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Roger O. Nieves, CFA

Mr. Nieves is a Vice President and account manager, with a focus on institutional client servicing. He joined the firm in 2001. Previously, Mr. Nieves was a manager of financial analysis at Nissan Motor Corporation and a summer associate at Goldman Sachs. Mr. Nieves holds a bachelor’s degree in economics from the University of California, Irvine, an MBA from Washington University, St. Louis and a master’s degree from the Kennedy School of Government at Harvard University.

This presentation is distributed for educational purposes only. Information contained herein has been obtained from sources believed to be reliable, but not guaranteed. No part of this publication may be reproduced in any form, or referred to in any other publication, without express written permission. Pacific Investment Management Company LLC, 840 Newport Center Drive, Newport Beach, CA 92660. Copyright PIMCO 2004.

Seminario Inversiones AMAFORE

September 23, 2004

FOR EDUCATIONAL USE ONLY

Agenda

Introduction to the Fixed Income Markets

Risk Management

Diversification Through Global Bonds

Practical Aspects of Fixed Income Investment Management

Investment Process and Strategy


US Dollars49%

Euro23%

Swiss Franc1% Canadian

Dollar1%

Danish Krone1%

Australian Dollar1%

Swedish Krona0.5%

Norwegian Krone0.2%

New Zealand Dollar 0.1%

Pound Sterling

3%

Emerging Markets*

5%

Japanese Yen16%

Global Bond Universe

* Includes those markets from the Asia and Pacific, Latin America / Caribbean, Emerging Europe and Middle East and Africa region** Based on total face value of index-qualifying fixed income securities by currency

SOURCE: Merrill Lynch Global Bond Indices

Total Size = $44.8 Trillion

As of December 31, 2003Size of the World’s Bond Market**


0

1,000

2,000

3,000

4,000

5,000

6,000

85 87 89 91 93 95 97 99 01 03

Mortgage-RelatedCorporateTreasury

Composition of the U.S. Bond Market Continues to Change

SOURCE : Bond Market Association

U.S. Bond Market Sector Growth

Mortgage Backed Securities are the largest sector of the U.S. bond market

Non-Treasury markets have grown dramatically

$ B

illio

ns

U.S. Tsy16%

ABS8%

Munis9%

Money Mkt11%

MBS24%

Corps20%

Fed Agcy12%

As of December 31, 2003Total Market Size: $22 Trillion USD


The Risks of Bond Ownership

Bond holders are paid, in the form of coupon and maturity payments, to assume these risks

– Rule of thumb: The greater the risk, the higher the yield

1. Interest Rate Risk

2. Volatility Risk

3. Credit Risk

4. Liquidity Risk

1. Interest Rate Risk

2. Volatility Risk

3. Credit Risk

4. Liquidity Risk


How Do You Structure a Risk Management System?

Investment objectives Liquidity requirements Risk tolerance Asset allocation Guideline construction

Philosophy Incentive structure Organization structure Process controls Compliance Reporting / communication

Well-defined philosophy and process Tools that support process Robust valuation

Client

Organization & Process Control

Portfolio


What Is Really Required For Risk Management?

Avoid tunnel vision

– Black box models work the worst when you need them the most

Scrutinize assumptions

– VAR - correlations and volatilities break down in a structural change

Interpret risk management as a soft science

– No model can completely capture the complex world where people drive decisions


Global Bonds as a Diversification Tool

Large bond universe means greater opportunities to add value

Diversification Benefits

– Low correlations across global markets

– Adding foreign bonds should reduce overall portfolio risk


Mexico Analysis

* Annualized

Risk/ Return Matrix

Return Risk Return* Risk* Return* Risk*LEHM A-Rated Corps 6.86% 5.69% 7.15% 5.73% 8.37% 4.92%JPEMMX Index (USD) 10.86% 8.64% 12.50% 8.40% 15.60% 8.11%JPEMMX Index (MXN) 14.01% 7.76% 20.78% 9.31% 20.18% 9.00%

Correlation MatrixBased on 1-Yr Returns

LEHM A-Rated CorpsJPEMMX Index (USD)JPEMMX Index (MXN)

Based on 3-Yr Returns


Correlation MatrixBased on 5-Yr Returns


Based on Monthly Returns From 01/ 31/ 93

LEHM A-Rated CorpsJPEMMX Index (USD)JPEMMX Index (MXN) 0.4604 0.1893 1

1 0.4210 0.46040.4210 1 0.1893

0.8397 0.8393 1

LEHM A-Rated Corps JPEMMX Index (USD) JPEMMX Index (MXN)

0.6007 0.6478 1

1

0.9775 0.83970.9775 1 0.8393

0.6752 0.60070.6752 1 0.6478

0.6793 0.6589 1


1 0.7743 0.67930.7743 1 0.6589

1 Year 3 Year 5 Year


LEHM A-Rated Corps JPEMMX Index (USD) JPEMMX Index (MXN)1


Adding International Bonds to Portfolios Can Lead to Higher

Returns

SOURCE: PIMCO, Datastream, Citigroup World Government Bond Index (WGBI) Non-U.S. Hedged Versus U.S. Component of Citigroup WGBIPast performance is no guarantee of future results. This model illustrates the stated combination bonds (Foreign bonds and U.S. bonds) from 1986 to 1999. Different time periods may produce different results. Certain assumptions were made in this analysis which have resulted in the returns detailed herein. Transaction costs (such as commissions) are not included in the calculation of returns and changes to the assumptions may have an impact on any returns detailed.

Diversification benefits – Adding hedged foreign bonds to

U.S. portfolios increases returns and decreases risks

Investment vehicles– Yankee bonds– Euro bonds– Brady bonds– Non $-denominated bonds– Futures, options, swaps

New opportunities– Advent of Euro creates rapid

development of European bond markets

– Jumbo corporate securities– European high yield– Mortgage-backed securities

Efficient Frontiers: 10-Year period ending 03/31/03WGBI ex-USD (hedged) and US Treasuries

6.8

7.0

7.2

7.4

7.6

7.8

8.0

8.2

2.6 2.8 3.0 3.2 3.4 3.6 3.8 4.0 4.2 4.4 4.6 4.8 5.0

Annualized Standard Deviation (%)

Exp

ect

ed

Retu

rn (

%)

WGBI ex-USUS TreasuriesTreasury + WGBI ex-US

WGBI ex-US

US Treasuries


Best and Worst Performing Bond Markets

1987 – 2002 (Currency Hedged in US$)

At different times, different markets perform well

SOURCE: Datastream, Salomon Brothers

-10

-5

0

5

10

15

20

25

30

'87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02

Perc

ent

(%)

Poland

UK

Japan

US

Aus

Aus

UK

France

Austria

NethSpain

UK

UK

Japan

US Switz

Aus

Switz Switz

Switz

Spain

Ger

UK

Italy

US

Austria

Japan

France

Japan

WGBI

US UKJapan


Currency Unhedged Positions Add to Portfolio Volatility

SOURCE: PIMCO, Datastream, Citigroup World Government Bond Index (WGBI) Non-U.S. Unhedged vs. U.S. Component of Citigroup WGBI. Past performance is no guarantee of future results. This model illustrates the stated combination bonds (Foreign bonds and U.S. bonds) from 1986 to 1999. Different time periods may produce different results. Certain assumptions were made in this analysis which have resulted in the returns detailed herein. Transaction costs (such as commissions) are not included in the calculation of returns and changes to the assumptions may have an impact on any returns detailed.

Foreign Bond Diversification from a U.S. Investor's Perspective,1986 to 1999, Using Unhedged Foreign Bonds

7.0

7.5

8.0

8.5

9.0

9.5

10.0

4.0 5.0 6.0 7.0 8.0 9.0 10.0 11.0Volatility (%)

Mean R

etu

rn (

%)

100 % U.S. Bonds

100 % UnhedgedForeign Bonds


The Currency Hedge Decision: Hedged vs. Unhedged Portfolios

Currency returns are very volatile

Unhedged portfolios imply large currency positions

Expected long-run currency returns are small


Preliminary Steps to Funding a New Fixed Income Portfolio

1. Understand your return objectives and risk tolerance (including regulatory restrictions)

2. Determine your service requirements

3. Select necessary partners including an investment manager and a custodian bank

4. Develop a set of investment guidelines; draft an investment management agreement


Why Benchmark?

Establishes expectations for portfolio risk and return

Helps portfolio managers to understand the restrictions on the types of securities that they may hold, as well as to define the risk exposures they may assume

Provides a useful focus for reviewing portfolios


Higher Discretion, Higher Information Ratio

1) Criteria of Full, Medium, and Limited Authority: a) use of swaps including spread locks and default swaps b) use of long and short futures and options c) use of sell/buybacks and the corresponding 1-year duration cash-backing instruments including MBS/ABS d) at least 10% currency exposure versus the benchmark e) at least 20% market value in country exposure versus the benchmark If an account allows criteria a, b, and c, it would be Full Authority. If an account allows at least 3 of the 5 criteria, it would be Medium Authority. If an account allows less than 3 of criteria, it would be Limited Authority.2) Information Ratio is calculated by as follows: a) Calculated for PIMCO’s global accounts which have more than 3 years track records from the end of November 2001. b) Formula is (Last 3 years annualized monthly alpha) / (Last 3 years annualized tracking error of monthly alpha)

Information Ratio

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8

Limited Authority

Medium Authority

Full Authority


ClientClientDaily, monthly,

quarterly reports ofportfolio statistics

Daily, monthly,quarterly reports ofportfolio statistics

Client workstation andon-line access to

portfolio information

Client workstation andon-line access to

portfolio information

Unique access tofirm insights

and white papers

Unique access tofirm insights

and white papers

Client meetings andboard presentationsClient meetings andboard presentations

Client educational seminars

Client educational seminars

Client Service and Reporting Capabilities


cs_active_bond_mgmt_11

Why Active Bond Management is Important Now

Benefits of active management– Provides returns over and above those of passively managed portfolios

– Exploits inefficiencies in the marketplace

– Reduces risk and adds diversification

Active fixed income management works– Median active manager outperformed market

– Effective selection of active manager can add even more

Active management is more important than ever– Low absolute returns across asset classes expected

– Alpha generation significantly more important*Performance as of December 31, 2003. All periods over 1 year annualized.**Frank Russell Company Active Core Fixed Income Universe.The Frank Russell Company Fixed Income Universe is comprised of fixed-income oriented, fully discretionary, tax-free portfolios.

Frank RussellMedian Manager (%)** 7.2 6.9 7.9 5.0

PIMCO Full Authority CompositeBefore Fees (%) 8.1 7.6 8.7 6.3

Lehman Brothers AggregateBond Index (%) 6.9 6.6 7.6 4.1

10 Yrs.* 5 Yrs.* 3 Yrs.* 1 Yr.


Investment Philosophy: Diversified Sources of Value Added

Construct diversified portfolios that draw on multiple strategies both top down & bottom up

Top down strategies include duration, country selection, curve positioning and currency

Bottom up strategies draw on the expertise of specialist teams

DurationDuration CountryCountry Yield CurvePositioningYield CurvePositioning CurrencyCurrency

Credit AnalysisCredit

AnalysisSector /QualitySector /Quality VolatilityVolatility Short-Term

ManagementShort-Term

Management

Value Added

Top Down Strategies

Bottom Up Strategies

Benefits No single strategy dominates risk in portfolios

Aims to reduce overall portfolio volatility while smoothing the value added

Diversification does not ensure against loss.


Bottom Up Strategies

Investment Process: Driving the Best Ideas Into Portfolios

Specialist TeamsSpecialist Teams

PIMCO Global Investment

Committee

PIMCO Global Investment

Committee

Thematic discussion Structural biases Risk allocation

Recommend best ideas within sector Provide sector analysis & intelligence Implementation / Execution

Construct model portfolio Monitor implementation Monitor portfolios daily

Strategy subject to change without notice.

3-5 year horizonSecular ForumSecular Forum Cyclical ForumCyclical Forum

Examine four regions Forecast GDP & CPI

Top Down Economic Themes


Investment Process: Comprehensive Approach Across All

Sectors

Specialists provide depth in every

fixed income sectorStructural trends

Global Model PortfolioGlobal Model Portfolio

EmergingSpecialistsEmergingSpecialists

ConvertibleSpecialistsConvertibleSpecialists

InternationalSpecialistsInternationalSpecialists

TechnologySpecialistsTechnologySpecialists

MunicipalSpecialistsMunicipal

Specialists

MortgageSpecialistsMortgageSpecialists

GeneralistPortfolio Managers

GeneralistPortfolio Managers

Credit Specialists

Credit Specialists

C

I nv e

s tment o m

mi tte

e

la

bo l

G

Gov’ts/FuturesSpecialists

Gov’ts/FuturesSpecialists

Short-TermSpecialistsShort-TermSpecialists

Secular and Cyclical Macroeconomic Themes


Global Economy’s High Wire Act – Conditions for Instability Accelerating

Continued Stable Climb in China, Japan

Steady Economic

Growth in U.S.

Increased Growth in Europe

U.S.consumer slowdown

Slowdown shock in Asia

Geopolitical instability

Central Bank interest rate

hikes

Twin deficits financed by Asian central banks

U.S. private sector highly levered

Chinese economy highly levered

Increased government control Cheap

money

Secular Implications

GDP Growth:– U.S. stabilizes around 2%– Europe, Japan move toward 2%

Inflation peaks near 4%

Reactive Fed

Deflation

Inflation

Risks RisksGoals

Opinion is subject to change without notice.


Duration

Country Allocation

Currency

Global Strategy

Dollar-Bloc(Includes Canada and

Australia)Europe Japan Summary

Underweight Overweight UnderweightDuration below benchmark

As fiscal stimulus fades, strong corporate profits will encourage investment and hiring

Target U.S. duration below benchmark to guard against higher rates

Tactically invest in mortgage securities when spreads compensate for extension risk

Euroland

Growth will remain below trend, structural reform will dampen employment and consumption

Maintain over weight, especially at the short end of the yield curve

UK

Position for steeper yield curve as reflation and heavy gilt issuance put upward pressure on long rates

Japan

Japan’s economy will grow near 2.5% on strong exports and capital expenditure

Target below-index duration; low yields and improving growth prospects could boost equities and hurt bonds

European bonds remain attractive, especially front ends

Overweight long-end of Europe, relative to UK

Japanese bonds remains unattractive

Long C$ vs. US$(if allowed)

Long Euro vs. US$Long Yen vs. US$

Growing twin US deficit will continue to undermine the US dollar


Duration 0.75 years below benchmark

Yield Curve Positioning Short to Intermediate focus

Sector Breakdown (duration weighted exposure %)

Sovereigns & Agency

Mortgage Backed

Corporate

U.S. Municipals

95%

01%

01%

03%

Average Portfolio Quality AAA

Regional Breakdown (duration weighted exposure %)

Sample Hypothetical

Portfolio Benchmark

U.S. & Dollar Bloc

Euroland

United Kingdom

Japan

9% 24%

67% 39%

0 1% 7%

23% 30%

How Would You Structure An AFORES Portfolio Today?

For a hypothetical Global Government portfolio benchmarked against the J.P. Morgan Global Government Bond Index (ex non-lOSCO countries).The structure of the portfolio is subject to change. The credit quality of a particular security or group of securities does not ensure the stability or safety of the overall portfolio.


Why Bonds If Rates May Increase?

Change in Interest Rates

Hypothetical Illustration of Annualized Index Returns Over Various Time Horizons1

1-Year 3-Year 5-Year 7-Year 10-Year 30-Year

+200 bps (1.9) 4.2 5.2 5.6 6.0 6.6

+100 bps 1.9 4.7 5.1 5.3 5.4 5.7

0 bps2 4.8 4.8 4.8 4.8 4.8 4.8

-100 bps 9.4 5.9 5.0 4.7 4.4 3.9

SOURCE: PIMCO AnalyticsNote: The simulation assumes that rates change on day one and then stay constant for the next thirty years.

1 Index prices, yield to maturity (4.7%) and duration (4.8 years) as of 06/30/04. The interest rate shifts are assumed to occur instantaneously rather than over time and are then held static over the entire period.

2 Assumes that with no change in interest rates, index return equals initial yields plus estimated impact of “roll-down”.Hypothetical example for illustrative purposes only. No representation is being made that any account, product, or strategy will or is likely to achieve profits, losses, or results similar to those shown. Hypothetical or

simulated performance results have several inherent limitations. Unlike an actual performance record, simulated results do not represent actual performance and are generally prepared with the benefit of hindsight. There are frequently sharp differences between simulated performance results and the actual results subsequently achieved by any particular account, product, or strategy. In addition, since trades have not actually been executed, simulated results cannot account for the impact of certain market risks such as lack of liquidity. There are numerous other factors related to the markets in general or the implementation of any specific investment strategy, which cannot be fully accounted for in the preparation of simulated results and all of which can adversely affect actual results.

The simulation assumes the index portfolio is static despite interest rate movements.


Appendix I: Derivatives


De-Mystifying Derivatives

What is a derivative?

A financial instrument that derives its value from movements in an underlying security

Financial derivatives include:

– Forwards

– Futures

– Swaps

– Options

– CMOs

– IOs/POs

– Structured Notes


Derivatives can replicate the most common physical securities of the bond market such as Treasuries, mortgages, and corporate bonds

Derivatives can facilitate more precise duration, curve, and spread risk management

Using Derivatives in a Fixed Income Portfolio

Cash Vehicles

TreasuriesTreasuries

MortgagesMortgages

CorporatesCorporates

Derivative Instruments

TreasuryFuturesTreasuryFutures

Options/ForwardsOptions/Forwards

Interest Rate and

CreditSwaps

Interest Rate and

CreditSwaps


Several Ways to Achieve Duration Target

=

Ten-YearNote

8 YearDuration

8 YearDuration

Ten-YearFutures

8 YearDuration

8 YearDuration =

TotalDesiredDuration

Five-YearFutures

4YrDuration

4YrDuration

Assets: Cash:

Liabilities:

$100 $0 $0$100Net Assets:

$100 $100

($100)$100

$200 $100

($200)$100


Rapid Growth of Swap Market

0

5

10

15

20

25

30

35

40

89 90 91 92 93 94 95 96 97 98 99 00 01 02

U.S. Interest Rate Swap Outstanding

Tri

llions

($)

SOURCE: BIS, PIMCO


Benefits of Swaps

Benefits

– Liquidity

– Becoming the “benchmark” in many markets

– Ability to customize and hedge portfolio risks

– Ability to alter spread exposure

– No exchange of principal minimizes counterparty risk


Appendix II: Trade Flow


Life Cycle of a Trade

Functions

Transaction Related Compliance Middle Office Compliance

Transaction through block confirmation

Prior to execution, Portfolio Managers check guidelines to determine eligibility of trade (pre-compliance check)

Upon execution, Portfolio Managers write trade ticket or entered into Bloomberg (Straight Through Processing (STP) system) for all available product types (Corp, HY, Muni, Bank Loan, Preferred Stock)

Non-STP trades allocated and sent to Middle Office

Block Trade detail reviewed and confirmed Pre-screen activity by scanning group

Broker initiated confirmation will occur within one hour if uninitiated by investment manager

Trade scanned to Compliance (non-STP trades) or sent via STP trade feed

Compliance team checks eligibilityof trade

Non-complianttrades sent to PM / AM for resolution (Trade Inquiry System)

Compliance logs & accounts for all tickets

Trade InfoReviewBlock

Execute

Broker Back Office

Compliance Checked

Broker Trading Desk

ConfirmBlock


Life Cycle of a Trade (continued)

Back Office Functions

Trade Settlement / Accounting Client Services

Compliance through performance reconciliation

Fully allocated and compliant trades scanned to back Office Operations. STP release down trade feed

Trades entered into account system (SMARTS)

All tickets audited to ensure correct and complete information

Trade settled by specialized team

Portfolios priced daily by Pricing and Performance Group

Monthly reconciliation with custodian

Performance / holdingtransactions reported to client

Reconciliation & Performance

Calculation

Broker Back Office

Custodian Bank

TicketAudit

AllocationConfirmed


Appendix III: Fixed Income Risk Management


Examples:

1. Measuring Interest Rate Risk: Duration

Duration is an estimate of a security or portfolio’s price sensitivity in response to changes in interest rates– Defined as net present value of weighted average cash flows

– Measured in years (like average maturity)

– Two rules of thumb:- Longer the maturity, longer the duration

- Lower the coupon, longer the duration

Starting Price

DurationChange In

YieldChange In

PriceEnding

Price

100 5 Years +1.0% -5% 95

100 5 Years -1.0% +5% 105


2. Volatility Risk

Definition: The risk that changes in interest rate levels will materially alter the expected cash flow pattern of a bond and change the rate at which these cash flows can be reinvested

Example: This is most prevalent in bonds with embedded options– Mortgage Backed Securities: The option for homeowners

to prepay their mortgage makes cash flows uncertain

– Corporate Securities: The option for corporations to call their bonds may cap price appreciation when rates fall

Measurement:

SOURCE : Frank Fabozzi

– Convexity


0

50

100

150

200

250

300

98 99 00 01 02 03

2. Mortgages – Spreads (vs. Treasuries) Compensate for Volatility

Risk

Fixed Rate MBS Spread Level

SOURCE: Bloomberg Financial Markets

Sp

read

Level (b

ps)


Credit Risk

Definition: The risk that a promised yield on a corporate bond will fail to compensate the investor for bearing the risk of default– Spread risk

– Downgrade risk

– Default risk

Example: Fixed income securities other than those guaranteed by major Governments carry some amount of credit risk

Measurement: Credit risk must be evaluated at the individual security and portfolio level. Two key metrics:– Quality rating

– Credit spread duration

SOURCE: Frank Fabozzi


Types of Credit Risk

SOURCE: Moody’s and Citigroup Yield Book

Quality

AAA

AA

A

BAA

BA

B

CAA and Below

Average Spreads

1992-2003 (bps)

37.6

65.6

92.2

168.8

341.7

562.7

1206.0

Spread Risk

1992-2003 Spreads to Treasuries (bps)

Min: 37.1 Max: 119.2

Range:

Min: 48.5 Max: 136.1

Range:

Min: 56.5 Max: 184.9

Range:

Min: 88.6 Max: 373.3

Range:

Min: 166.3 Max: 734.3

Range:

Min: 338.4 Max: 1082.5

Range:

Min: 561.6 Max: 2033.9

Range:

Downgrade Risk

Down/Up Ratio2002

N/A

7.2

4.7

10.6

4.7

3.3

7.2

Default Risk

Default Rate 1994-2002 (%)

0.0

0.0

0.7

1.0

2.1

6.9

36.81472.3

568.0

284.7

128.4

87.6

82.1

744.1


Liquidity Risk

Definition: Liquidity risk is the risk that the investor will have to sell a bond below its “true value” where the true value is indicated by a recent transaction

Example: Periodic freezing of corporate market during periods of financial distress

Measurement: Bid-Ask Spread



Measuring Liquidity Exposure:Bid-Ask Spread Levels

bonds bondsFinance

Corporates Aa/Aaa

Bid-Ask spread levels vary by sector of the bond market

Typical Bid-Ask Spreads


of DistressBid-Ask Spreads in Times

They also fluctuate widely in times of distress in fixed income markets

Bid-Ask Spreads

Bid

-Ask

Sp

read

(%

of

Pri

ce)

0

1

2

3

4

5

6

Treasury Bill On-the-runnotes and

Off-the-runnotes and

A Rated

Corporates

B RatedIndustrial

Fixed RateGeneric MBS

Municipals(long),

Rated

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simulated

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simulation