Strategy Spotlight
February 2015
Your Global Investment Authority
PIMCO Introduces the
PIMCO Multi-Strategy
Alternative Strategy
Josh Davis
Executive Vice President
Portfolio Manager
Mihir Worah
CIO Asset Allocation and Real Return
Mohsen Fahmi
Managing Director
Portfolio Manager
PIMCO recently introduced the PIMCO Multi-Strategy
Alternative Strategy, a comprehensive liquid alternatives
approach that seeks attractive risk-adjusted returns and
diversification relative to traditional stock and bond
allocations. The approach accesses the full suite of PIMCO’s
absolute-return-oriented liquid alternative strategies,
including offerings across absolute return fixed income,
equity long/short, equity market neutral and managed
futures categories. In the following interview, portfolio
managers Josh Davis, Mihir Worah and Mohsen Fahmi
discuss the strategy’s objectives, investment process and
role in an investor’s portfolio.
Q: What is the PIMCO Multi-Strategy Alternative Strategy?
Worah: The strategy is an “all in one” liquid alternatives approach that seeks
to generate attractive risk-adjusted returns across market environments, with
a focus on limiting portfolio downside during large corrections in equity or
bond markets. The majority of the portfolio is dynamically allocated across the
full suite of PIMCO’s liquid alternative offerings. It also has the ability to invest
directly in individual securities, which helps facilitate better risk management
and allows us to access additional complementary alternative strategies.
Q: What are the potential benefits to investors?
Davis: Return potential, diversification and convenience are the big ones.
Through a single investment, our strategy allows investors to access the
complete suite of PIMCO’s liquid alternative strategies.
In a New Neutral environment that anticipates muted returns
and heightened volatility, many investors have looked to
liquid alternatives in an effort to boost returns and lower
overall portfolio risks. Yet the risks and returns of liquid
alternative strategies tend to vary markedly between
strategies, even within the same category. This creates a
challenge for investors seeking to assemble and manage a
diversified portfolio of liquid alternative strategies.
Our approach seeks to efficiently combine a range of
complementary liquid alternative strategies, offering the
potential for diversification and higher return per unit of risk
than a single strategy could achieve on its own. In so doing,
we address the three key challenges that investors face when
allocating to liquid alternatives: strategy selection, asset
allocation and risk management.
Q: What is unique about this strategy?
Fahmi: PIMCO is one of the few managers with such a broad
suite of independent liquid alternative strategies, and we are
the largest provider of alternative mutual fund strategies in
the U.S. as of December 2014, as defined by Morningstar.
Portfolio managers of the underlying liquid alternative
strategies include two Morningstar U.S. Fixed-Income Fund
Managers of the Year award recipients, Mark Kiesel in 2012
and Alfred Murata in 2013, as well as Rob Arnott, co-Founder
of Research Affiliates and a pioneer in fundamental indexing.
A key differentiating feature of this strategy is its ability to
tactically allocate and manage risk. We have full look-through
into the investment positions of strategies that we manage
in-house, which allows us to monitor changes in risk exposures
and liquidity in real time. It also allows us to make prudent
allocation shifts if we find there are meaningful changes in
risk exposures of underlying strategies.
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FEBRUARY 2015 | STRATEGY SPOTLIGHT
Furthermore, we primarily allocate to mutual fund strategies
that provide daily liquidity in contrast to approaches that offer
daily liquidity but allocate to third-party managers who may
offer liquidity only on a monthly, or even less frequent, basis.
Finally, our approach has the flexibility to invest in individual
securities to gain exposure to additional liquid alternative
strategies and to manage overall portfolio risks. This allows us
to efficiently manage overall exposures – both in the
component strategies and at an aggregate level – and hedge
undesired ones.
Q: Could you describe the investment process?
Davis: The investment process is designed to construct a
portfolio that is balanced across a diversified set of strategies,
optimized to achieve our investment objectives. It begins with
our proprietary risk systems that look through the underlying
strategies in real time to estimate key inputs in the portfolio
construction process – in particular, correlations and
volatilities of the underlying strategies. We then construct a
target risk allocation that seeks to diversify risk across our
investment opportunity set, while accounting for potential
overlap in positions across some strategies. Finally, the
portfolio is monitored daily to ensure allocations remain
within target. Even though we already have a very broad
investment opportunity set, we have the flexibility to include
new strategies over time. Mihir, Mohsen and I work closely as
a team to evaluate new strategies for inclusion in the
opportunity set.
Q: Could you elaborate on how investors should think
about incorporating this strategy into their existing
asset allocation?
A: The size and placement of an allocation in a portfolio can
vary based on investor objectives and constraints. For investors
who have carved out an allocation to liquid alternatives, this
strategy can play a central role as it provides broad exposure
to multiple liquid alternative strategies and seeks attractive
risk-adjusted return potential and diversification to traditional
stocks and bonds. Alternatively, because many of the strategy’s
underlying investments seek to deliver returns from stock and
bond markets but in a less constrained manner than traditional
approaches, it can also be used as a stand-alone complement
to traditional stock and bond allocations.
STRATEGY SPOTLIGHT | FEBRUARY 2015
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Past performance is not a guarantee or a reliable indicator of future results. 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. Equities may decline in value due to both real
and perceived general market, economic and industry conditions. 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. Swaps are a type of
derivative; swaps are increasingly subject to central clearing and exchange-trading. Swaps that are not centrally
cleared and exchange-traded may be less liquid than exchange-traded instruments.
PIMCO’s liquid alternative strategies are without the principal lock-ups of traditional private equity funds and
hedge funds and include separate accounts whose holdings can be liquidated at a client’s request subject to
current market conditions, mutual funds that can be liquidated at NAV on a daily basis and ETFs that can be
liquidated on the secondary market under normal market conditions. There is no guarantee that a security will be
able to be liquidated in a timely fashion or when it would be most advantageous to do so.
Diversification does not ensure against loss. 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.
The Morningstar Fixed Income Fund Manager of the Year award is based on the strength of the manager,
performance, strategy, and firm’s stewardship (2012/2013). Morningstar named Dan Ivascyn and Alfred Murata
the 2013 Fixed Income Manager of the Year (US).
This material contains the opinions of the managers 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 or registered trademark of Allianz Asset Management of America L.P. in the United States and
throughout the world. THE NEW NEUTRAL and YOUR GLOBAL INVESTMENT AUTHORITY are trademarks or
registered trademarks of Pacific Investment Management Company LLC in the United States and throughout the
world. ©2015, PIMCO.
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