April 2017
PIMCO TRENDS Managed
Futures Strategy Fund:
Seeking a Smoother Ride
in an Uncertain World
Trend-following, the primary approach used in managed
futures strategies, has generally delivered strong returns
over multiple decades.1 Today, the heightened possibility
of increased volatility coupled with the prospect of lower
returns going forward, suggests that the time may be right to
consider the potential benefits of trend-following strategies.
Portfolio manager Matt Dorsten and product manager
Michael Connor discuss the mechanics of trend-following
strategies, and how PIMCO TRENDS Managed Futures
Strategy Fund (TRENDS), which recently hit its three-year
mark, is differentiated in the marketplace.
Q: What are managed futures and how do they work?
Michael Connor: Managed futures funds – also known as trend-following or momentum
strategies – have been around since the 1980s. Historically, investors have been drawn to these
strategies mainly for their diversification benefits and their potential for equity-like returns.
Because of their low-to-negative correlation with many risk assets, they may help to lower
overall portfolio volatility and contain drawdowns. Ideally, they should demonstrate their
best performance during equity sell-offs, when investors need returns the most. In choppier
markets without clear trends, performance may be down or muted.
Measured by Eurekahedge CTA/Managed Futures Hedge Fund Index
1
2
April 2017 Q&A
AUTHORS
Figure 1: THREE RECENT STOCK SELL-OFFS
Have Managed Futures Strategies Performed as Expected?
Equity Index
Managed Futures Index
PIMCO TRENDS Managed Futures Fund (PQTIX)
115%
110
2. Negative Rate Scare
1. China Devaluation
3. Brexit
105
Total Return
Matt Dorsten
Portfolio manager
100
95
90
85
Jul
‘15
Michael Connor
Product manager
Aug
‘15
Sep
‘15
Oct
‘15
Nov
‘15
Dec
‘15
Jan
‘16
Feb
‘16
Mar
‘16
Apr
‘16
May
‘16
Jun
‘16
Jul
‘16
Aug
‘16
Sep
‘16
Equity Index represented by S&P 500 Index, Managed Futures Index represented by NEIXCTAM Index.
TRENDS Managed Futures Strategy Fund (at NAV)
3 Month USD LIBOR Index
1-year
3-year
Since inception
-4.78%
3.15%
3.42%
0.78
0.46
0.45
Source: PIMCO for the Institutional Share Class. Bottom table as of 31 March 2017. Top chart as of 30 September 2016.
If this material is used after 30 June 2017, it must be accompanied by the most recent Performance Supplement. For
performance to the most recent quarter-end, please visit PIMCO TRENDS Managed Futures Strategy Fund.
Performance quoted represents past performance. Past performance is not a guarantee or a reliable indicator of
future results. Investment return and the principal value of an investment will fluctuate. Shares may be worth more
or less than original cost when redeemed. Current performance may be lower or higher than performance shown.
For performance current to the most recent month-end, visit www.pimco.com or call (888) 87-PIMCO. Total
expense ratio 1.46%. Net expense ratio 1.15%.2
2
Q: Why have investors been allocating to
managed futures strategies?
Q: How have managed future strategies
performed during recent market shocks?
Connor: With low annual returns expected
for mainstream stocks and bonds over the
next decade, and asset prices in both the
equity and bond markets near all-time highs,
investors are looking to alternative strategies
for return and diversification potential. As
such, investors have been allocating to
managed futures strategies, which offer the
potential for both.
Connor: The last two years have offered a
good test case for trend-following strategies
as equity markets experienced a number of
notable sell-offs. A natural question for
investors to ask is: During these sell-offs, did
trend-following funds do what they’re
supposed to do? For true managed futures
strategies, we believe the answer is yes.
T he net expense ratio reflects two contractual expense reduction agreements of 0.25% through 31 July 2017 and 0.06%, an amount
equal to the management fee and administrative services fee, respectively, paid by the PIMCO Cayman Commodity Fund VIII, Ltd. (the
Subsidiary) to PIMCO. This waiver may not be terminated so long as PIMCO’s contract with the subsidiary is in place.
April 2017 Q&A
A closer look at these three drawdowns –
the China devaluation scare in August of
2015, the negative rate scare in early 2016,
and Brexit in mid-2016 – helps provide
insight into the potential benefits, and
limitations, of trend-following strategies.
Trend following strategies may not always
outperform the broader market as displayed
in Figure 1, but the chart above examines
how managed futures strategies fared during
these market sell-offs, noting some key
distinctions in the three different episodes.
1. China Devaluation: This downdraft
occurred very quickly and somewhat
unexpectedly over the course of four days.
Trend-following strategies that were
particularly fast-moving, like PIMCO’s
strategy, were able to identify the trend and
then take appropriate positions. However,
note that the diversification effect here
(trend-followers rally as the equity market
sells off) is somewhat muted due to the
speed of the move.
2. Negative Rate Scare: The JanuaryFebruary 2016 selloff took several weeks and
the rebound in risk market assets was slower
which allowed trend-following strategies to
provide a much stronger diversifying effect
with particularly strong performance from
strategies, like TRENDS, which are designed
to react more quickly.
3. Brexit: The sell-off in June 2016, like the
China devaluation scare, also occurred very
quickly, taking place over two days.
However, the performance of trend followers
was stronger this time, because, given
previous market moves, trend-followers
generally were well positioned for the event.
PIMCO TRENDS, for example, was up
over 4.15% on the day following the
Brexit vote.
Q: How do you expect managed futures to
perform in different market environments
going forward?
Matt Dorsten: Managed futures strategies
are all designed differently so there is
considerable disparity among these funds.
Trend horizons, portfolio construction and
risk management criteria are three main
factors that determine the nature of a
managed futures fund.
At PIMCO, we focus on shorter-term trend
windows because we believe this makes our
strategy more responsive in an equity market
selloff, and also that it positions us to trade
ahead of other managers who track longer
time horizons. This seeks to increase the
likelihood that investors will benefit during
surprise market shocks but does expose the
fund to risk in choppier markets. Investors
should educate themselves on specific
strategies to understand how performance
can vary in different environments.
Q: What is PIMCO’s managed futures
investment philosophy?
Dorsten: PIMCO TRENDS specializes in
capitalizing on shorter-term trends and is
characterized as a faster moving, adaptive
strategy that limits long equity exposure.
With 14 years of dedicated quantitative
expertise, PIMCO integrates
macroeconomic insight and bottom-up
microeconomic (i.e. security-level)
considerations to create a strategy that is
designed to maximize diversification
potential without sacrificing return.
The fund possesses several distinct
characteristics relative to competitors:
3
IMPLEMENTING MANAGED
FUTURES WITHIN A PORTFOLIO
Managed futures strategies seek to
generate attractive returns by capturing
price trends across major asset classes.
Incorporating managed futures strategies
in portfolios has the potential to and can
provide diversification to a traditional
portfolio of stocks and bonds, especially
during times of market stress. This
strategy was once reserved for large
institutional investors through private
funds, but now we can provide access
with the transparency and daily liquidity
of a 40-act open-end fund that many
investors desire.
Depending on an investor’s objectives
and tolerance for risk, managed futures
strategies can play a few different roles in
a portfolio and are commonly
implemented in the following ways:
ROLES IN PORTFOLIO
• Improve potential risk-adjusted returns
• Improve diversification potential
• Improve potential portfolio
performance during market downturns
IMPLEMENTATION
As impactful as managed futures
strategies can be, their impact on the
overall portfolio depends on the size of
the allocation. Many investors incorporate
managed futures into their overall
alternatives allocation, which can often
range from 10% to 30% depending on
the investment objectives and the role of
managed futures in the portfolio.
Dedicated Alternatives Allocation
Cash
Alternatives
Core bonds
Core stocks
4
April 2017 Q&A
• Fast moving: By focusing on shorter
moving-average windows, TRENDS seeks
to enter newly formed market trends
quickly and potentially exit completely
once trends have reversed, often ahead of
other slower-moving trend followers.
• Adaptive: Over the short term, TRENDS
aims to scale up or down quickly in
response to strong or weak market trends.
This allows us to focus allocation to the
strongest trend signals which may
outperform.
• Limits long equity exposure: Short equity
exposure in the fund can reach -100%, but
TRENDS limits long equity exposure to
+50% to emphasize diversification
characteristics of the strategy.
Q: What is PIMCO’s managed futures
investment process?
Dorsten: PIMCO’s approach to trendfollowing is to refine the standard models
using both macro- and micro-level insights
informed by PIMCO’s investment process,
such as:
• Active collateral management: In an era
of low returns, maximizing the potential
from investing collateral through PIMCO’s
active fixed income management may add a
significant boost.
• Drag reduction: We use PIMCO’s carry
forecasts in an effort to avoid a significant
portfolio drag from negative carry and
roll-down.
• Scaling rules: We do not target a constant
risk level, but rather scale up volatility as
opportunities develop and scale down
when market trends are few.
• Cross-market trends: Robust
macroeconomic insights provide the ability
to look both within and across markets to
identify trend signals.
• Risk management bias: TRENDS
is designed to maximize its risk
management role by constraining
exposures that may overlap with
traditional portfolio risks.
New strategy ideas are vetted by the Trends
Research Advisory Group, which is
comprised of senior portfolio managers
across a variety of specialist desks.
PIMCO’s derivatives execution is conducted
by specialist portfolio managers on our
global derivatives execution platform.
Futures rolls are determined and executed by
the appropriate specialist desk. Collateral is
managed by our specialist Short Term
Portfolio Managers. And, an appropriate
liquidity buffer is mandated and monitored
by our Risk Management Desk. Through this
robust process, our TRENDS strategy
harnesses the scope of PIMCO’s industryleading global resources, which we believe
provides a competitive advantage.
Past performance is not a guarantee or a reliable indicator of future results. The performance figures presented
reflect the total return performance and reflect changes in share price and reinvestment of dividend and capital gain distributions. All periods longer than one year are annualized. The minimum initial investment for Institutional class shares is $1 million;
however, it may be modified for certain financial intermediaries who submit trades on behalf of eligible investors.
Investments made by a Fund and the results achieved by a Fund are not expected to be the same as those made by any other
PIMCO-advised Fund, including those with a similar name, investment objective or policies. A new or smaller Fund’s performance may not represent how the Fund is expected to or may perform in the long-term. New Funds have limited operating
histories for investors to evaluate and new and smaller Funds may not attract sufficient assets to achieve investment and
trading efficiencies. A Fund may be forced to sell a comparatively large portion of its portfolio to meet significant shareholder
redemptions for cash, or hold a comparatively large portion of its portfolio in cash due to significant share purchases for cash,
in each case when the Fund otherwise would not seek to do so, which may adversely affect performance.
Differences in the Fund’s performance versus the index and related attribution information with respect to particular categories
of securities or individual positions may be attributable, in part, to differences in the pricing methodologies used by the Fund
and the index.
A word about risk:
Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk.
The value of most bonds and bond strategies are impacted by changes in interest rates. Bonds and bond strategies with longer
durations tend to be more sensitive and volatile than those with shorter durations; bond prices generally fall as interest rates
rise, and the current low interest rate environment increases this risk. Current reductions in bond counterparty capacity may
contribute to decreased market liquidity and increased price volatility. Bond investments may be worth more or less than the
original cost when redeemed. The fund will seek exposure to commodities through commodity-linked derivatives and
through the PIMCO Cayman Commodity Fund VIII Ltd., a wholly-owned subsidiary of the Fund organized under the laws of the
Cayman Islands (the “Subsidiary”). The Subsidiary is advised by PIMCO, and has the same investment objective as the Fund.
The Subsidiary (unlike the Fund) may invest without limitation in commodity-linked swap agreements and other commodity-linked derivative instruments. Commodities contain heightened risk including market, political, regulatory, and natural conditions, and may not be suitable for all investors. Derivatives and commodity-linked 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. Commodity-linked derivative instruments may involve additional costs and risks such as changes in commodity index
volatility or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes,
tariffs and international economic, political and regulatory developments. Investing in derivatives could lose more than the
amount invested. High yield, lower-rated securities involve greater risk than higher-rated securities; portfolios that invest
in them may be subject to greater levels of credit and liquidity risk than portfolios that do not. Mortgage and asset-backed
securities may be sensitive to changes in interest rates, subject to early repayment risk, and their value may fluctuate in response to the market’s perception of issuer creditworthiness; while generally supported by some form of government or private
guarantee there is no assurance that private guarantors will meet their obligations. Investing in foreign denominated and/
or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which
may be enhanced in emerging markets. The strategy may utilize quantitative models as part of implementing its investment
strategies. The models evaluate securities or securities markets based on certain assumptions concerning the interplay of market
factors. Models used may not adequately take into account certain factors, may not perform as intended, and may result in a
decline in the value of your investment, which could be substantial. The Fund is non-diversified, which means that it may
concentrate its assets in a smaller number of issuers than a diversified fund.
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 to invest long-term, especially during periods of downturn in the market. Investors
should consult their investment professional prior to making an investment decision.
This material contains the opinions of the manager and such opinions are subject to change without notice. This material has
been distributed for informational purposes only and should not be considered as investment advice or a recommendation of
any particular security, strategy or investment product. Information contained herein has been 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, without express written permission. PIMCO is a trademark of Allianz Asset Management of America L.P. in the United
States and throughout the world. ©2017, PIMCO.
PIMCO Investments LLC, distributor, 1633 Broadway, New York, NY, 10019 is a company of PIMCO.
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