and its implementing ordinance. Accordingly, the Fund has not been and will not beregistered with the Swiss Financial Market Supervisory Authority (FINMA). This offering material relating to the shares that have been approved by the Swiss representativemay be made available in Switzerland solely to Qualified Investors. Home Jurisdiction of the fund: Ireland; Swiss representative: BNP Paribas Securities Services, Paris,succursale de Zurich, Selnaustrasse 16, 8002 Zurich, Switzerland; Swiss paying agent: BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002Zurich, Switzerland; Jurisdiction: Zurich, Switzerland. The prospectus, the Key Investor Information Documents (KIIDs), the articles of association of the Fund and the annualand semi-annual reports of the Fund are available at the Swiss representative office.


This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been distributed for informational purposesonly and should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. Information contained herein hasbeen obtained from sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referred to in any other publication, withoutexpress written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2019, PIMCO.

Equities at PIMCO: Nontraditional Solutions, Recognized Results
Next Article

Strategy Spotlight: Equities at PIMCO: Nontraditional Solutions, Recognized Results

XDismiss Next Article