PIMCO Commodity Real Return Strategy Fund

Fund Overview

Management at PIMCO Commodity Real Return Strategy fund employs a two-fold strategy. To provide for real returns, which factor in inflation, management invests in high-quality bonds—mostly Treasury inflation-protected securities, or TIPS—and commodity futures to gain exposure to a broad range of holdings in the commodity markets without directly investing in tangible commodities.

As of February 03, 2012, the fund has assets totaling $22.21 billion. Its portfolio consists primarily of investments in commodity futures and TIPS.

The fund is unlike a typical fund that invests in physical commodities, and its returns will not mirror those of funds that are actually invested in the commodities market. "We're investing in commodities futures," says manager Mihir Worah. During the financial downturn, the fund performed better than funds that hold stocks of commodity producers, but it wasn't able to outperform its benchmark because of its relatively large share of fixed-income holdings. The same TIPS-heavy fixed-income portfolio that slowed the fund's returns during the downturn outperformed its benchmark (the Dow Jones-UBS Commodity Index) by more than 20 percent in 2009. Since then, the fund has cooled off quite a bit, but its streak of outperformance has nonetheless continued. The fund has returned -5.51 percent over the past year and 19.36 percent over the past three years.

Since management uses derivatives to gain commodities exposure, there is room left over for investments in fixed-income holdings like TIPS, according to Morningstar. Investors seeking a purely commodity-focused strategy should look elsewhere because of the fund's dual investment strategies. "We call it the double real fund because it has two levels of inflation protection—one from the commodities and the second from the TIPS," Worah says. Morningstar notes that exchange-traded funds focused on commodities can also present cheaper alternatives. The fund has returned 2.95 percent over the past five years.

Investment Strategy

The fund's prospectus says, "The fund seeks to achieve its investment objective by investing under normal circumstances in commodity-linked derivative instruments backed by a portfolio of inflation-indexed securities and other fixed-income instruments." The fund is classified as nondiversified, which allows management to invest in a smaller number of options than a typical diversified fund, according to the fund's prospectus.

Role in Portfolio

Morningstar assigns the fund a "specialty" role in portfolio.

Management

Mihir Worah became lead manager for the fund in 2008, replacing John Brynjolfsson, who had run the fund since its 2002 inception.

In the annual Lipper/Barron's Fund Families Survey for 2010, PIMCO/Allianz Funds ranks 22 out of 57 fund families surveyed.

2011-04-07

Performance

The fund has returned -5.51 percent over the past year, 19.36 percent over the past three years, and 2.95 percent over the past five years.

Hypothetical Growth of $10,000

Updated 01.31.2012

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Holdings

According to the prospectus, "The fund invests in commodity-linked derivative instruments, including commodity index-linked notes, swap agreements, commodity options, futures and options on futures, which provide exposure to the investment returns of the commodities market, without investing directly in physical commodities." The fund's prospectus also allows management to invest "up to 10 percent of its total assets in high-yield securities," "up to 30 percent of its total assets in securities denominated in foreign currencies," and "up to 10 percent of its total assets in securities and instruments that are economically tied to emerging market countries."

Asset Allocation

	% Long	% Short	% Net
Cash	61.95	104.63	-42.68
Stocks	0.0	0.0	0.0
Bonds	98.55	0.0	98.55
Other	20.13	0.2	19.92
Foreign Bonds	24.54	0.55	23.98
Foreign Stocks	0.08	0.0	0.08
Convertible	0.0	0.0	0.0
Preferred	0.14	0.0	0.14

Updated 09.30.2011

Top Holdings

Performance as of 01.31.2012

Portfolio as of 09.30.2011

	% Net Assets
Pimco Cayman Cmdty Fd Ltd Instl	13.21
US Treasury Note 1.25%	10.34
US Treasury Note 2.625%	7.13
US Treasury Note 2%	6.95
US Treasury Note 1.875%	6.57

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Fees

PIMCO Commodity Real Return Strategy Fund has an expense ratio of 1.24 percent.

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Risk

The fund is unique in that it doesn't invest directly in commodities and its TIPS portfolio makes for added interest-rate risk for investors, according to Morningstar.

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