PIMCO Alternatives Commodities

PIMCO

Investment Style: Enhanced Commodities

Pacific Investment Management Company (PIMCO) was established in 1971 as a subsidiary of Pacific Mutual Life Insurance Company, headquartered in Newport Beach, California.

German financial services company Allianz purchased a 70.0 percent stake in PIMCO in May 2000, Pacific Life and some senior PIMCO staff retaining the remaining interest.  Allianz is repurchasing these equity interests over time, and owned 98.0 percent of PIMCO at 31 December 2008, although operates PIMCO as an autonomous subsidiary.

PIMCO's structured product invests in a basket of global commodities (by an index return swap) collateralised with a basket of cash and short-term interest rate securities. By design, the strategy provides exposure to both global commodities and PIMCO's active interest rate management capabilities.

PIMCO believes that commodity assets are highly-correlated to movements in inflation, and that exposure to commodity assets provides a natural hedge against those inflationary effects. The house also believes that one of the most efficient and effective means of gaining exposure to a diversified basket of commodities is by investing in an index return swap contract, collateralised in the case of this product by a basket of cash and short-term interest rate securities of less than one year duration. PIMCO asserts that this is equivalent to a ‘buy and hold' strategy of a range of commodity assets. Commodity returns are enhanced by actively managing the collateral supporting the derivatives position through a range of collateral management strategies.

PIMCO enters into a total return index swap. In accordance with the swap, PIMCO fully-collateralises the contract with a portfolio of cash and short-term interest rate securities of less than one year duration. The underlying commodity index itself assumes a fully-collateralised investment into exchange-traded futures contracts over what is considered a basket of true commodities.

The investment process at PIMCO commences at a high level with an annual secular/cyclical forum to determine a global view on trends in the major economies, focusing on major economic indicators, capital flows, trade flows, and the likely impact on monetary policy (i.e. direction of interest rates). All of PIMCO's senior investment personnel participate in the process, the resultant views forming the basis for all of PIMCO's duration, country, yield curve, sector, and currency positioning across all of its portfolios.

PIMCO has a large and well-resourced global team. Mihir Worah is the lead portfolio manager of this structured product.