(PUB) Investing 2015

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PIMCO in Better Shape Than Expected Income Strategist | Sarah Bush

Scott Mather, who previously headed up the fund’s global portfolio management group, has taken the lead at both funds, and heavy outflows do not appear to have significantly affected their performance. PIMCO Unconstrained Bond PUBDX When Marc Seidner took over in January 2015 , he became the fourth manager to run this fund in less than 18 months. Seidner has an impressive resume and is backed by an experienced team. However, the number of changes to the fund’s investment team and questions regarding the fund’s implementation of an unconstrained mandate support its Morningstar Analyst Rating of ˇ . Global, Foreign, and Emerging-Markets Bond Funds The ´ -rated global- and foreign-bond funds run by Andrew Balls have experienced little turnover during the past several years, and the additions of comanagers Sachin Gupta and Lorenzo Pagani should help to alleviate Balls’ workload. The funds’ emerging-markets exposure bears monitoring, with those stakes climbing as high as 30% – 40% of assets as recently as late 2014 . We downgraded PIMCO Emerging Markets Bond PEBIX and PIMCO Emerging Local Bond PELBX to ´ from Silver. The team under Michael Gomez has seen several departures in recent years, and the team has courted volatility through large country bets (Brazil, Russia, and Mexico) that on balance haven’t played out well lately. Real Return Funds and Global Multi-Asset The picture for the real-return and multiasset teams under Mihir Worah is brighter than expected. Jeremie Banet returned to the fold shortly after Gross left; he, Nic Johnson, and Greg Sharenow have been named comanagers on PIMCO Real Return PRRDX , PIMCO Commodity Real Return PCRIX , and PIMCO Commodities PLUS PCLDX , respectively. PIMCO Global Multi-Asset PGMDX , too, is on more solid ground, following the early- 2015 arrival of emerging-markets and equities specialist Geraldine Sundstrom. K Contact Sarah Bush at sarah.bush@morningstar.com

We are maintaining our Neutral Parent rating on PIMCO , though we see positive signs. Here’s a rundown of where the firm stands. Fears that analysts and managers would flee PIMCO following Bill Gross’ September 2014 departure have not materialized. The departures of Saumil Parikh and central-bank watcher Paul McCulley are notable, but otherwise, personnel turnover has been close to historic levels. The return of several high-level invest- ment staff is also a positive signal that the firm’s culture has improved. Outflows, While Lessening, Remain a Concern Redemptions from PIMCO Total Return PTTRX and other hard-hit strategies, including PIMCO Uncon- strained Bond PUBDX , PIMCO Low Duration PLDDX , PIMCO All Asset All Authority PAUDX , and PIMCO High Yield PHYDX , have eclipsed $250 billion through April 2015 . Outflows from PIMCO Total Return have finally started to slow, dropping to approximately $2 . 7 billion in May 2015 , and there have been several strategies enjoying sizable inflows, including PIMCO Income PONDX . PIMCO Fund Ratings Recap Our highest-rated PIMCO funds are those for which management has remained consistent since Gross’ departure, including PIMCO Income, PIMCO Invest- ment Grade Corporate Bond PIGIX , and Rob Arnott’s PIMCO All Asset PASDX and PIMCO All Asset All Authority. Here are some we’ve revisited:

PIMCO Total Return PTTRX and PIMCO Low Duration PLDDX

While it will take time to see how the three new portfolio managers on PIMCO Total Return settle into their new roles, and flows remain a concern, the ´ ratings on these two funds reflect our con- viction in the strength of PIMCO ’s investment team.