Alternative Investments for Wealth Management Portfolios

FEATURED SOLUTION Alternative Investments for Wealth Management Portfolios

AUTHORS High net worth and mass-affluent investors are increasingly allocating to alternative investment strategies in order to enhance returns, manage risk and diversify portfolios. We see several factors driving

Barbara Clancy, CFA this trend across wealth management portfolios, Executive Vice President including the desire for alternative sources of return at Head of Business Management and Strategy, U.S. Global this late stage in the economic cycle and the Wealth Management expectation that future returns are likely to be lower across traditional asset classes.

Two additional, yet critical, developments are also driving the interest in alternatives: technological innovations that are increasing investor access to alternative investment strategies and greater sponsorship by asset managers of less liquid, registered investment companies (RICs).

Jason Mandinach TECHNOLOGICAL INNOVATIONS Executive Vice President A host of financial technology (fintech) platforms have evolved in recent years that greatly Alternatives Credit Strategist reduce the operational challenges and the minimum investment amounts historically associated with alternative strategies housed in private vehicles. These platforms have greatly streamlined the subscription process, mainly through less onerous, paperless documentation and electronic signatures, and helped drive down minimum initial investment requirements to levels that cater to a wider array of individual investors. Fintech platforms have also made it easier for certain qualified investors to access alternative investment strategies in private vehicles. PIMCO has recently formed a partnership with fintech firm Artivest to deliver technology and feeder fund solutions to wealth management advisors. 2 February 2018 Featured Solution

GREATER SPONSORSHIP OF LESS LIQUID RICS 3. Greater downside risk management – Certain alternative strategies have the flexibility to implement market-neutral or Investors who may not be eligible to invest in private funds have short positions across many financial markets, providing the historically had limited access to alternative investment potential for explicit downside protection. strategies. This is now changing for two main reasons. First, investment managers are sponsoring more registered closed-end 4. Expanded opportunity set – Alternative investment strategies investment companies, such as interval funds or tender offer can allocate across both public and private markets, providing funds, which can hold a greater amount of illiquid investments exposure to a wide variety of asset classes that are not accessed than open-end mutual funds. In addition, mass-affluent to a significant extent via more traditional vehicles. investors are showing greater willingness to sacrifice liquidity in 5. Better liquidity matching – Even as investors have moved exchange for higher return potential. out on the risk spectrum in recent years to generate returns, While these types of RICs do not offer the same degree of many wealth management investors have kept nearly all of investment freedom as many private placement vehicles, we their investments in daily or intra-day liquid vehicles. At believe they can dramatically expand the investment PIMCO, we believe many wealth management portfolios are opportunity set into less liquid markets and address many key now invested in far more liquid vehicles and assets than operational hurdles for wealth management investors – by investors’ needs dictate. By providing exposure to an offering generally lower minimum initial investments than expanded investment opportunity set, RICs with alternative private funds, 1099 tax treatment and a purchase experience investment strategies can offer investors the opportunity to that can be similar to that of a mutual fund.1 put some of this excess liquidity to work.

WHY ARE THESE DEVELOPMENTS IMPORTANT? BOTTOM LINE

Wealth management investors today face significant investment We have seen a significant change in the mindset of wealth challenges posed by historically low interest rates and high management investors: Many are showing a greater willingness valuations in equities and other publicly traded risk assets. We to sacrifice liquidity in the search for potentially higher current believe alternative strategies offered through fintech platforms yields, more attractive risk-adjusted returns and flexibility to or RICs can help wealth management clients meet multiple protect against the downside. PIMCO is finding attractive investment needs. opportunities in complex and less liquid credit markets, as many wealth management investors are seeking access to 1. Elevated income potential – Given current low interest rates alternative strategies either as de-risking tools for equity and credit yield spreads, certain alternative investment exposure or yield- (and sometimes risk-) enhancement tools strategies have the potential to help enhance income in relative to traditional credit allocations. wealth management portfolios beyond what traditional beta sources typically generate. We believe that the combination of investors’ long-term return needs, the current backdrop in financial markets, and 2. Lower correlations – Greater ability to implement hedges technological and product innovation will be powerful forces and focus on less trafficked, more complex markets can shaping alternative allocations across wealth management provide investors with potentially attractive risk-adjusted portfolios over the coming years. At PIMCO, we are excited to returns and relatively low correlations to traditional stock be delivering strategies that combine our portfolio management and bond markets. expertise in alternative investments with the financial technology of Artivest in highly user-friendly formats.2 To learn more, please contact your account manager.

1 Interval funds may offer daily subscriptions similar to a mutual fund. However, it is important to note that an investment in an interval fund [and tender offer funds] should be considered an illiquid investment, given these funds’ limited liquidity (e.g., periodic repurchases of a targeted percentage of an interval fund’s outstanding shares, and periodic tender offers in the case of tender offer funds). 2 Artivest and PIMCO are not affiliated. Past performance is not a guarantee or a reliable indicator of future results. All investments contain risk and Newport Beach Headquarters may lose value. Alternatives strategies involve a high degree of risk and prospective investors are advised that these 650 Newport Center Drive strategies are suitable only for persons of adequate financial means who have no need for liquidity with respect to their Newport Beach, CA 92660 investment and who can bear the economic risk, including the possible complete loss, of their investment. The strategies may +1 949.720.6000 be leveraged and may engage in speculative investment practices that may increase the risk of investment loss. An alternative strategy’s fees and expenses may offset its trading profits. A substantial portion of the trades executed for certain strategies may be in non-U.S. securities and take place on non-U.S. exchanges. Certain strategies may invest in non-publicly traded securities which may be subject to illiquidity risk. Hong Kong There is no secondary market for private fund and unlisted closed-end “interval” fund shares, and none is expected to develop. There is no guarantee that an investor will be able to redeem or tender all or any of their shares in a periodic repurchase or London tender offer. Performance could be volatile; an investor could lose all or a substantial amount of their investment. Investing in debt or the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and Milan 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 Munich generally fall as interest rates rise, and the current low interest rate environment increases this risk. Equity investments may decline in value due to both real and perceived general market, economic and industry conditions Entering into short sales New York includes the potential for loss of more money than the actual cost of the investment, and the risk that the third party to the short sale may fail to honor its contract terms, causing a loss to the portfolio. Management risk is the risk that the Rio de Janeiro investment techniques and risk analyses applied by PIMCO will not produce the desired results, and that certain policies or developments may affect the investment techniques available to PIMCO in connection with managing a strategy. Investors Singapore should consult their investment professional prior to making an investment decision. Sydney Statements concerning financial market trends or portfolio strategies are based on current market conditions, which will fluctuate. Outlook and strategies are subject to change without notice. Strategy availability may be limited to certain Tokyo investment vehicles; not all investment vehicles may be available to all investors. Please contact your PIMCO representative for more information. Toronto This material contains the current opinions of the manager and such opinions are subject to change without notice. Statements contained in this material may constitute forward-looking statements. These statements may involve a number of Zurich risks, uncertainties and other factors that could cause actual results to differ materially, including the performance of financial markets, the investment performance of PIMCO’s sponsored investment products, general economic conditions, competitive conditions and government regulations, including changes in tax laws. Further, such forward-looking statements speak only on the date at which such statements are made. PIMCO undertakes no obligation to update any forward-looking pimco.com statements to reflect events or circumstances after the date of such statement. blog.pimco.com 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. Pacific Investment Management Company LLC (“PIMCO”), 650 Newport Center Drive, Newport Beach, CA 92660, is regulated by the United States Securities and Exchange Commission. PIMCO Investments LLC (“PI”), a U.S. broker-dealer registered with the U.S. Securities and Exchange Commission, serves as the principal underwriter for the U.S. registered PIMCO Funds (“Funds”) and placement agent for the PIMCO-sponsored private funds (the “Private Funds”). PIMCO is a trademark of Allianz Asset Management of America L.P. in the United States and throughout the world. ©2018, PIMCO

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