Q:  What is the history of the fund? A : The PIMCO Investment Grade Corporate Bond Fund was launched on April 28, 2000, and I have been managing the fund since its inception. The fund is actively managed to maximize total return potential while minimizing any increase in risk relative to the market benchmark. Q:  What core beliefs guide your investment philosophy? A : Our philosophy is based on finding the best opportunities globally in investment grade corporate bonds of companies that are either experiencing healthy and sustained growth or are likely to see debt rating revisions (e.g. credit upgrades). We use a three-step top down approach to find investments and build our portfolio. The first step in the process is to find the best opportunities at a country level, before selecting the best companies in each nation or region. In general, we scout for opportunities around the globe based on our estimate of the economic outlook. Then, the second step involves our rigorous bottom-up research at an individual company and security level. To this end, we travel the world to meet with companies in the United States, Europe and Russia, India and China, as well as other nations throughout Asia, and Brazil in Latin America. We believe that having face-to-face meetings with executive managements, regulators and competitors provide insights into the dynamics of the countries, economies and companies that are generally not available through reports. Thus, the unique perspective we gain by combing our world view with local field knowledge prepares us with the data and the confidence that we need to be able to make an informed decision when an investment opportunity arises. Personally, I travel to many countries for company visits with management teams, but I also encourage my co-workers to participate in these meetings too. What we are invariably looking for is a company with growth, irreplaceable assets or market position, where either the fundamentals are set to improve, or for whatever reason bondholders are going to be favored over equity holders. Finally, the third step in the process is organized around our objective to find bonds, Credit Default Swaps or derivatives, where we leverage our global organization. Having 43 portfolio managers and traders around the globe guarantees us exceptional access to global markets, where we can add or reduce our positions virtually round the clock. After all, an investor might be able to find a good opportunity, but one needs proper global infrastructure to consistently build positions in these securities. Q:  How do you transform your philosophy into an investment strategy? A : The fund combines our global top-down views on the macroeconomic environment with proprietary local bottom-up analysis of credit quality and market factors by our credit analysts. From an investment strategy standpoint, we favor growth, which means we give preference to companies that are growing worldwide regardless of whether they are in the U.S. or in emerging markets, as long as the companies have strong credit profiles and upward momentum in fundamentals. In terms of industries, we have been favoring industries with hard assets - irreplaceable assets like pipelines that transport oil and natural gas, and energy companies which are growing rapidly. Also, we have focused on gambling companies exposed to the growth in Asia, and especially in Macau, China. Since gaming is a limited license market, the companies that have access to these licenses in Macau stand to prosper. Additionally, we are focused on U.S. banks, mainly because regulators are trying to make these companies safer even though the higher capitalization is occurring at the expense of equity holders. However, as far as bonds of these banks are concerned they are likely to strengthen as banks add more capital to their balance sheets. We also like rising stars such as credits that today may be high yield or below investment grade but likely to move to investment grade due to favorable conditions. As a rule, we follow companies for a long time and we gather deep knowledge about their business, industry and competition before we invest in them. This long-term perspective together with the frequent contacts with management over a period of time help us identify candidates experiencing better credit fundamentals that will lead to upgrades. Q:  What is your research process? A : The research process involves face-to-face meetings with companies and, of course, an extensive amount of traveling. In effect, we are constantly meeting with CEOs and CFOs of some of the largest companies in the world, and that is precisely where we get our information edge over the competition by meeting with all levels of management and doing on-the-ground inspections and credit reviews. As part of this extensive research process we are constantly hiring research analysts worldwide. For example, in China we have offices in Hong Kong, where we hire local professionals with degrees from top universities and a track record of following the local market from 5 to 15 years. Whenever we go on a trip, we always take people with proficiency in the language and in-depth knowledge of the local market. Once we start inspecting the assets, we get information in a very detailed fashion, not just from the CEOs and CFOs, but all the way down the line in terms of doing on-site analysis. We like to talk to a company’s competitors, customers, regulators, monetary policy officials and government officials, so these trips are absolutely essential to build the pieces that we need to thoroughly understand an industry and a company. Last but not least, our trips to these companies help us access bonds for clients. In some cases we have controlling stakes in companies where we own a significant amount of the issuance of a particular bond. That again is a major competitive advantage for us. Q:  How do you justify the name of your fund? A : The Investment Grade Corporate Bond Fund is a portfolio consisting primarily of high quality corporate bonds diversified broadly across industries, issuers, and regions. We have to have 80% of our assets in corporate bonds, and from time to time we will run higher or lower exposure. We are allowed to own treasuries, mortgages, municipal bonds and high yield bonds but we are anchored primarily in high grade corporate bonds around the world. Presently, we happen to be in a risk-off mode, which means that we are expecting the turmoil from Europe to affect risk assets, and therefore, owning treasuries has not been such a bad thing because many corporate bonds can trade with a very high beta to treasuries. We are actively managing that beta or the market volatility. The beta is essentially the overall credit risk to the index and right now we have been reducing risk. Q:  How do you build your portfolio? A : Although the fund may have up to 300 to 400 individual securities, we typically try to concentrate in about 80 to 120 names where we have overweights. Overall, this is a fairly diversified portfolio. A significant overweight versus the index would be a 75 basis point overweight. There may only be 10 or 15 securities with an overweight in the fund in excess of 75 basis points. At present, we are not taking a significant duration position. We are only slightly overweight versus the index, which reflects our view that, as a whole, rates have come down quite a bit. We are overweight in Australia, Brazil and Mexico in terms of duration. Again, the fund is less about duration and more about picking the right companies and overweighting the right credits at the right time. For example, we are currently overweight in emerging market corporate bonds mainly in Brazil and Russia. We also like energy (oil focused) companies that are domiciled in Texas as well as in North Dakota. This illustrates how the overall industry overweights have been significantly scaled back. A year ago, we were overweight banks about 8% to 10%. Right now, our overweight in banks is only about 3%. Further, the fund is very much underweight in Europe. That is primarily because we are taking more of a macro view on Europe right now and we are trying to avoid exposure to the region. As the 10-year Treasury yield is at 1.5% and our fund is yielding 5.25%, we actually offer investors a very compelling prospect, particularly when we consider the fact that the fund has a track record of adding historically between 2% and 3% of excess returns on top of the benchmark. And we have been consistently outperforming the benchmark for a decade. Q:  What is your buy-and-sell strategy? A : We have reduced exposure this year to some cyclical companies particularly in the resource sector. Since our top-down view was that the economies in China and Asia would be slowing, that caused us to identify certain metals and mining companies as well as more natural gas-oriented energy companies. It was a call based on our macro-economic view and in partnership with analysts, because we were seeking to avoid or reduce our exposures to weaker credits that were at risk of being downgraded or simply lacking the high margins to be able to sustain the ratings. That helped us significantly in getting out of some of that cyclical risk because spreads of yields of weaker bonds to better quality bonds have been widening, with the weaker bonds falling in price more sharply than the bonds of higher quality. All in all, our buy decisions center on where we have the highest conviction and the information advantage, where we feel the market is mispriced and where the next rising star is coming from. Currently, our buy decisions are centered on energy and pipeline assets that are basically mission-critical, or special assets like U.S. banks where we think the regulators are making a particular bank safer. The key is in defining where the growth is coming from, whether it is sustainable and the company is having an irreplaceable asset or market position, and, finally, if we are getting paid enough for this risk. Ultimately, it is the step-by-step process that determines our buy-and-sell discipline. Q:  What kinds of risk do you perceive and how do you manage them? A : Our approach to risk breaks down into duration, curve, and sector, out of index risk, the overall beta or corporate spread duration to the benchmark. What differentiates PIMCO is that every quarter we have very tight bands for all of the funds that we manage. As a result, portfolio managers are required to be within those bands and within a certain range on duration, curve, and corporate spread. This is how the fund is consistent with all portfolios at PIMCO. It is important to get the macro view right in terms of our top-down approach in being overweight or underweight against interest rates or credit risk. Once the parameters are set, my job is to operate accordingly and pick the companies with the team of 87 traders and credit analysts around the globe to align the fund within those risk parameters. This is carefully monitored by our risk desk, and if any one of us gets out of line, we are immediately warned. In addition to all the day-to-day correspondence through e-mails and face-to-face communication, once a week, we sit down with corporate portfolio managers and credit analysts for an hour and a half to go through the portfolio, allowing the entire team to offer their input. For example, if an analyst wants to increase or decrease a credit, they have the opportunity to make the case to change positioning. Also, if a portfolio manager or a trader who reports to me feels that we should be doing a swap, we will certainly take that into consideration too.