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Fresno County Employees' Retirement Association Fresno County Employees' Retirement Association Strategy review October 2019 Lipper Asset Class Group Awards are awarded to eligible fund family groups and not individual funds. Best Group over 3 Years Large Equity (2019, 2013, 2012, 2011, 2010) The Lipper Fund Best Group over 3 Years Large Equity award recognizes funds that have delivered consistently strong risk-adjusted performance, relative to peers. From Lipper Fund Awards from Refinitiv, ©2019 Refinitiv. All rights reserved. Used under license. ) For institutional investor use only Disclosures This material is to be used for one-on-one separate account presentations to institutional investors and not for any other purpose. These materials are being provided on the express basis that they and any related communications (whether written or oral) will not cause Pacific Investment Management Company LLC (or any affiliate) (collectively, “PIMCO”) to become an investment advice fiduciary under ERISA or the Internal Revenue Code, as the recipients are fully aware that PIMCO (i) is not undertaking to provide impartial investment advice, make a recommendation regarding the acquisition, holding or disposal of an investment, act as an impartial adviser, or give advice in a fiduciary capacity, and (ii) has a financial interest in the offering and sale of one or more products and services, which may depend on a number of factors relating to PIMCO (and its affiliates’) internal business objectives, and which has been disclosed to the recipient. These materials are also being provided on PIMCO’s understanding that the recipients they are directed to are all financially sophisticated, capable of evaluating investment risks independently, both in general and with regard to particular transactions and investment strategies. If this is not the case, we ask that you inform us immediately. You should consult your own separate advisors before making any investment decisions. These materials are also being provided on the express basis that they and any related communications will not cause PIMCO (or any affiliate) to become an investment advice fiduciary under ERISA or the Internal Revenue Code with respect to any recipient or any employee benefit plan or IRA because: (i) the recipients are all independent of PIMCO and its affiliates, and (ii) upon review of all relevant facts and circumstances, the recipients have concluded that they have no financial interest, ownership interest, or other relationship, agreement or understanding with PIMCO or any affiliate that would limit any fiduciary responsibility that any recipient may have with respect to any Plan on behalf of which this information may be utilized. If this is not the case, or if there is any relationship with any recipient of which you are aware that would call into question the recipient’s ability to independently fulfill its responsibilities to any such Plan, we ask that you let us know immediately. The information provided herein is intended to be used solely by the recipient in considering the products or services described herein and may not be used for any other reason, personal or otherwise. Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, CA 92660, 949.720.6000 1 Biographical information R. Matthew Clark, CFA, CAIA Mr. Clark is a senior vice president and account manager in the Newport Beach office with a focus on institutional client servicing. Prior to joining PIMCO in 2002, he served as an officer in the U.S. Army for eight years, achieving the rank of captain. Mr. Clark currently serves on the board of directors of Working Wardrobes, an Orange County-based charity that helps individuals with employment barriers find meaningful work. He has 18 years of investment experience and holds an MBA from Harvard Business School. He received an undergraduate degree from Trinity University, San Antonio. Raji O. Manasseh, CFA Mr. Manasseh is a senior vice president and equity strategist in the Newport Beach office. Prior to joining PIMCO in 2012, he was a vice president and client portfolio manager on Goldman Sachs Asset Management's (GSAM) fundamental equity team, working with a variety of clients from financial advisors to institutional consultants. Previously he was a product manager and an internal sales consultant at GSAM, and a medical researcher at Loyola University Chicago Stritch School of Medicine. He has 19 years of investment experience and holds an undergraduate degree in biology from Wheaton College in Illinois. He is a member of the CFA Society of Orange County. 2 Agenda 1. FCERA StocksPLUS Small AR 2. FCERA RAE Fundamental International 3. Appendix 3 1. FCERA StocksPLUS Small AR StocksPLUS Small: An innovative strategy that benefits from PIMCO’s core strengths StocksPLUS BETA ALPHA = Return from Russell + Active high quality Small 2000 equity exposure bond portfolio How StocksPLUS works… EFFICIENCY . Gain passive equity exposure to the index through futures and total return swaps . Invest in a high quality, actively managed bond alpha portfolio with meaningful return potential over QUALITY cash CONSISTENCY . Seek to take advantage of structural return opportunities in the bond market in an effort to deliver consistent excess returns FINANCING . Russell 2000 Index futures have historically traded below cash rates, providing an additional structural ADVANTAGE advantage The bond portfolio is designed to be… . Uncorrelated to equities . High quality . Highly liquid . Flexible stocksplus_phil_02a_751 5 StocksPLUS Small AR: Passive equity exposure complemented by fixed income alpha BETA ALPHA 4.24% 7.01% 3.48% 7.01% 3M LIBOR 3M LIBOR 1.60% 1.60% -0.77% Russell 2000 AR Bond Portfolio Equity Financing PIMCO StocksPLUS Small AR Rep. Account Index Return + Return vs. ‒ Spread vs. = Total Return (Before fees) 3M LIBOR 3M LIBOR As of 30 June 2019 * Since inception, 31 March 2006 Past performance is not a guarantee or a reliable indicator of future results. Performance is shown for the StocksPLUS Small AR representative account before fees. Bond Alpha Portfolio returns are estimated based off of historical financing costs and composite alpha. Financing costs are comprised of 3m LIBOR and a positive or negative spread to LIBOR (also known as “roll costs”) The above data is for a representative account. An investor should refer to the PIMCO StocksPlUS Small AR Composite included in the Appendix stocksplus_TR_phil_01_751a 6 PIMCO StocksPLUS suite A time-tested approach that seeks meaningful long-term excess returns Since inception performance Excess returns (before fees) Benchmark 12.0% 1.27% 10.0% 2.45% 4.05% 3.03% 8.0% 6.0% 10.43% 2.80% 8.81% 4.0% 7.06% 6.95% 2.0% 3.45% 0.0% PIMCO StocksPLUS PIMCO StocksPLUS PIMCO PIMCO PIMCO StocksPLUS International AR Enhanced Equity StocksPLUS Absolute StocksPLUS Small AR International AR Composite (USD- Composite Return Composite Composite Composite Hedged) Inception date 31 Jul '86 30 Jun '02 30 Apr '06 31 Jan '06 30 Nov '03 Composite vs. benchmark monthly 96% 92% 100% 100% 98% rolling 5-year periods outperformance MSCI EAFE Net MSCI EAFE Net Dividend Benchmark S&P 500 Index S&P 500 Index Russell 2000 Index Dividend Index USD-Hedged Index Bond Alpha Strategy Short-term Absolute return Absolute return Absolute return Absolute return Past performance is not a guarantee or a reliable indicator of future results. As of 30 June 2019. Performance shown are before fees. Refer to Appendix for additional performance and fee, chart, composite, index, and risk information. stockplus_perf_comp_summary 7 StocksPLUS Small has an additional source of return potential Index Typical Range (bps) • The difficulty in shorting individual S&P 500 -15 to 15 small cap stocks tends to lead investors Russell 2000 -75 to 0 to sell the Russell 2000 futures contract as a substitute for short sales MSCI EAFE -15 to 25 MSCI EM -15 to 50 • This dynamic tends to create a supply/demand imbalance that causes Russell 2000 futures financing cost annualized spread relative to LIBOR per the Russell 2000 futures contract to roll quarterly expiration “cheap” 50 0 • Costs and operational challenges associated with shorting individual small cap stocks tends to prevent this -50 “cheapness” from being arbitraged away -100 Average: -73 bps -150 Annualized financing cost (bps) cost financing Annualized -200 -250 03Q3 05Q2 07Q1 08Q4 10Q3 12Q2 14Q1 15Q4 17Q3 19Q2 As of 30 June 2019. Source: PIMCO, Bank of America Merrill Lynch The terms “cheap” in this context refers to a futures contract that is deemed to be substantially underpriced compared to futures contracts on other equity indices. There is no guarantee of future results or that a valuation will ensure a profit or protect against a loss. A financing cost at a discount to LIBOR can be viewed as a potential source of return to the fund. stocksplus_review_54 8 StocksPLUS aims to deliver consistent long-term excess returns PIMCOStocksPLUS StocksPLUS Enhanced Enhanced Equity EquityComposite Composite PIMCOStocksPLUS StocksPLUS Absolute Absolute Return ReturnComposite Composite PIMCOStocksPLUS StocksPLUS Small SmallAR Composite AR Composite (beforeRolling fees) 5-Year vs S&P Returns 500 index, vs. S&P rolling 500 Indexmonthly (beforeRolling fees)5-Year vs S&PReturns 500 vs.Index, S&P rolling 500 Index monthly (beforeRolling fees) 5-Year vs Russell Returns 2000 vs. Index,Russell rolling 2000 monthlyIndex 5-yrJuly returns 1986 – from June 312019 Jul '86 through 31 Dec '18 5-yrJune returns 2002 – from June 302019 Jun '02 through 31 Mar '19 5-yrApril returns 2006 from– June 30 2019 Apr '06 through 31 Mar '19 40 40 40 Outperformed Outperformed Outperformed 30 323 periods 30 134 periods 30 99 periods 20 20 20 10 10 10 Returns (%) Returns (%) Returns (%) 0 0 0 -10 Underperformed -10 Underperformed -10 Underperformed 13 periods 11 periods 0 periods -20 -20 -20 -20-100 10203040 -20-100 10203040 -20-100 10203040 Benchmark returns (%) Benchmark returns (%) Benchmark returns (%) 96% outperformance 92% outperformance 100% outperformance 1.26% average alpha 2.47% average alpha 4.55% average alpha As of 30 June 2019 Past performance is not a guarantee or a reliable indicator of future results.
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