PIMCO Global Advantage Inflation-Linked Bond Index Profile

8/13/2019 PIMCO Global Advantage Inflation-Linked Bond Index Profile

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Your Global Investment Authority

Index Profile

PIMCO Global AdvantageInflation-Linked Bond IndexPIMCO Global AdvantageInflation-Linked Bond Index


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The PIMCO Global Advantage Inflation-Linked Bond Index (GLADI ILB) is

an inflation-linked global government bond benchmark. Launched in March

2011, GLADI ILB is part of the PIMCO Global Advantage Index family that

was first introduced in 2009 and is designed to better capture fixed income

investment opportunities in a rapidly changing world. Intended to offer

investors an improved benchmark for global inflation-linked bond beta,

GLADI ILB provides a building block for portfolios with the potential for highe

risk-adjusted returns.

A New Approach to Global

Inflation-Linked Bond IndexingThe global economy is in the midst of dramatic transformations that challengethe ability of traditional investment approaches to generate sustainable

returns while also managing risks. Profound changes crucial to the global ILB

market include the divergence in monetary policies and inflation regimes

across regions, an explosion of public debt levels in industrialized countries,

and a structural shift in consumption patterns in developing countries.

Traditional global inflation-linked bond indexes by virtue of their market

capitalization weighting methodology are beholden to ILB issuance

patterns around the world, and turn a blind eye to desirable factors for

investing in global inflation-linked bonds. As concerns about sovereigncreditworthiness become increasingly critical to asset allocation, and as

growth patterns and inflation realities diverge across regions, there is greater

urgency for an alternative to traditional indexing approaches.

Through its unique construction methodology, GLADI ILB recognizes the

need for investors to better position their global inflation-linked bond portfolios

within this evolving global environment. Several core features distinguish GLADI

ILB from traditional global inflation-linked bond indexes, including:

an innovative GDP-weighting methodologythat is designed to avoid

the disadvantages of tradit ional indexes based solely on market

capitalization weighting

a continuum in coverage from developed to emerging markets,

capturing the fuller set of global investment-grade opportunities and

avoiding a bias in weighting toward developed markets

a global beta that evolves with the worlds economic structure, providing

broad exposure to a diversified basket of global currencies, especially

currencies of creditor countries in the emerging world


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INDEX PROFILE | PIMCO GLOBAL ADVANTAGE ILB BOND INDEX 3

Advantages of GDP WeightingGLADI ILB weights constituent countries based on gross domestic product

(GDP) as an alternative to the market capitalization weights used by most

existing global inflation-linked bond indexes. GDP weighting offers

a number of relative potential benefits:

1. Better alignment of investors bond exposures with countries

capacity to pay:Traditional ILB indexes use a market capitalization

weighting approach which aligns the investors country exposure with

the arbitrary metric of national ILB issuance. By contrast, GLADI ILBs

GDP-weighted approach bases country allocation on national income

(GDP), which should better reflect the capacity to repay debt.

2. More comprehensive inflation protection:GLADI ILBs GDP-weighted

methodology gives investors exposure to countries based on their global

economic significance. This includes exposure to leading developing

economies, where inflation rates tend to be higher and more sensitive to

key inflation drivers such as commodity prices. In addition, the GLADI ILB

GDP-weighted approach incorporates a broader currency allocation

concentrated in countries that are a greater contributor to global

growth. This may enhance overall inflation protection by capturing the

opportunities that exist in the worlds most dynamic economies. By

embedding a concept of where capital markets will be in the future rather than where they have been in the past GLADI ILB helps investors

position their portfolios to reap potential first-mover benefits.

3. Favoring higher real yielding economies:GLADI ILBs GDP-weighted

methodology emphasizes countries that contribute a larger share of

global GDP, favoring higher growth countries over comparably sized

lower growth countries. In addition, the inclusion of emerging market

inflation-linked bonds may contribute to an elevated overall real yield,

as these countries tend to exhibit higher growth rates with additional

risk premium requirements. As emerging markets continue to develop,

real yield convergence toward developed market levels represents thepotential for further total return opportunities.

GLADI ILB recognizes

the need for investorsto better position their

global infl ation-linked

bond portfolios

within this evolving

global environment.


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4 PIMCO GLOBAL ADVANTAGE ILB BOND INDEX | INDEX PROFILE

MethodologyThe construction of GLADI ILB follows three steps as illustrated in Figure 1:

(1) regional weightsare assigned based upon the relative GDP share of

the respective major regions in the global economy, (2) country weightsare

assigned to eligible markets that issue ILBs, have a minimum investment-

grade rating, provide sufficient liquidity, and adhere to additional

investability considerations, (3) security selectionis guided by a set of rules

designed to ensure that the index is investable and can be replicated in a

portfolio of liquid securities, rather than illiquid instruments that are only

theoretically investable.

Step 1. Regional weights

The regional classification distinguishes the major economic regions listed in

Figure 2, with the weight of each region in GLADI ILB determined by its

respective share of global GDP. GDP shares are calculated as the simple

average of each regions share of global GDP for the previous five years,

measured in nominal U.S. dollars at market exchange rates. The GDP data

comes from the International Monetary Fund.

GDP weights are revised annually, with the new weights becoming effective

on October 31 of each year. Figure 2 displays the current regional target

weights for GLADI ILB, based on the annual review that became effective on

31 October 2012.

Figure 1: Three Steps in ConstructingGLADI ILB

ILB Selection Designed for Replicability

& InvestabilitynEligibility Criteria

Minimum Issue Size

Fixed rate bonds linked to the country or regions consumer price index

Greater than one year maturity

Major Regions Weighted by Share of Global GDP

nUnited States 23.5%

nEurozone 20.8%

nJapan 8.3%

nOther Industrialized Countries 11.4%

nEmerging Markets 36.0%

STEP 1: Assign regional weightsbygross domestic product

STEP 2: Assign country weightsbased onILB issuance, credit and liquidity screens

STEP 3: Complete security selectioneligibility criteria

Country Weights Based on the ProportionalShare of GDP in Major Regions

nILB Issuing Countries

nCredit Screens

Investment grade credit rating ofthe country

nLiquidity Screen

Inclusion of countries with linker markets that have reached $7 billion USD equivalent

Source: BofA Merrill Lynch.

Data values as of 10/31/12.

The data shown above for the PIMCO Global Advantage

Inflation-Linked Bond Index is based on the target-weightsconsistent with the GDP weights of each region shown. The

index rebalances to these target-weights on a quarterly basis

(January, April, July, October) and the intra-quarter weights

may vary slightly from the targets shown. The target GDPweightings are updated annually based on each regions

average GDP contribution over the past five years.

Figure 2: Regional Weights Based on Share of Global GDP

Region Target Weights

United States 23.5%

Eurozone1 20.8%

Japan 8.3%

Other Industrialized Countries2 11.4%

Emerging Markets3 36.0%

1Includes all members of Europes Economic and Monetary Union (EMU), which have adopted the

euro as the national currency.2Includes Australia, Canada, Denmark, New Zealand, Norway, Sweden, Switzerland and the U.K.3Emerging Markets covers any markets not included in other categories.

Source: BofA Merrill Lynch. Data values as of 10/31/2012.


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Step 2. Country eligibility and weights

Within multi-country regions such as Eurozone, other industrialized countries

and emerging markets, individual countries are further weighted by their

share of GDP in each region. To help ensure high quality and investability of

the index, countries need to meet a series of eligibility criteria to be included:

Size of inflation-linked bond market.Eligible countries must have an

inflation-linked bond market that exceeds the local currency equivalent

of $7 billion USD.

Credit quality.Eligible countries must be investment grade (BBB- or

higher). The average rating from Moodys, S&P and Fitch is considered

when available. Countries downgraded to below investment grade are

removed from the index upon monthly reconstitution. Investability.The market needs to be investable, i.e. markets with

significant capital controls and access restrictions or lack of liquidity are

not eligible for the index.

The list of currently qualifying countries and their respective weights are

illustrated in Figure 3.

Figure 3: GLADI ILB Index Region and Country Weights

Intra-Region Sub-Weights

United States 23.5%

Eurozone 20.8%France 32.4%

Germany 41.4%

Italy 26.2%

Japan 8.3%

Other Industrialized Countries 11.4%

Australia 20.3%

Canada 27.0%

Sweden 8.4%

United Kingdom 44.3%

Emerging Markets 36.0%

Brazil 51.0%

Chile 5.5%

Israel 5.7%

Mexico 28.9%

South Africa 8.9%

*Components may not sum up to aggregate due to rounding.

Source: BofA Merrill Lynch. Data values as of 10/31/2012.

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6 PIMCO GLOBAL ADVANTAGE ILB BOND INDEX | INDEX PROFILE

Step 3. Security selection

Once a country is determined eligible for inclusion in GLADI ILB, security

eligibility screens within each country are applied to maximize the

replicability and investability of the index.

Eligibility criteria

There are three eligibility criteria that define the universe of instruments.

Securities that become ineligible upon monthly reconstitution are excluded

from the index.

Instrument type.Only fixed-rate, non-callable central government debt

qualifies. Index inclusion is limited to bonds with a bullet redemption

structure whose principal and coupons are linked to the local countryor regions consumer price index.

Remaining maturity.All government bonds must have at least

12 months remaining until maturity.

Minimum par amount outstanding.Eligible instruments must have

a current par amount outstanding greater than or equal to a minimum

amount that differs by local currency.

Index Attributes

The index methodology described above produces an index that is broadlydiversified across regions, currencies and maturities. Key attributes of GLADI

ILB and its sub-indexes are presented in the accompanying figures. Figures 4

through 6 show index data as of 30 April 2013.


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INDEX PROFILE | PIMCO GLOBAL ADVANTAGE ILB BOND INDEX 7

BBB37%

AA20%

AAA38%

A4%

1-3 Years16%

5-7 Years10%7-10 Years

18%

15 + Years26%

10-15 Years11%

3-5 Years19%

Japan yen8%

Mexican peso10%

Euro,21%

Israeli shekel2%

Brazilian real18%

Australian dollar2%

U.S. dollar24%

Canadian dChilean pe

South African rand 3%Swedish krona 1%

British pound 5%

Figure 4:GLADI ILB Credit Quality Exposure* (%)

Displayed values are rounded



Figure 5:GLADI ILB Maturity Exposure* (%)

Figure 6:GLADI ILB Currency Exposure* (%)

Reweighting and RebalancingTarget regional weights for GLADI ILB will be revised in an annual review,

with the new weights becoming effective on 31 October of each year. On

occasion, the target country weights may also be changed at the monthly

update to reflect the most up-to-date set of eligible countries following

sovereign credit downgrades and upgrades.

On a daily basis, the actual country weights of GLADI ILB will deviate from

their target weights, reflecting changes in the prices of the underlying

instruments in the index, inflation accruals and fluctuations in the local

currency value relative to the U.S. dollar. On a quarterly basis (31 October,

31 January, 30 April, 31 July), GLADI ILB will be rebalanced to restore theactual country weights to their targeted levels. On a monthly basis, countries

that no longer meet eligibility requirements will be removed and securities

within each eligible country will be added and removed at month-end

according to the GLADI ILB eligibility criteria.

Index Administration and DataGLADI ILB will be administered and calculated independently from PIMCO

by BofA Merrill Lynch, an unaffiliated leading global index provider. BofA

Merrill Lynch will be responsible for the ongoing application of the index

methodology, identification of index constituents and all other technical

matters connected to the calculation and provision of index data.

Additional information and access to data can be found at:

www.pimcoindex.com.

For more information, please email [email protected]

*Also known as Global Advantage Inflation-Linked Bond Index.

Source (Figures 4 through 6): BofA Merrill Lynch.Data values as of 4/30/2013.

Figure 7: GLADI ILB Rebalancing Schedule

Review of Target Weights Annually

Rebalancing to Target Weights Quarterly

Country and Security Selection Update Monthly


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Past performance is not a guarantee or a reliable indicator of future results.Back-testing and other statistical analysismaterial that is provided in connection with the explanation of the mechanics and/or potential yield of GLADI Inflation-LinkedBond Index or a GLADI Inflation-Linked Bond sub-indexes use simulated analysis and hypothetical circumstances to estimatehow the index or sub-index may have performed prior to its actual existence for the period shown. No representation is beingmade that any investment will achieve results similar to those shown. The information provided is not intended for tradingpurposes, and should not be considered investment advice. Yield and other information are derived from data provided byBofA Merrill Lynch. While PIMCO believes the data to be accurate, no warranty is given regarding the accuracy of the data.The performance shown does not include transaction costs, fees of any kind, or any other costs which could have materiallyreduced the performance shown. GLADI INFLATION-LINKED BOND Index IS AN INDEX AND YOU CANNOT INVEST DIRECTLYIN GLADI INFLATION-LINKED BOND OR ANY SUB-INDEX. The Quality ratings of ind ividual issues/issuers are provided toindicate the credit worthiness of such issues/issuer and generally range from AAA, Aaa, or AAA (highest) to D, C, or D(lowest) for S&P, Moodys, and Fitch respectively. There is no guarantee that these investment strategies will work under allmarket conditions and each investor should evaluate their ability to invest long-term, especially during periods of downturnin the market.

The Use of Third Party Information: GLADI Inflation-Linked Bond relies on information from an unaffiliated third partyprovider, BofA Merrill Lynch. PIMCO does not make any warranty or representation as to the accuracy and/or completenessof that information and takes no responsibility for the impact of any inaccuracy of such data.

The PIMCO Global Advantage Inflation-Linked Bond Index represents the global bond market for inflation-linked governmentdebt encompassing both developed and emerging markets. The index adheres to the principals of the PIMCO Global

Advantage Indices when applicable to the global inflation-linked bond market. It is not possible to invest directly in anunmanaged index.

This material contains the current opinions of PIMCO and such opinions are subject to change without notice. This materialhas been distributed for informational purposes only and should not be considered as investment advice or arecommendation of any particular security, strategy, or investment product. Information contained herein has been obtainedfrom sources believed to be reliable, but not guaranteed. No part of this material may be reproduced in any form, or referredto in any other publication, without express written permission.

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PIMCO Global Advantage Inflation-Linked Bond Index Profile