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Focus on Tactical Allocation and Relative Value

Focus on Tactical Allocation and Relative Value

2015 Asset Allocation Outlook

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Mihir Worah CIO Asset Allocation and Real Return BEYOND Focus on Tactical Allocation and Relative Value

2015 ASSET ALLOCATION OUTLOOK PAGE 2 “ ­— MihirWorah relative value decisions going are to 2015. be critical in ‘bottom-up’careful selection prudent and emphasis an means on asset allocation, tactical sectors within and returns in –which extended business cycle, we greater expect divergence the global economy creeps into aslow further and alow and probabilitygrowth of recession 2015. in As multi-assetin portfolios given continued global Investors should consider amoderate risk-on posture

| CIOAssetAllocationandRealReturn ” Allocation themes the Fedtighteningcycle. increased marketvolatilityasweapproach thestartof correction. Nevertheless,there remains significantriskof long-run average,reducing theprobability ofasharp in theU.S.relative toreal ratesremains closetoits returns. Inparticular, weobservetheequityriskpremium we expectvariousriskassetswilldeliverattractive purchases. Aslongastheoddsofarecession remain low, with acontinuationoftheBankJapan’s (BOJ)asset stimulus from theEuropean CentralBank(ECB)along than impederobust U.S.growth andincreased policy of aslow-movingFedwillingtochaseinflationrather more extendedbusinesscyclethrough thecombination Yet, thepicture isnotentirely bleak:We anticipatea asset valuationsthanintherecent pastamidapersistinglowyieldenvironment. and unevenglobaleconomicgrowth, wealsoobservethat2015beginswithfuller do weanticipateatug-of-warescalatingbetweendivergentmonetarypolicies an assetallocationperspective,achievingtargetreturns maybedifficult. Notonly to nameafew—mayneedprepare foranotherchallengingyearin2015.From uncertainties —geopoliticaltensions,plummetingoilprices,volatilecurrencies, Investors already wearyofapersistentlowyieldenvironment complicatedby in emerging Asia. Asia. in emerging investment opportunities and find attractive basis) hedged Japanese equities (on a favor European and appear justified. We valuations equity current course, its run to cycle ahead for the business still years some and low rates interest With Equities

attractive value. attractive offer sectors debt securities, EM and select mortgage-backed U.S. non-agency debt, European peripheral rates. to rising sensitive less are that sectors income favor fixed 2015, in we later rates interest hiking Fed the of likelihood the Given Rates andCredit INTRODUCTION

investment professionals from around theworldgathered At PIMCO’s CyclicalForuminDecember2014,our Our Forumconclusions the pastfewyears. than thebold“betabets”thathavebeensufficient over opportunities across assetclasseswillbemore important construction andonexploitingrelative value commodities. In2015,anemphasisonrobust interest raterisk,andwehaveaneutralstanceon credit sectors.Incontrast,weare modestlynegative is stillwarrantedandseepocketsofopportunityacross Bottom line:We believeanoverweighttoequity risk risk andreturn potential across globalassetclasses. valuations, risksandmarkettechnicalsislikelytoimpact the interplaybetweenmacroeconomic fundamentals, portfolio managementleadershipteamconsidered how evolve overthecomingyear. FollowingtheForum,our to discusshowtheglobalmacro economyis likely to extreme outcomes. produce may of bouts though bottom, near hovering are prices oil We believe gold. on bearish are but stance on commodities aneutral maintain We hedges. inflation priced attractively are bonds inflation-linked European and TIPS U.S. Real Assets

rupee and Mexican peso. Mexican and rupee particular the Indian emerging , in inopportunities select We find and the Japanese yen. euro the of weakening U.S. dollar and further strengthening of the continued expect we further, diverge centralAs bank policies Currencies

2015 ASSET ALLOCATION OUTLOOK PAGE 3 2015 ASSET ALLOCATION OUTLOOK PAGE 4 self-sustaining andbroad-based. evidence thattheeconomicrecovery isbecoming household financesandconfidenceaswellincreasing in 2015isincrementally positive,reflecting improving PIMCO’s viewthattheoutlookforU.S.economy guest speakerattheDecemberCyclicalForum,affirmed 3.0% and1.5%,respectively. Dr. the BenBernanke, Japanese growth topickup,reaching levelsofaround stronger thanin2014.Inparticular, weexpectU.S.and 2015 tobehighlydivergent,thoughoverallsomewhat Across keyglobaleconomies,weexpectgrowth in also supportiveofhigherglobalgrowth this year. petrodollar cashflowsfrom producers toconsumers,is velocity ofmoney, drivenbythetransferofincremental supply-driven declinesinoilprices.Accelerationthe believe themajorityofthisimprovement willcomefrom 2.50% (year-over-year) in2014to2.75%2015.We PIMCO expectsglobalgrowth toacceleratefrom around Outlook formajorglobaleconomies outlook foreconomiesandmarkets. professionals from allourglobaloffices gatherin Newport Beachtodiscussthe originate from ourSecularandCyclicalEconomicForums,duringwhichinvestment allocation viewsthatare expressed inourmulti-assetportfolios.Thesemacro views PIMCO’s top-downmacroeconomic forecasts formthebackdrop fortheasset MACROECONOMIC OVERVIEW “ ­— DanielJ.Ivascyn rates isnow pricedintothemarkets. largely longer-term outlookforlower neutralpolicy thesis. However, weconcludedthatthis was anchoredby oursecularNewNeutral Our discussionofglobalratesand risk assets

Among otherregions, weexpecttoseegrowth in confront majorsecularandstructuralheadwinds. a depreciating yen.However, theprivatesectorstillmust action bypolicymakersaswelldecliningoilpricesand In Japan,weexpectgrowth torebound duetobold on ayear-over-year basis. energy) willlikelyremain around current levelsof1.6% 2015 andearly2016.Core inflation(excluding foodand bounce backintopositiveterritoryaswegolate become negativeintheearlypartof2015,onlyto developed economies,headlineinflationwilllikely impact onglobalinflationdatathisyear. Inmost Declining oilpricesare likelytohaveacleardownside Cyclical inflationoutlook rate) thatislessreliant oncredit expansionandinvestment. attempts totransitionagrowth model(andgrowth 6.5%, moderatingdownward asChinacontinuesits but stillweak.InChina,weexpectgrowth ofaround Europe ofaround 1.0%in2015,higherthan2014

| Group ChiefInvestmentOfficer

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GROWTH OUTLOOKFOR2015(GDPRANGE) Source: Bloomberg, PIMCOcalculations ***World isweighted average ofcountrieslistedintableabove **BRIM isBrazil, Russia, India, Mexico *Current dataforrealGDPandinflationrepresent fourquartersendingQ32014 WORLD*** BRIM** CHINA JAPAN UNITED KINGDOM EUROZONE UNITED STATES FORECAST BRIM isBrazil,Russia, 2.75% to3.25% UNITED STATES 1.5% to2.5% India, Mexico BRIM

UNITED KINGDOM CURRENT* 2.5% to3.0% +2.4% +2.5% +1.8% +7.3% +3.0% +0.8% -1.2% MACROECONOMIC OVERVIEW 0.75% to1.25% REAL GDP EUROZONE

+1.25% to+1.75% +0.75% to+1.25% +2.75% to+3.25% +2.5% to+3.0% +6.0% to+7.0% +2.5% to+3.0% +1.5 to+2.5% Q4’14 –Q4’15 CURRENT* +2.1% +6.7% +2.1% +1.0% +1.3% +0.4% +1.7% HEADLINE INFLATION 6.0% to7.0% CHINA 1.25% to1.75%

+5.25% to+6.25% +0.75% to+1.25% JAPAN +0.75 to+1.25% +1.5% to+2.0% +1.5% to+2.5% +1.0% to+1.5% +0.5% to+1.0% Q4’14 –Q4’15

2015 ASSET ALLOCATION OUTLOOK PAGE 5 2015 ASSET ALLOCATION OUTLOOK PAGE 6 cognizant ofchangestomarket liquidity, ASSET ALLOCATION PHILOSOPHY would normallyhave. horizon relative towhatawell-diversifiedportfolio to haveanunderweightglobalratesoverthecyclical the Fedislikelytostarthiking.Thismeansweexpect in 2015,theoutputgapwillcontinuetoshrinkand the U.S.economyislikelytogrow atarobust 3.0%rate yet fullyreflected bytheratemarketsis view that largely pricedintothemarkets.Whatisprobably not term outlookforlowerneutralpolicyratesisnow before theglobalfinancialcrisis.However, thislonger- policy ratesare setwellbelowthelevelsthat prevailed secular NewNeutralhypothesis,inwhichaverage On basis) andselectemergingAsiaequities. European andJapaneseequities(bothonahedged regions, wefavornon-U.S.equities,inparticular to posture meansweexpecttomaintainanoverweight multi-asset portfoliosin2015.Amoderaterisk-on Several broad themeswill be reflected inPIMCO’s value decisionsare goingtobecriticalin2015. tactical assetallocation,careful “bottom-up”securityselectionandprudentrelative on emphasis an divergence inreturnswithinassetclassesandsectors—whichmeans economy creeps furtherinto aslowandextendedbusinesscycle,weexpect greater continued globalgrowth andalowprobability ofrecession in2015.Astheglobal Investors shouldconsideramoderaterisk-onposture inmulti-assetportfoliosgiven Market technicalscanhavemeaningful Tactical allocationdecisionsneedto be global equities. interest rates, investor flowsandpricemomentum -term impactonassetprices MARKET TECHNICALS wecontinuetobelieveinPIMCO’s Within globalequitymarket Within & MOMENTUM ASSET ALLOCATION THEMES FORMULTI-ASSET PORTFOLIOS

where attractivespreads canoffer diversifiedsources of investment grade,highyieldandemergingmarkets credits innon-agencymortgage-backedsecurities, selective overweights,carefully surveyingindividual On appreciation oftheUSD. divergent monetarypoliciesshouldleadtofurther attractive valuations,increasing growth differentials and overweight totheU.S.dollar. Therare coincidenceof Finally, on Europe mayoffer attractiveopportunities. near bottom,inflation-linkedbondsintheU.S.and valuations andwithourexpectationsthatoilpricesare view ontheagriculturalcommodities.Givencurrent industrial versusprecious metalsandhaveanegative commoditiesweare neutraloil,favor of 2015.Within demand willmovebackintobalanceoverthecourse resulting curtailmentofproduction meanssupplyand on commodities:Thedrop incommodityprices andthe Turning to identify strong credits andavoiddefaults. portfolio carry, withcareful credit analysis helping to spread sectors, currencies, real assets, strongest indicators offuture returns Beginning valuationlevelsare the over long-terminvestmenthorizons Long-term meanreversion drivesreturns VALUATIONS as centralbankandfiscalpolicy surprises ingrowth andinflationaswell Asset classreturnsare influencedby MACRO FUNDAMENTALS webelieveinvestorsshouldconsider we expecttomaintainour wemaintainaneutralstance

Overall View WHERE WESEEVALUE REAL ASSETS CURRENCIES UNDER UNDER UNDER UNDER UNDER EQUITIES WEIGHTING WEIGHTING WEIGHTING WEIGHTING CREDIT RATES WEIGHTING OVER OVER OVER OVER OVER Inflation-linked bonds Peripheral Europe Core Europe U.S. duration EM Asiaequities Japanese equities European equities U.S. equities Tactical Tilts Emerging markets Yen Euro USD REITs Commodities ASSET ALLOCATION THEMES FORMULTI-ASSET PORTFOLIOS Emerging markets High yieldcorporates Investment gradecredit Non-agency MBS – – – – – – – – – – – – – – Weighting – – – –

+ + + + + + + + + + + + + + + + + + rates may be slightly rich; slightly rates may be ECB U.S. thesis, PIMCO’s Neutral New pricing now markets the With pairingsneutral market- event-driven other and in merger participate ECB selectively we accommodation; from benefit may financials European U.S. growth; strong from may and valuations benefit attractive offer equities EM Asia and Risks Opportunities Select keep up with or outpace the dollar the outpace or keep with up to able rates may be attractive and fundamentals improving with throughout the year; countries is likely to strength persist USD returns to generating approach value relative tactical, warrant amore markets futures commodity across of yields oil;roll repricing negative significant of in the spite low appear breakevens inflation Longer-maturity risk currency hedging after even real sovereigns yields, offer attractive EM spreads; select peripheral is likely toaccommodation compress fundamental strength retain but levels to attractive that haveWe widened favor credits sectors: in other also but energy in only not to widen spreads credit have caused pressures price Oil

2015 ASSET ALLOCATION OUTLOOK PAGE 7 2015 ASSET ALLOCATION OUTLOOK PAGE 8 U.S. real equityriskpremium suggestsattractivelong-termreturn potentialinequities While there willbeboutsof volatilityinglobalequitymarketsastheFedfirst yields. Thecurrent valueofthismetricforU.S.equities ratio,orShillerP/E)adjustedforthelevelofreal earnings yield(inverseofthecyclicallyadjustedprice-to- earnings premium (ERP),asmeasured bythecyclicallyadjusted attractiveness ofequitiesversusbondsistheequityrisk we believe,are justified.A robust measure ofthe relative longer, somewhathigherthanaverageequityvaluations, but withreal interest rateslowandlikelytostaylowerfor equitiesare Some investorsmaybeconcerned overvalued, Equities versusbonds years lefttorun,whichwebelieveissupportiveofequityvaluations. remaining intheeconomy, means thebusinesscycleprobably stillhasafewmore very slowly—onecouldsayunusuallyslowly. This,inadditiontothedegree ofslack than itslong-termhistorywouldsuggestgiventhelikelihoodthatFedwillmove approaches andthenproceeds tohikerates,webelievevolatilityislikelybelower REAL EQUITY RISK PREMIUM (%) 10 12 14 -4 -2 0 2 4 6 8 Source: sub-sampled byusing thefirst10monthsashalfand second10monthsasthelatter. upon NBERbusiness cycle data.Firstandsecondhalvesareequal halvesofthefullexpansionperiodper thisdata;e.g.ahypothetical20-monthexpansion wouldbe rate. 10-yearrealrateusesTIPSyield since1998and10-yearnominalratesless36-monthtrailinginflationforperiod s before1998.Expansionsaredefinedbased Hypothetical exampleforillustr ‘55 RobertShiller ‘59 ,

Y ‘62 ale database EXTENDED BUSINESSCYCLESUPPORTIVE OFEQUITIES ‘66 ‘66 , Bloomberg, ative purposesonly ‘70 PIMCOasofDecember2014 ‘74 . Equity RiskPremium(ERP)=S&P500cyclically adjustedearningsyield(inverseoftheShillerP/E)–10-yearreal ‘78 GLOBAL EQUITIES ‘82 level ofbondyields,equitiesoffer long-termincremental right around itsmedian.Thismeansthatrelative tothe compared withitslong-termhistorysincethe1950sis and potentiallyatriskofreceding. corporate profits asashare ofGDP are atanall-timehigh be furthermultipleexpansiondespitethefactthat mid tolatestagesofabusinesscycle.Hencethere could Moreover, onetypicallyfindstheERPcompressing inthe return potentialthatisinlinewithhistoricallyfairlevels. ‘86 ‘90 ‘94 Average level: 2.6% Current level: 3.6% 2nd halfofexpansions: 1st halfofexpansions: ‘98 ‘02 3.5% 3.4% ‘06 ‘10 ‘14 Equity indexes:valuationscorecard andkeyvalueindicators small capvaluationsare stilltoorich,andas such donot such assmallcaps,overlargecaps.We, however, believe outperformance ofmore domesticallyfocused , coupled withastronger U.S.dollarshouldsupport Some believethatfurtherU.S.economicstrength high marketexpectationsare keyriskstothisview. and theabilityofECBtodeliverversuswhatare now growth.earnings However, theeffectiveness ofBOJpolicy are easingandthere ispotentialforupsidesurprisesin Their valuationsare more attractive,theircentralbanks (on acurrency-hedged basis) forthree keyreasons: expect Europe andJapanto outperformtheU.S. equities, althoughweseeU.S.equitiesasfairlyvalued, on severalmajorthemesin2015.Indevelopedmarket theoverallequityoverweight,weare focusing Within Regional views 5 4 3 2 1 MSCI India MSCI Taiwan MSCI Korea MSCI China Nikkei 225 EURO STOXX50 S&P 500 MSCI EmergingMarkets MSCI World INDEX Cyclically adjustedprice-to-earnings ratio, orShiller’s P/E, iscalculated by findingthe ratio oftheaverage of10-yeartrailing realearningsandtheinflation-adjusted price. ForEMindices, cyclically Trailing Twelve Months Price-to-Earnings iscomputedbydividingpricetrailing 12monthEPS(earningspershare)before extraordinary items (As-reportedEPSinthecaseofS&P 500). P/B =Price-to-Bookratio Valuation scoreiscomputedasfollows: We percentilerank key valuation indicators foreachvariable (P/Betc.) basedonthepast10-yearhistoryforeach. We thencombinedthese scoresequally All fundamentaldataaretaken fromBloomberg. All figuresareonaconsolidatedbasis. Trailing returns arelocalcurrencytotalreturns. Dataasof2 January 2015 adjusted P/Eiscomputed usingpricesandEPSinUSD, andadjustedforUSD inflationinthecomputationofmedianEPS atcurrentprices. weighted acrossP/B, P/Evariables anddividendyield. Among P/Evariables, weattachaweightof25%toSpotP/Eand75% cyclicallyadjustedP/E. VALUATION SCORE Less AttractiveValuations

GLOBAL EQUITIES 2

P/B Attractive Valuations 2.9 1.9 1.0 1.5 1.7 1.5 2.8 1.4 2.1 as loweroilpricesandinflationallowfurthermonetary large AsiancountriessuchasChinaandIndiaattractive many emergingmarkets.However, wefindequitiesof lower growth differentials in andweakeningearnings given headwindsthrough continuedU.S.dollarstrength, stage. Ingeneral,weexpectEMequitiestostruggle to theirownhistory, weare beingveryselectiveatthis market (EM)equityvaluationsappearattractiverelative Moving beyonddevelopedmarkets,althoughemerging likely tobethebeneficiaries. overseas investors,themore liquidlargecapstocksare that theU.S.stockandbondmarketsare supportedby warrant asystematicoverweight.Moreover, totheextent equity valuationsfurther. stimulus alongwithpolicyreforms thatcouldboost 3 TTM P/E 19.0 15.2 11.7 10.2 21.4 22.1 19.2 12.6 18.4 1 4 ADJUSTED P/E CYCLICALLY 20.0 18.0 11.0 15.5 30.5 12.8 23.6 11.8 19.6 5 DIVIDEND YIELD (%) 1.5 2.9 1.1 3.0 1.4 3.7 2.0 2.7 2.5

2015 ASSET ALLOCATION OUTLOOK PAGE 9 2015 ASSET ALLOCATION OUTLOOK PAGE 10 PIMCO seesacontinuednegativecorrelation in2015 History ofthestock-bondcorrelation (1927-2014): 2% range,modestlyhigherthanimpliedbytheforward the 10-yearU.S.Treasury yieldtoendtheyearinhigh upside forinterest rateduration.Forexample, weexpect and differentiated returns. Inparticular, we seelimited market forbondsin2015,butratherayearofmuted neutral policyratesrelative tohistory, wedon’t seeabear Given oursecularNewNeutralhypothesisoflower context ofamulti-assetportfolio. bonds therefore remain usefulasportfoliohedgesinthe correlation willcontinueto benegative.Highquality premium inthebondmarket, webelievethestock- While current valuationsmean there isnotmuchterm againstdownsideeconomicsurprisesthatresult inequitymarketdrawdowns. as apotentialreturn generatorastheyhaveformostofthelast20years,andalsoa Bonds playavitalandspecialrole inamulti-assetportfolio.Theycanbeviewed Treasuries, U.K.GiltsandGermanBunds.Asdiscussed asset portfoliosflattomodestlyunderweightU.S. markets. Assuch,ourpreference istopositionmulti- -BOND CORRELATION -1.0 -0.8 -0.6 -0.4 -0.2 0.2 0.4 0.6 0.8 1.0 0 representation ofthebondmarket.Differentasset classproxieswillhavedifferentresults. basis, usingmonthlyreturns(12datapoints). Data asofJune1927–June2014.BondsarerepresentedbylongTreasuries(Ibbotson)whichshouldnotbeinterpretedafullsample Source: Ibbotson,PIMCO,Bloomberg.Stocksare representedbytheS&P500(S&P90forperiodspriortoreleaseof500).Correlationsareestimatedonanon-overlapping ‘27 1927-1953: +0.17 Avg. correlation: ‘29 ‘31 ‘33 ‘35 ‘37 POCKETS OFOPPORTUNITY ACROSSGLOBALCREDITSECTORS ‘39 ‘41 ‘43 ‘45 ‘47 ‘49 ‘51 ‘53 1953-1966: -0.18 Avg. correlation: ‘55 ‘57 GLOBAL FIXEDINCOME ‘59 ‘61 ‘63 ‘65 ‘67 1967-2000: +0.34 Avg. correlation: attractive risk-adjustedreturns. bondmarketsweseeseveralareas likelytoofferWithin Notable opportunitiesinbonds firmly inmind. Our core durationunderweight issizedwiththispoint also servingasahedgeduringeconomicdownturns. portfolio –notjustgeneratingincomeandreturns, but earlier, highqualitybondsplayaspecialrole inamulti-asset continued stabilizationinthehousingandjobmarkets. the outlookforabove-trend economicgrowth and We continuetofavornon-agencymortgagesgiven investment gradeandhighyieldcorporateissues. spreads hascreated selectopportunitiesinboth U.S.credit sectors,recentWithin widening incredit

‘69 ‘71 ‘73 ‘75 ‘79 ‘81 ‘83 ‘85 ‘87 ‘89 ‘91 ‘93 ‘95 ‘97 ‘99 ‘01 2001-2014: -0.39 Avg. correlation: ‘03 ‘05 ‘07

‘09

‘11

‘13 is positivefortheseeurozone peripherals Yields onkeyeurozone peripheralsovereigns havefallensteadily;likelihoodofECBQE in themixandtherefore standtobenefit. non-financial corporatebondsare alsolikely tofeature likely wouldbecentered bonds;however, ongovernment €500 billionto€1trillion.Aprogram ofthismagnitude March 2015meetingandislikelytorangeinsizefrom we believewillbeannouncedateithertheJanuaryor bonds giventhelikelihoodofanECBQEprogram, which In non-U.S.credit sectors,wefavorEuropean peripheral such asprincipalandinterest modifications. optimize liquidityandtomanageservicerpolicyrisks diversification across multiplecredits isimportantto However, rigorous analysisofindividualsecuritiesand CCC ratednon-agencyMBS:estimatedholdtomaturityloss-adjustedyields 10YR SOVEREIGN BOND YTM (%) HOLD TO MATURITY

0 1 2 3 4 5 6 7 8 LOSS-ADJUSTED YIELD (%) 0 1 2 3 4 5 6 7 8 Data shownareon-the-run 10-yearsovereignbondyields. Source: Bloombergdata through31December2014 Dec ‘11 Returns assume2-yearcumulativehomepriceappreciationratesshowninhorizontalaxis. Source: PIMCOprojectionsbasedonsampleCCCratedsecuritiesandstatedhousingpriceappreciationassumptionsasof31December2014. -5% 1.3 3.9 0 % Dec ‘12 GLOBAL FIXEDINCOME HOME PRICEAPPRECIATIONSCENARIOS 4.3 3 %

I T investors beselectivewheninvestinginEMdebt. dollar andneutralstanceoncommodities,wesuggest considering ourviewsofcontinuedstrength intheU.S. buffeted bymacroeconomic orpolicyheadwinds.Also, more attractivevaluations,butseveralcountriesare Finally, emergingmarketbondshavegenerallyreset to help ensure bankscanstaysolvent. regime, andtheECBisexpectedtoprovide liquidityto higher capitalratiorequirements inanewregulatory Many European banksare raisingcapital,movingtoward Also inEurope, wefavorselectsubordinated bankdebt. A L Y 6 5.1 S % P AIN Dec ‘13 10% 5.9 15% 7.2 Dec ‘14

2015 ASSET ALLOCATION OUTLOOK PAGE 11 2015 ASSET ALLOCATION OUTLOOK PAGE 12 U.S. TIPSandEuropean inflation-linked bondsare attractivelypricedinflation 5YR U.S. REAL YIELD, 5YR FORWARD (%) U.S. real yieldsare likelytobelowerinTheNewNeutral and wefindthemextremely attractiveatcurrent U.S. Among themostattractiveinflationhedgesavailableare cost ofproduction. difficult tojustifygoldtradingsofaraboveitsmarginal If thelikelihoodofhyperinflationisnegligible,it bank balancesheets,thevelocityofmoneyandinflation. new understandingoftherelationship between central prices couldseeasharpcorrection giventhe market’s 2015 asreal interest ratesare likelytomovehigher. Gold We alsohaveanegativeoutlookfor to high$60sperbarrel bytheendof2015/early2016. the markets.Assuch,weexpectoilpricestobeinmid support theamountofsupplygrowth required tobalance production. However, webelievecurrent oilpriceswillnot million barrels perdayin2015, necessitatingmore U.S. around 2.75%,oildemand shouldincrease byover1 Given ourviewonglobalGDPgrowth reaching arateof extreme outcomes. believe oilpricesare hoveringnearbottom,thoughboutsofvolatilitymayproduce hedges. We maintainaneutral stanceoncommoditiesbutare bearishongold.We - 0 0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0 . 5 Treasury Inflation-Protected Securities(TIPS) 5YR U. This ismarketimpliedexpectation forfive-yearrealyields,fiveyears into thefuture. Source: Bloombergasof31December2014 2 0 0 S. R 6 EAL YIELD, U.S. TIPSANDEUROPEANILBSOFFERATTRACTIVE OPPORTUNITIES 200 7 5YR 2 0 F 0 O 8 R W “OL gold prices ARD 2 0 0 9 D NEUTRAL in 2 0

REAL ASSETS 1 , 0 201 generally are nottakingintoaccounthowcore inflation (even asitgetsoff thezero bound).We believeinvestors gap andcontinuedmonetaryaccommodationbytheFed pessimistic: Itisunderpricingtheclosingofoutput decline inoilprices,webelievethemarketistoo negativeonayear-over-yearturn basisduetothesharp valuations. Althoughheadlineinflationin2015islikelyto in ourview. outperformance hasmovedvaluationsfrom cheap tofair, We are neutralinourexposure to attractive opportunitiestoday. along withinflation-linkedbondsinEurope, offer currently reflected intheTIPSmarket.Therefore TIPS, the next10yearswillaverageabove1.5%thatis bottom. Inparticular, itisquitelikelythatinflationover portion ofinflation,whichislikelytohave reached a remains steady, andtheyare toofocusedonthegoods and inparticulartheservicescomponentofinflation 1 ” 201 2 range for5y5y 201 Fair value real yield “ 3 N EW N

201

4 REITs EUT 201 as the2014 5 RAL” 201 6 Continuing strength inU.S.dollar countries. Nevertheless,twoEMcurrencies wecurrently dollar currencies, includingthoseofemerging market currencies. USDstrength willposeaheadwindtonon- our exposure toequities,weare veryselectivein In emergingmarketspace,justasweare very selectivein growth andalsosolidifyinflation expectations. primary toolbywhichtheseregions canboosteconomic weakening already. Thisdeclineintheircurrencies isa the U.S.dollarovercyclicalhorizondespitesignificant We expectboththeeuro andtheyentodeclineversus economic growth and–importantly ­ U.S. dollaroverweightversusotherG-10currencies asaresult ofdiverging On currencies, ourdominant cyclicalviewinmulti-assetportfoliosremains the U.S. TW MAJOR CURRENCY DOLLAR (MAR'73 =100) 105 115 65 75 85 95 Source: Bloombergdatathrough31December2014 Trade-weighted U.S.dollar 1993 1996 CONTINUING STRENGTHINU.S.DOLLAR 1999 – divergingcentralbankactions. CURRENCIES 2002 peso offers anattractiveentrypointasMexicoistheEM small netimporterofenergy. Therecent declineinthe Mexico’s oilproduction ishedgedand,infact,itavery market isoverreacting totheoilpricedecline.Mostof thepeso,webelieve from loweroilprices.With credible centralbank,declining inflationandnetbenefits case fortherupeeisstrong, givenattractivecarry, a favor are theIndianrupee and theMexicanpeso.The U.S. economy. country likelytobenefitthemostfrom inthe theupturn 2005 2008 2011

2014

2015 ASSET ALLOCATION OUTLOOK PAGE 13 2015 ASSET ALLOCATION OUTLOOK PAGE 14 Investors mayneedtobraceforachallengingyearfrom investors thisyear. volatile currencies allconfront andgeopoliticalconcerns policies inmajoreconomies,extremely lowoilprices, classes. Persistentlylowyields,divergentmonetary impact onriskandreturn potentialacross globalasset and marketdevelopmentsare likelytohaveaprofound an assetallocationperspective:Recentmacroeconomic various riskassetswilldeliver recession remainlow, weexpect As longastheoddsofa of riskassets business cyclethatissupportive We anticipateanextended positive in2015 and energy)willlikelyremain Core inflation(excludingfood the earlypartof2015 go intonegativereadingsin Headline inflationwilllikely into themarkets are nowlargelypriced Lower neutralpolicyrates countries andregions be highlydivergentacross We expectgrowthin2015to in 2014to2.75%2015 accelerate fromaround2.50% We expectglobalgrowthto attractive returns GENERAL THEMES MACRO THEMES

ASSET ALLOCATION BEST IDEASFOR2015 Europe, JapanandEMAsia overweight toglobalequities; We expecttomaintainan multi-asset portfolios moderate risk-onposturein Investors shouldconsidera important thanbold“betabets” asset classeswillbemore opportunities withinandacross Exploiting relativevalue Fed tighteningcycle as weapproachthestartof of increasedmarketvolatility There remainssignificantrisk of theUSD lead tofurther appreciation and divergentpolicyshould valuations, growthdifferentials Coincidence ofattractive attractive opportunities U.S. andEuropemayoffer Inflation-linked bondsinthe portfolio carry can offer diversifiedsourcesof credits whereattractivespreads Carefully surveyindividual in particular GENERAL THEMES,CONTINUED KEY OVERWEIGHTS IN2015 KEY TAKEAWAYS multi-asset portfoliosin2015. views andthemajorthemesweintendtoexpress in and returnobjectives.Here are highlightsofourmacro across regions andsectorsinaneffort toachieverisk beyond betaandlookingforrelative valueopportunities In assetallocationportfolios,thismeansreaching

could gethit countries andglobalgrowth hold inEurope,peripheral Not likely, butifdeflationtakes prices wouldposeakeyrisk A furthersharpdropinoil surrounding firstFedhike Watch forvolatility velocity ofmoneyandinflation bank balancesheets,the relationship betweencentral new understandingofthe correction giventhemarket’s Gold pricescouldseeasharp is likelytostarthiking continue toshrinkandtheFed in 2015,theoutputgapwill to growatarobust3.0%rate given theU.S.economyislikely Underweight U.S.duration KEY UNDERWEIGHTS IN2015 KEY RISKS

Quantitative Strategies Managing Director Bhansali,Ph.D. Vineer Real Return CIO, AssetAllocationand Mihir Worah, Ph.D. 20 YEARS:AVERAGE INDUSTRY EXPERIENCE PIMCO ASSESTALLOCATION INVESTMENTTEAM “ risk management whenconstructingrisk management multi-asset portfolios. up ideas. Finally, Icannot stress enoughourfocusondiversification and the asset allocationteamwiththemost compellingtop-down andbottom- analysts. Together thesebest-in-class investment professionalsprovide PIMCO’s deepbenchofspecialist andquantitative portfoliomanagers analysis acrossglobalasset classes. For tacticaltilts, wedraw upon decisions, PIMCO’s weleverage andriskfactor macroeconomicviews top-down andbottom-up investment process. For strategic allocation portfolios combinestrategic derived andtacticalviews throughour distinguish PIMCOasamulti-asset manager. Ourasset allocation Our investment process, togetherwithourdepth of resources, helps ­— MihirWorah

| CIOAssetAllocationandReal Return Strategies Managing Director Mohsen Fahmi Fixed IncomeandRelativeValue Managing Director Lorenzo Pagani

ASSET ALLOCATION TEAM Real AssetsandRelativeValue PresidentExecutive Vice Nicholas Johnson Risk Management Managing Director Bill DeLeon

” Global Macro andTactical Trading PresidentSenior Vice Rahul Devgon Analytics Managing Director Ravi Mattu

As of31December2014

2015 ASSET ALLOCATION OUTLOOK PAGE 15 Past performance is not a guarantee or a reliable indicator of future results. Performance results for certain charts and graphs may be limited by date ranges specified on those charts and graphs; different time periods may produce different results. Charts are provided for illustrative purposes and are not indicative of the past or future performance of any PIMCO product. All investments contain risk and may lose value. Investing in the is subject to risks, including market, , 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. Commodities contain heightened risk, including market, political, regulatory and natural conditions, and may not be suitable for all investors. 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. Currency rates may fluctuate significantly over short periods of time and may reduce the returns of a portfolio. Sovereign securities are generally backed by the issuing government. Obligations of U.S. government agencies and authorities are supported by varying degrees, but are generally not backed by the full faith of the U.S. government. Portfolios that invest in such securities are not guaranteed and will fluctuate in value.Inflation-linked bonds (ILBs)issued by a government are fixed income securities whose principal value is periodically adjusted according to the rate of inflation; ILBs decline in value when real interest rates rise. Treasury Inflation-Protected Securities (TIPS)are ILBs issued by the U.S. government. REITs are subject to risk, such as poor performance by the manager, adverse changes to tax laws or failure to qualify for tax-free pass-through of income. Mortgage- and asset-backed securities may be sensitive to changes in interest rates, subject to early repayment risk, and while generally supported by a government, government-agency or private guarantor, there is no assurance that the guarantor will meet its obligations. 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. 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 MSCI World Index is a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. The MSCI World Index consists of the following 24 developed market country indices: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, the United Kingdom, and the United States. The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance of emerging markets. The MSCI Emerging Markets Index consists of the following 21 emerging market country indices: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey. The S&P 500 Index is an unmanaged market index generally considered representative of the as a whole. The index focuses on the Large-Cap segment of the U.S. equities market. The EURO STOXX 50 Index, Europe’s leading blue-chip index for the Eurozone, provides a blue-chip representation of supersector leaders in the Eurozone. The index covers 50 stocks from 12 Eurozone countries. The Nikkei Stock Average is an index of 225 leading stocks traded on the Tokyo Stock Exchange. Similar to the Dow Jones Industrial Average, it is composed of representative “blue chip” companies (termed first-section companies in Japan) and is a price-weighted index, whereby the movement of each stock, in yen or dollars respectively, is weighed equally regardless of its market capitalization. The MSCI China Index is a market capitalization weighted index composed that was originally designed as a benchmark representing People’s Republic of China (PRC) companies that are freely available only to non-PRC domestic investors. The Index is free-float adjusted, calculated in Hong Kong dollars and published in real time. The index is made up primarily of H-shares and red chips trading in Hong Kong and selected B-shares. The MSCI Korea Index is designed to measure the performance of the large and mid cap segments of the South Korean market. With 106 constituents, the index covers about 85% of the Korean equity universe. The MSCI India Index is a market capitalization weighted index composed of approximately 70 issues, and is generally representative of the market structure of India. The index is calculated separately; without dividends, with gross dividends reinvested and estimated tax withheld, and with gross dividends reinvested, in both U.S. Dollars and local currency. The MSCI Taiwan Index is a free-float adjusted market capitalization weighted index that is designed to track the equity market performance of Taiwanese securities listed on Taiwan Stock Exchange and GreTai Securities Market. The MSCI Taiwan Total Return Index takes into account both price performance and income from dividend payments. The MSCI Taiwan Index is constructed based on the MSCI Global Investable Market Indexes Methodology, targeting a free-float market capitalization coverage of 85%. It is not possible to invest directly in an unmanaged index. This material contains the opinions of the manager and such opinions are subject to change without notice. This material has been Newport Beach Headquarters distributed for informational purposes only. Forecasts, estimates and certain information contained herein are based upon 650 Newport Center Drive proprietary research and should not be considered as investment advice or a recommendation of any particular security, strategy or Newport Beach, CA 92660 investment product. 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They are not available to individual investors, who should not rely on this communication. | PIMCO Asia Pte Ltd (501 Munich Orchard Road #09-03, Wheelock Place, Singapore 238880, Registration No. 199804652K) is regulated by the Monetary Authority of Singapore as a holder of a capital markets services licence and an exempt financial adviser. The asset management services and investment products are not available to persons where provision of such services and products is unauthorised. | PIMCO Asia New York Limited (Suite 2201, 22nd Floor, Two International Finance Centre, No. 8 Finance Street, Central, Hong Kong) is licensed by the Securities and Futures Commission for Types 1, 4 and 9 regulated activities under the Securities and Futures Ordinance. 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Valuations of assets will fluctuate based upon prices of securities and values of Tokyo transactions in the portfolio, market conditions, interest rates, and credit risk, among others. Investments in foreign currency denominated assets will be affected by foreign exchange rates. There is no guarantee that the principal amount of the investment will be preserved, or that a certain return will be realized; the investment could suffer a loss. All profits and losses incur Toronto to the investor. The amounts, maximum amounts and calculation methodologies of each type of fee and expense and their total amounts will vary depending on the , the status of investment performance, period of management and Zurich outstanding balance of assets and thus such fees and expenses cannot be set forth herein. | PIMCO Canada Corp. (199 Bay Street, Suite 2050, Commerce Court Station, P.O. Box 363, Toronto, ON, M5L 1G2) services and products may only be available in certain provinces or territories of Canada and only through dealers authorized for that purpose. | PIMCO Latin America Edifício .com Internacional Rio Praia do Flamengo, 154 1o andar, Rio de Janeiro – RJ Brasil 22210-906. | 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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