!mk_emerging_markets investment workshop series: “the expanding credit universe – avoiding black...

!mk_Emerging_Markets

Investment Workshop Series:

“The Expanding Credit Universe – Avoiding Black Holes and Supernovas”

August 2004

2

Mark T. Hudoff

Mr. Hudoff is an Executive Vice President and portfolio manager. Mr. Hudoff joined the firm in 1996, previously having been associated with Bank Credit Analyst Research Group where he worked as a fixed income strategist. He also has been associated with International City Managers Association, Quantitative Risk Management Group and Martin Marietta Corporation as a financial analyst. He has 16 years of investment experience and holds a bachelor’s degree in economics from Arizona State University, and an MBA in finance from the University of Chicago School of Business.

Curtis A. Mewbourne

Mr. Mewbourne is an Executive Vice President, portfolio manager and a senior member of PIMCO’s portfolio management and strategy groups. He is an Emerging Market and Investment Grade Credit specialist. He joined the firm in 1999, having spent the previous seven years trading fixed income securities at Salomon Brothers and Lehman Brothers. Mr. Mewbourne has 12 years of investment experience, and holds a degree in Computer Science Engineering from the University of Pennsylvania.

Charles Wyman

Mr. Wyman is an Executive Vice President and head of global credit research. Mr. Wyman joined the firm in 2001 from Morgan Stanley, where he was a principal and the senior telecom analyst in high yield. He previously covered the energy sector in high yield at Morgan Stanley and was ranked second in Institutional Investor's annual poll for 1999 and 2000. Prior to Morgan Stanley, Mr. Wyman spent ten years at Lehman Brothers in mergers and acquisitions, corporate finance, and equity capital markets, and as an analyst for oil exploration and production companies. He has 18 years of investment experience and holds a bachelor’s degree from Harvard University and an MBA from Harvard Business School.

.

Presenters

3

Agenda

Credit Research Process

Global Credit

Global High Yield

4

Credit Research Objectives

Identify and communicate investment actions that generate measurable excess return through specific investments made or investments avoided.

Identify, quantify, and manage credit risk in specialist and generalist portfolios.

5

Credit Research Functions

Objective Description Measurement

Review of new issues and new idea generation

Avoidance of defaults

Credit monitoring

Avoid black holes

Monitor issuer performance with written responses to earnings reports & headline events

Regular company visits and meetings with management

New issue calendar dictates pace of review

Every addition to the portfolio requires note from the analyst

Cooperative effort between PM‘s & analysts

Quantitative performance of recommendations

Qualitative review of responsiveness to PM requests and clarity of recommendations

Tracked and included in year-end evaluation

Focus on accountability, investment performance, and productivity.

Model portfolio alpha Analyst prepare quarterly model portfolios for their sectors with recommendations for sector weightings, issuer weights, and security selection

Quantitative measurement of productivity by number of notes written

Qualitative review of note content and clarity

Alpha generated versus benchmark

6

Coverage universe represents roughly €3 trillion of corporate assets: 2/3 U.S., 1/3 Europe; 80% investment grade, 20% high yield.

Pimco has rated over 40% of issuers in the coverage universe, which accounts for 60% of market value and 66% of risk dollars.

Coverage Universe($millions except for issuer data, € at 31-Mar-04)

1. Risk dollars = (bond exposure x beta corp)/ (beta corp for total holdings)

2. 7% of issuers in the universe have both USD and Euro issues outstanding.

Lehman investment grade

corporates

Merrill Lynch high yield master

Merrill Lynch euro investment

grade corporates

Merrill Lynch euro 3% high

yield corporates total

Market Value $1,241,234 $404,564 $912,626 $58,872 $2,617,296

Risk Dollars $1,455,273 $958,153 $495,793 $89,244 $2,998,463

Parent Issuers 621 909 393 134 1,914

Market Value 47% 15% 35% 2% 100%Risk Dollars 49% 32% 17% 3% 100%

Parent Issuers2.

32% 47% 21% 7% 107%

1.

Source: PIMCO, Lehman & Merrill Lynch index data

Coverage Universe

7

Green Light

PIMCO’s Internal Rating System

Fundamental Credit Analysis

Criteria Rating System

Positive

Implications for Analysts

Investigate & communicate the firmwide risk position in the credit

Estimate recovery rates

Close monitoring of up/downgrade potential

Ongoing reviewInitial warning if exposures

become too large

No bond may be purchased for client portfolios prior to research from our credit analysts

Credit selection a two-stage process

Fundamental analysis Relative value

Credit opinions include five elements

Independent credit rating (BBB, BB, etc.)

View on company outlook (positive, neutral, negative)

Risk rating (red, yellow, green)

Analysis of relative value Buy/sell recommendation

Color system used to assess credit risk, not relative value

Goal: Select the best credits and avoid defaults

credit_phil_06 red green light

Red Light

presence of significant current or prospective risk

viability of the issuer as a going concern in serious question

Yellow Light

risk relative to rating is stable to improving or where any credit deterioration is unlikely to have any significant impact on price

8

Issuer and Security Selection

Start with the definition of credit: what is credit?

Credit is the risk associated with an issuer’s ability to repay obligations as they come due.

Credit is not asset coverage, credit is not relative value, but both play an important role in the analysis of credit.

Risk profile of credit differs markedly from other fixed income asset classes

Linkages between credit risk and broad macroeconomic trends are indirect and complex

Granularity of different types of credit risk is high and the relationships between those risks are complex and unpredictable

Risk at the level of individual credits is virtually unhedgable

9


Principals of Credit Analysis

Articulate assumptions that support our judgments on which outcomes are most likely for an individual credit.

Marry granular analysis of individual credit with broader secular industry view to develop investment action.

Seek credits with the strongest foundations of balance sheet, cash flow, management, and industry position.

Three tests for an investment recommendation

Does the investment thesis make sense?

Do we as an investor have an edge and what is that edge?

Can we control our risk through collateral value and structure?

10


Credit_phil_16a

Key Factors in Credit Selection

Identify and prioritize by relevance the 4-5 factors tha determine success of an investment.

Factors are different for every credit, every industry, and every phase of the industry cycle.

Business Model

• Strength & profitability of competitive position

• Pace of technological innovation

• Access of capital through the cycle

• Return on assets

• Management track record and accessibility

• Transparency of financial reports

Cash Flow

• Size

• Stability

• Visibility

• Growth

Balance Sheet

Leverage

Liquidity

Financial flexibility

Asset coverage

Structure

• Seniority

• Covenants

11

Issuer and Security Selection: balance sheet

Source: PIMCO, Company reports

(Є millions)

Net Assets 30-Jun-03 Net Capital 30-Jun-03

Accounts Receivables 17,405 31%

Inventories 636 1%Accrued income and prepaid expenses 1,891 3%

Accounts payables (5,436) (10%)

Other payables (7,427) (13%) Short-term debt 4,378 8%Accrued expenses and deferred income (2,344) (4%) Current portion of LT debt 2,969 5%

Advances (454) (1%) Due to banks 6,857 12%

non financial working capital 4,271 8% Debentures 25,970 46%

Convertible debentures 5,677 10%

PPE, net 18,737 33% Cash and Cash Equivalents (5,957) (11%)

Investments 2,864 5% ST Financial Assets (3,430) (6%)

Intangible assets 6,511 12% net debt 36,464 64%

Goodwill 31,666 56%

Other 4 0% Minority interests 4,098 7%Reserves (7,473) (13%) Shareholders' equity 16,018 28%

Net Assets 56,580 100% Net Capital 56,580 100%

Analysis of Telecom Italia Net Balance Sheet

PIMCO may or may not own the securities referenced and, if such securities are owned, no representation is being made that such securities will continue to be held.

12

Sep-98 Sep-99 Sep-00 Dec-00 Mar-01EBITDA Electronics 969 1,213 2,918 935 1,030

Telecommunications 297 356 589 108 101Healthcare & Specialty Products 703 1,614 1,762 489 513Fire & Security Services 863 1,268 1,470 480 477Financial Services -Flow Control Products 560 709 834 reclassified

19% 20% 21%subtotal 3,392 5,160 7,574 2,012 2,121

General & Administrative Expense (49.4) (114.9) (179.9) (54.8) (25.3)Interest Income 62.6 61.5 75.2 - -EBITDA $3,405 $5,106 $7,469 $1,957 $2,096

0.3Cash Interest (251) (509) (814) (168) (227) Cash Taxes (346) (210) (455) (332.2) (478.8) Other (55) 37 41 87.6 322.5 Working Capital (272) (7) 263 (630) (93)Capital Expenditures, net (5,646) (5,844) (6,938) (3,214) (3,355)Capital Stock Issuance 1,310 235 601 (442) (344)Dividends (303) (188) (86) (22) (22)Debt assumed in acquisitions (260) (1,629) (244) (1,358) (257)Acquisition adjustments & other 843 (902) (227) 59 124Free Cash Flow (1,822) (4,178) (1,374) (4,062) (2,235)

- - - - - Net Debt 4,183 8,360 9,734 13,797 16,032


Analysis of Tyco Cash Flow

($millions)

Issuer and Security Selection: cash flow

PIMCO may or may not own the securities referenced and, if such securities are owned, `no representation is being made that such securities will continue to be held.

13


Issuer and Security Selection: comparable security analysis

cvg

Analysis of Dynegy Inc. Relative Value

2002

ebit ebitda cfo/ debt/company rating issue EBV debt ebit ebitda lev debt cap px ytw oas

TXU Energy Baa2/BBB 7% Sr. Nts. '13 3,829 4,863 1,171 1,600 3.92x 3.0x 17.7% 56% 103.88 6.46% 249

IPALCO (AES) Ba1/BB- 7.625% Sr Nts '11 52 1,392 299 411 3.11x 3.4x 15.4% 96% 104.50 6.92% 323

Williams Cos Caa1/B 8.125% Sr Nts '12 5,049 12,979 790 1,565 0.64x 8.3x (4.2%) 72% 95.63 9.59% 573

Dynegy Inc. Caa2/CCC+ 8.75% Sr Nts '12 2,590 6,681 531 1,096 1.16x 6.1x 9.0% 72% 83.00 11.91% 818

Calpine Corp. B1/B+ 8.5% Sr Nts '11 3,851 14,099 781 1,241 1.89x 11.4x 7.6% 79% 65.63 16.47% 1,296

Mirant Caa2/BB 8.3% Sr Nts '11 5,231 9,569 1,085 1,450 2.50x 6.6x 9.4% 65% 55.63 19.43% 1,585

NRG Corp. Ca/CC 7.75% Sr Nts '11 2,237 9,176 570 840 0.92x 10.9x 6.0% 80% 37.63 23.00% 1,814

Dynegy 2003E pro forma new bank line

credit Market 16-Apr-03

($millions)


14

Analysis of Invensys plc Collateral Value


ltm 30-sep 03EBITDA low high low high

Process Systems £51 7.8x 8.8x £400 £450Eurotherm 22 8.0x 9.1x 175 200 APV 41 7.9x 9.1x 325 375 Rail Systems 64 11.7x 13.3x 750 850 Climate Controls 92 7.9x 9.0x 725 825 Appliance Controls 76 6.9x 7.9x 525 600 Powerware & LHB 23 5.4x 6.5x 125 150

subtotal 369 £3,025 £3,450

add/deduct Pensions (786) (786)Tax (126) (126)Litigation/environmental (111) (111)Factoring (180) (180)Minority Interests, Earnouts (225) (225)Escrow 586 586Cash 489 489

Enterprise Value 2,672 3,097

low highdebt Term A 184% 214% (350) (350)

Term B 184% 214% (450) (450)Revolving Credit Facility 184% 214% (250) (250)Bonding Facility 184% 214% (400) (400)2nd Lien Facility 815% 1098% (150) (150)Senior Notes 165% 230% (650) (650)

total debt (2,250) (2,250)Equity Value £422 £847

multiple net value

coverage

(million sterling)


Issuer and Security Selection: asset valuation

15

Agenda


Global Credit

Global High Yield

16

Global_credit_orga_01a

Benefits of PIMCO’s Global Credit Process

Our global resources and expertise – portfolio managers and research

Unique credit philosophy, multiple sources of added value in portfolio construction

Consistent outperformance – with a focus on risk-adjusted returns

Global resources, multiple sources of alpha, and risk controls lead to consistency of performance

17

Global Credit Portfolio ManagementDrawing on Regional Expertise

Defines global themes

Serves as risk regulator

Portfolio construction and monitoring

Global Credit Portfolio Management Team

Hinman/Kiesel/Mewbourne

Global Credit Portfolio Management Team

Hinman/Kiesel/Mewbourne

Focus on credits within region/sector

Handle local execution

Monitor daily credit developments

Global_credit_orga_02

U.S.U.S. AustraliaAustralia Asia Asia U.K.U.K. Sovereign & Supranationals

Sovereign & Supranationals

KieselBentley Masanao

Continental Europe

Continental Europe

Mariappa / El-Erian

Mead PalghatLead Portfolio Manager:

EmergingMarket

EmergingMarket High YieldHigh Yield

El-Erian Kennedy

18

Credit Analysts U.S. 14 U.K. 2 Germany (dit)* 5 Australia 1Credit Analysts U.S. 14 U.K. 2 Germany (dit)* 5 Australia 1

Global Credit Research Team Organizational Structure

* Deutscher Investment-Trust Gesellschaft für Wertpapieranlagen mbH1 Adam Borneleit covers emerging market corporates with the support of the industry specialists in addition to gaming, lodging, broadcasting as the primary analyst.

Global_HY_Orga_01

Charles WymanExecutive Vice President

Director of Global Credit Research

Oversees global credit research effort

Charles WymanExecutive Vice President

Director of Global Credit Research

Oversees global credit research effort

UtilitiesUtilities

Elissa JohnsonMurphy McCann

Tim ShalerSofia RamosBob Sahota

Elissa JohnsonMurphy McCann

Tim ShalerSofia RamosBob Sahota

EnergyEnergy

Juergen DahlhoffDonna Riley


FinancialsFinancials

Michael Chang Greg Gore Brian Kim

Rolando RodriguesBob Sahota

Ivor Schucking

Michael Chang Greg Gore Brian Kim

Rolando RodriguesBob Sahota

Ivor Schucking

IndustrialsIndustrials

David AndrewsMichael Chang Juergen DahlhoffElissa Johnson

Bob Sahota

David AndrewsMichael Chang Juergen DahlhoffElissa Johnson

Bob Sahota

Consumer Non-CyclicalConsumer Non-Cyclical

Greg GoreBrian Kim

Murphy McCannMonika Nemeth

Rolando RodriguesMarion Scherzinger

Greg GoreBrian Kim

Murphy McCannMonika Nemeth


CommunicationsCommunications

Adam Borneleit1

Cyrille ConseilGreg GoreBrian Kim

Richard MakDhruv MallickChristian Wild

Adam Borneleit1

Cyrille ConseilGreg GoreBrian Kim

Richard MakDhruv MallickChristian Wild

AutoAuto

David AndrewsMichael ChangDavid AndrewsMichael Chang

WorkoutsWorkouts

David BehennaCharles WymanDavid BehennaCharles Wyman

Ivor SchuckingSenior Vice President

Director of European Credit Research

Oversees European researchReports to Director of Global Credit Research

Ivor SchuckingSenior Vice President

Director of European Credit Research

Oversees European researchReports to Director of Global Credit Research

Basic IndustryBasic Industry

Monika NemethElissa Johnson


Monika NemethElissa Johnson


Consumer CyclicalConsumer Cyclical

Adam Borneleit1.

Dhruv MallickGreg GoreBrian Kim


Adam Borneleit1.

Dhruv MallickGreg GoreBrian Kim


19

Portfolio Managers and Credit Research Interaction

Daily Weekly Quarterly

Daily credit market e-mails

Informal discussion of market conditions and company news

Global credit team meetings

Determine research priorities

Review portfolio construction issues relative to client guidelines and objectives

Portfolio strategy meetings

Investment committee input

Review of model portfolio

Establish broad portfolio targets for maximizing return relative to risk

Construction and distribution of GIGC model portfolio

Global credit phil 05

The importance of good and timely communication

20

alpha

Credit SelectionCredit Selection

PIMCO’s Alpha Generation Process

global_credit_phil_06

Bottom-up research

Onsite visits

Financial modeling and forecasts

Investment Committee

PIMCO’s Risk Controls

Cyclical / Secular Forum

Active trading

Other credit markets:

– European High Yield

– Bank Loans

– High Grade

– Convertibles

– Emerging Markets

RelativeValue

RelativeValue

PortfolioConstruction

PortfolioConstruction

21

BB / Crossover-Corporates,

EM, Sovereigns

Bank Loans, Convertible

Bonds, Asset-Backed and Credit Derivatives

Middle Tier Corporates/Sovereigns

Upper Tier Corporates/Sovereigns/Agencies

Higher Yielding Sectors

Modest exposure in a diversified fashion

Non-traditional instruments/sectors

Use tactically (relative value) versus comparably rated corporates/sovereigns

Middle tier

Improving credit fundamentals with compelling a structure and good yields

Core holdings

Strong credit profiles

Liquid instruments

Global Investment Grade Credit Portfolio Construction


Our focus is on upper and middle tier – most clients permit us to use, tactically, other areas of the credit spectrum

22

Portfolio Construction Taps Multiple Sources of Added Value

Diversified industry and issuer exposure constitute the core risk position

Only moderate risk is taken ineach area

No one or two positions will drive overall portfolio returns


Duration/CurveDuration/Curve

QualityQuality

SectorSector

IndustryIndustry

Top Down Strategies

IndustryIndustry

IssuerIssuer

Capital StructureCapital Structure

Bottom Up Strategies

Legal & CovenantLegal & Covenant

0.88

0.78

36.02%

30.12%

A

BBB

0.93

0.93

19.71%

14.75%

AAA

AA

Correlation with

Quality US Treasuries % of Index

US

Credit

23

Investment Grade Corporate Fundamentals

Positives Negatives/Risks

Accommodative monetary policy has improved economic fundamentals

Risk appetite has been high, reducing risk premium demanded by investors, driving prices higher

Foreign demand for US corporate bonds has been high

Corporate default rates have fallen to historical lows after the highs of 2002 and corporate earnings have been meeting or exceeding expectations

Corporate bond supply has been muted given focus of companies to strengthen balance sheets and reduce debt – capital spending has also been subdued

Current valuations of corporate bonds have factored in most of the positives with current yields in certain sectors not compensating for risk taken

Whilst corporates have done much to strengthen balance sheets, leverage remains high

Corporate credit spreads set to underperform in a rising interest rate environment due to corporates maintaining higher leverage

24

Stru_1270_01

Duration

– US: Under

– Euroland: Over

– UK: Neutral

– Asia: Under

Sector

– Underweight Mortgages

– Underweight Corporates

– Overweight International

– Overweight Emerging Markets

Quality

– AA / A

*Average weighted as of May 31, 2004.The structure of the portfolio is subject to change.The credit quality of the investment in the portfolio does not apply to the stability or safety of the fund.

% Index

Sector Quality % DWE

27 Mortgage Securities (GNMA, FNMA, FHLMC)

AAA 18

48 Corporates AA / A 32

- Governments/Swaps AAA 40

20 Agencies AAA 1

1 High Yield BB .5

2.5 Emerging Markets BB 4

.5 Munis AAA 1

1 Net Cash A1+ 3.5

100% AA+ 100

How Would We Construct A Global Credit Portfolio Today?

25

Agenda


Global Credit

Global High Yield

26

High Yield Experience

Firm History and Assets

PIMCO High Yield Background

Founded in 1971

Formed PIMCO Advisors in 1994

Majority interest acquired by Allianz in 2000

Global high yield portfolio management team in Newport Beach, London, and Munich (Deutscher Investment-Trust Gesellschaft für Wertpapieranlagen mbH) with extensive experience

22 dedicated credit research analysts

As of June 30, 2004

Assets

Fixed Income $367.0 B

High Yield Mandates* 16.4 B

Equity 24.9 B

Total $391.9 B

Past performance is no guarantee of future results.*Does not include CDO business assets.

high_yield_asst_09d

27

High_yield_products_aum

PIMCO’s High Yield Product Breadth

* Based on strategic mandates.

Ray KennedyHead of High Yield Products

Ray KennedyHead of High Yield Products

As of June 30, 2004

Mark HudoffPortfolio Manager


Charles WymanDirector of Credit Research

Charles WymanDirector of Credit Research

Ray KennedyPortfolio Manager


Jason RosiakTrader

Jason WilliamsAssistant Trader

Yuri GarbuzovPortfolio Manager

Axel PotthofPortfolio Manager

Alex StrucAssistant Trader

U.S. High Yield$ 16.2 B*

U.S. High Yield$ 16.2 B*

Euro High Yield$ 1.25 B*

Euro High Yield$ 1.25 B*



Alex StrucAssistant Trader

Global High Yield$ 0.5 B*

Global High Yield$ 0.5 B*

High Yield MandatesHigh Yield Mandates

Jason Rosiak Portfolio Manager

Greg Miller Trader

Bob BoydAssistant Trader

Bank Debt$ 5.1B*

Bank Debt$ 5.1B*

Mark Hudoff Portfolio Manager


Convertibles $ 0.2 B*

Convertibles $ 0.2 B*

Specialty ProductsSpecialty Products

David Andrews

David BehennaWorkout Consultant

Adam Borneleit

Michael Chang

Cyrille Conseil

Greg Gore

Brian Kim

Richard Mak

Dhruv Mallik

Murphy McCann

Monika Nemeth

Donna Riley

Tim Shaler

Ivor SchuckingDirector of European Credit Research

Jurgen Dahlhoff

Elissa Johnson

Sofia Ramos

Rolando Rodrigues

Marion Scherzinger

Christian Wild

Bob Sahota

U.S. Credit Team European Credit Team

Australia/Asia Credit Team

Craig Dawson

Nicolette Beyer

Product Management

Charles WymanDirector of Global Credit Research

28

Global_HY_phil_01

Benefits of PIMCO’s Global High Yield Process

Focus on risk adjusted returns

Credit selection process that emphasizes credit fundamentals, but which incorporates PIMCO’s macro views

Extensive experience in credit analysis and portfolio management

– Ray Kennedy has more than 17 years experience in credit research and portfolio management*

– Mark Hudoff has more than15 years experience in credit research and portfolio management, including 4 years of experience focused exclusively on European high yield *

– Global research team in the U.S. Europe and Asia with 24 analysts

Resources and experience to migrate among multiple sectors

High yield track record

– Consistent outperformance relative to the benchmark of the broad high yield universe

– Low tracking error / high information ratio

Focus on risk controls and processes that help to limit downside risk and reduce volatility

Unparalleled global platform

* Years of experience include firms other than PIMCO.

29

Global_HY_Review_11

Global High Yield Outpaces U.S. & Non-U.S. Equity In Performance Per Risk

Over the long run, high yield provides attractive risk-reward versus most asset classes

Globalization of the high yield market should reinforce these results

Diversification does not ensure against loss.

S&P 500S&P/BARRA 500 Value

Wilshire 5000

S&P/BARRA500 Grow th

MSCI EAFE

LB AAA Corp

ML Mortgage

ML Corp

U.S. IT Govt

U.S. LT Govt

U.S. 30 day T-Bill

U.S. Inflation

0

3

6

9

12

15

0 3 6 9 12 15 18 21 24

Standard Deviation of Return (%)*

Annualiz

ed R

etu

rn (

%)

Annualized Returns Versus Volatility of Return (1982-2003)

High Yield Bonds(182 bps Outperformance)

30

Global_HY_review_09a

Global High Yield Has a Low Long-term Correlation With Other Asset Classes

SOURCE: Merrill Lynch & Co., J.P. Morgan, Morgan Stanley, Lehman BrothersPast performance is no guarantee of future results. The chart does not reflect any PIMCO product.

Global High Yield

U.S. Stocks

Non-U.S.

StocksMortgages

Global Bonds

Global Investment

GradeGlobal High Yield 1.00U.S. Stocks 0.48 1.00Non-U.S. Stocks 0.33 0.66 1.00Mortgages 0.22 0.13 -0.03 1.00Global Bonds 0.14 0.06 -0.11 0.78 1.00Global Investment Grade 0.38 0.22 -0.02 0.87 0.86 1.00

Issuance of Non-U.S. Countries

0

5

10

15

20

25

1998 1999 2000 2001 2002 2003

Perc

enta

ge (

%) Non-U.S. High Yield

issuance is the fastest growing segment of the Global High Yield market

Global High Yield provides compelling correlation advantage when combined with other asset classes

31

Upper Tier Spreads Are More-Than-Compensating Investors for Defaults

The “breakeven spread over treasuries” is the spread needed to offset a given level of default losses*

Actual spreads** over treasuries have exceeded breakeven levels on average over the entire period

Higher quality segments, within high yield, offer the most compelling risk versus reward

Global_HY_Review_14UPDATE ANNUALLY (Hinman updates)

SOURCE: Moody's Investors Service, Salomon Smith Barney and PIMCO.

* Breakeven spread = 1 + average 10-Yr. Treasury YTM 1 - (average price – recovery rate) (default rate) + (average coupon x 0.5) (default rate)

Assumed Recovery Rate = 35%

** Average month-end absolute spread over 10-Year Treasury according to Salomon Smith Barney.

Past performance is no guarantee of future results.

(1 + average 10-Yr. Treasury YTM)-

As of June 30, 20041985-2004* PIMCO Default Study

167

569540

96

14

341

0

200

400

600

800

Baa Ba B

Basi

s Poin

ts

Breakeven Annual Spread over Treasuries

10-Year Average Spread

32

Qualitative Improvements in European High Yield Markets

Global_HY_Review_07

Bankruptcy regimes have matured and been preliminarily tested in most countries

Structural subordination have been reduced through industry moves to improve unsecured creditor positions

Transparency has improved as issuers provided investors with more information and maintained ratings

Cross-border M&A has yet to develop, but we’ve seen a strong surge in solid industrial and other first time issuers that adds to diversity and depth of market

However, European high yield remains too heavily concentrated on a stand-alone basis.

As such, we like the global high yield alternative.Sector Percentage

Weight

Capital Goods 17.4%

Consumer Cyclicals 15.2%

Basic Industries 12.9%

Technology & Electronics 12.0%

As of June 30, 2004

SOURCE: Merrill LynchINDEX: Merrill Lynch European Currency High Yield Index (HP00)

Issuer Percentage Weight in

Broad Index

FIAT 10.2%

AHOLD 5.8%

ALCATEL 5.4%

ERICSSON 4.2%

33

high_yield_phil_01

PIMCO’s High Yield Philosophy – “Buy the Best High Yield Bonds”

The credit quality of a particular security or group of securities does not ensure the stability or safety of the overall portfolio.Strategy subject to change without notice. Diversification does not ensure against loss.

Bottom-up credit research incorporating top-down economic framework

Broad opportunity set resulting from expertise in all global credit fixed income sectors

Core high yield approach with a total return orientation

Upper tier quality focus

Limit risk through issuer and sector diversification

34

high_yield_phil_07

PIMCO Operates in a Unique Market Niche

Upper / Middle tier of the high yield market

Higher quality than typical high yield manager

Result: Better risk / return trade off potential

Investment GradeFocus is Here

Investment GradeFocus is Here

BBB BB B

Junior Subordinated

Senior Secured

IssueRating

Capital Structure

PIMCO Operates Here

Most High Yield Managers Operate Here

1January 1986 – June 2004. The chart does not reflect any PIMCO product.2Return per unit of volatility is calculated by dividing annualized return by annualized monthly volatility of return.

*Upper / middle tier is a market weighted blend that is rebalanced annually.

Past performance is no guarantee of future results. SOURCE: Credit Suisse First Boston Corporation, Salomon Smith Barney, PIMCO.As defined by CSFB, Upper Tier includes split BBB, BB and split BB; Middle Tier includes B and split B; Lower Tier includes B-, CCC, split CCC and defaulted as rated by Moody's and/or S&P. The S&P 500 Index is an unmanaged index of U.S. companies with market capitalizations in excess of $4 billion. It is generally representative of the U.S. stock market.The credit quality of a particular security or group of securities does not ensure the stability or safety of the overall portfolio.Strategy subject to change without notice. Diversification does not ensure against loss.

Rating TierAnnualized

Return (%)(1)

Return per Unit of Volatility(2)

Correlation with 10-Yr Treasury

Returns

Correlation with S&P 500

Upper/Middle Tiers (BB and B)*

11.0% 1.79% 0.16 0.50

Lower Tier (B- and below) 3.6% 0.30% -0.06 0.38

35

PIMCO’s High Yield Portfolio Construction Process

Global_HY_Phil_03

The credit quality of a particular security or group of securities does not ensure the stability or safety of the overall portfolio.

5-15%

25-35%

50-70%

Goal: Enhance return with less volatility

Out of Sector

Strategies

Core Holdings

Tactical Overweights

Emerging MarketsBank LoansConvertibles

Attractively priced, improving credits with 0.5%-2.5% overweight

Stable credits with neutral to modest overweight

36

2cs_HY_outlook_01

Outlook - Yield Will Be The Primary Driver of Returns For Remainder of 2004

Neutral – Market technicals likely to remain supportive

Neutral – Intermediate maturities offer best value with less treasury risk

Positive – Continuing to improve

+ Continued slowdown in fallen angels and a peak in default rates

+ Modest economic growth driven by fiscal and monetary stimulus

+ Emphasis on improving corporate balance sheets and raising liquidity

+ / – M & A activity is resulting in increased event risk

FundamentalsFundamentals

ValuationValuation

+ / – Spreads are wider than 2004 tights, but yields are still near historical low levels

+ Middle and lower quality tiers offer less treasury rate sensitivity

TechnicalTechnical

+ / – Mutual fund outflows likely to slow; Institutional flows have been slightly positive

+ / – Refinancing cycle has slowed down with treasury sell-off

Appendix

38

Current Global Credit Sector Views

sector aggregate industry % dur$ yield oas oas dur beta cp rating strategy Credits

consumer consumer cyclical 12.0% 5.4% 146 5.7 10.3 BAA+ Market weight autos given recent spread compression - balance sheet improvements (+ve) vs. earnings pressures (-ve)

Prefer GM to Ford. Take advantage of CDS market which trades wider than cash market.

consumer non-cyclical 8.9% 4.9% 84 6.3 7.3 A- Underweight. Within sector focus on Tobacco, Supermarkets and Healthcare.

Buy lower rated supermarkets such as Kroger and Albertsons

financial banking 13.7% 4.3% 67 4.5 4.4 A+ Underweight. Decent fundamentals more than offset by rich valuations.

Overweight higher quality names such as Citigroup, BoA and Wells Fargo

brokerage 6.9% 4.6% 83 5.2 5.6 A Underweight in brokers due to rich valuations; otherwise, Marketweight due to stable

GS, BRK

finance companies 4.5% 4.3% 69 4.8 5.7 AA Underweight

insurance 3.5% 4.9% 91 6.1 6.8 A Underweight Life P&C. Valuations are rich for Life and fair for P&C.

industrial basic industry 3.4% 5.1% 97 6.4 8.4 BAA+ Market weight Paper which has improving fundamentals and attractive valuations. Underweight Chemicals.

Overweight Weyerhauser. Underweight commodity chemicals such as Dow.

capital goods 4.8% 4.8% 80 6.1 7.6 BAA+ Marketweight stable industrials such as Environmental Services and underweight interest rate sensitive sectors such as Home Builders

Overweight out of index bet on Tyco and D.R. Horton.

lehman credit index

39

Current Global Credit Sector Views

sector aggregate industry % dur$ yield oas oas dur beta cp rating strategy Credits

industrial communications 11.8% 5.3% 122 6.5 11.5 BAA+ Overweight high beta telecom and cable/media. Underweight low beta wirelines.

Overweight Sprint, Newscorp and Comcast. Underwieght BLS, SBC.

energy 5.0% 5.2% 92 7.3 9.4 BAA+ Underweight E&P, Integrated Oils, Oil Field Services and Refining due to rich valuations.

COP, KMG, AHC

technology 1.6% 4.7% 84 5.8 6.6 A- Underweight due to rich valuations. Underweight HP. IBM. MOT.

transportation 2.3% 5.5% 126 7.0 10.0 BAA+ Slight overweight on airlines and underweight on rails.

Focus on A class tranches of EETC for stronger carriers such as AMR and CAL. Underweight DAL due to headline risk.

non corp credit non-corporate 13.9% 4.4% 65 5.3 5.0 AA-

utilities natural gas 2.0% 5.2% 107 6.4 9.1 BAA+

utilities 5.6% 5.0% 93 6.2 8.9 BAA+ Overweight. Focus on pipelines, operating companies, nuclear deals, crossovers and improving low BBBs.

NRUC, EP, WMB

Grand Total 100.0% 4.8% 91 5.7 7.3 A

lehman credit index

40

Sample Credit Write-up

credit_phil_25

41

Sample Risk Reports

global_credit_phil_07

42

External Research Supplements Internal Research

credit_phil_23



Short Sellers Views: Behind the NumbersShort Sellers Views: Behind the Numbers

Qualitative Models:KMV/Moody’s Risk Metric

Qualitative Models:KMV/Moody’s Risk Metric

Industry Experts:J.S. Herold

Industry Experts:J.S. Herold

Independent Credit Shops:KDP and CreditSights

Independent Credit Shops:KDP and CreditSights

Industry Publications & Associations: Modern Healthcare, Chemical

Week, EEI

Industry Publications & Associations: Modern Healthcare, Chemical

Week, EEI

Web Based Tools:Multex

Web Based Tools:Multex

43

Risk Monitoring Tools and Approach

credit_phil_24

Spreads/Yields vs.

Index

Spreads/Yields vs.

Index

Industry Overexposure & Underexposure

Industry Overexposure & Underexposure

Worst Performers

Worst Performers

IssuerOverexposure & Underexposure

IssuerOverexposure & Underexposure

Quality vs. Index

Quality vs. Index

Duration OutliersDuration Outliers

Risk Control Goals

-Actively monitor credit bets-Reduce volatility & tracking error

-Reduce account dispersion

Risk Control Goals

-Actively monitor credit bets-Reduce volatility & tracking error

-Reduce account dispersion

!mk_emerging_markets investment workshop series: “the expanding credit universe – avoiding black...

Documents

investment performance

years of investment

investment actions

credit risk

portfolio manager

head of global credit

harvard university

executive vice president