<PAGE>
[LOGO OF PIMCO APPEARS HERE]
PIMCO FUNDS
- -----------
Pacific Investment Management Series
FIXED INCOME FUNDS
Money Market Fund
Short-Term Fund
Low Duration Fund
Low Duration Fund II
Low Duration Fund III
Moderate Duration Fund
High Yield Fund
Total Return Fund
Total Return Fund II
Total Return Fund III
Commercial Mortgage Securities Fund
Long-Term U.S. Government Fund
Real Return Bond Fund
Foreign Bond Fund
Global Bond Fund
Global Bond Fund II
International Bond Fund
EQUITY FUNDS
StocksPLUS Fund
StocksPLUS Short Strategy Fund
BALANCED FUND
Strategic Balanced Fund
PROSPECTUS
- --------------------------------------------------------------------------------
January 17, 1997
<PAGE>
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<PAGE>
PIMCO Funds: Pacific Investment Management Series
Prospectus
January 17, 1997
PIMCO Funds (the "Trust") is an open-end management investment company
("mutual fund") consisting of twenty separate investment portfolios (the
"Funds"). Each Fund has its own investment objective and policies. The Trust
is designed to provide access to the professional investment management
services offered by Pacific Investment Management Company ("PIMCO"), which
serves as investment adviser to the Funds.
This Prospectus describes two classes of shares offered by each Fund: the
"Institutional Class" and the "Administrative Class." Through a separate
prospectus, certain Funds offer up to three additional classes of shares,
Class A shares, Class B shares and Class C shares. See "Other Information--
Multiple Classes of Shares." Shares of the Institutional Class are offered
primarily for direct investment by investors such as pension and profit
sharing plans, employee benefit trusts, endowments, foundations, corporations,
and high net worth individuals (Institutional Class shares may also be offered
through certain financial intermediaries that charge their customers
transaction or other fees with respect to the customers' investments in the
Funds). Shares of the Administrative Class are offered primarily through
employee benefit plan alliances, broker-dealers, and other intermediaries, and
each Fund's Administrative Class shares are subject to service and/or
distribution fees paid to such entities for services they provide to
shareholders of that class. Administrative Class shares of certain Funds are
not currently available for investment. Institutional Class and Administrative
Class shares of the Funds are offered for sale at the relevant next determined
net asset value for each class with no sales charge. Shares of the PIMCO
International Bond Fund are offered only to private account clients of PIMCO.
EACH OF THE FUNDS, EXCEPT THE PIMCO MONEY MARKET FUND, MAY INVEST ALL OF ITS
ASSETS IN DERIVATIVE INSTRUMENTS, SOME OF WHICH MAY BE PARTICULARLY SENSITIVE
TO CHANGES IN PREVAILING INTEREST RATES. UNEXPECTED CHANGES IN INTEREST RATES
MAY ADVERSELY AFFECT THE VALUE OF A FUND'S INVESTMENTS IN PARTICULAR
DERIVATIVE INSTRUMENTS.
This Prospectus sets forth concisely the information a prospective investor
should know before investing in the Funds. It should be read and retained for
ready reference to information about the Funds.
Information about the investment objective of each Fund, along with a detailed
description of the types of securities in which each Fund may invest, and of
investment policies and restrictions applicable to each Fund, are set forth in
this Prospectus. There can be no assurance that the investment objective of
any Fund will be achieved. Because the market value of the Funds' investments
will change, the investment returns and net asset value per share of each Fund
will vary.
A Statement of Additional Information, dated January 14, 1997, as amended or
supplemented from time to time, containing additional and more detailed
information about the Funds, has been filed with the Securities and Exchange
Commission and is hereby incorporated by reference into this Prospectus. It is
available without charge and may be obtained by writing or calling:
PIMCO Funds
840 Newport Center Drive, Suite 360
Newport Beach, CA 92660
Telephone: (800) 927-4648 (Current Shareholders)
(800) 800-0952 (New Accounts)
(800) 987-4626 (PIMCO Infolink Audio Response
Network)
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY FINANCIAL INSTITUTION, AND THE SHARES ARE NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD, OR ANY OTHER AGENCY.
INVESTMENT IN THE PIMCO MONEY MARKET FUND (OR IN ANY OTHER FUND) IS NEITHER
INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT. THERE CAN BE NO ASSURANCE THAT
THE MONEY MARKET FUND WILL BE ABLE TO MAINTAIN A STABLE NET ASSET VALUE OF
$1.00 PER SHARE.
THE PIMCO HIGH YIELD FUND MAY INVEST ALL OF ITS ASSETS, AND THE PIMCO
COMMERCIAL MORTGAGE SECURITIES FUND MAY INVEST UP TO 35% OF ITS ASSETS, IN
JUNK BONDS, WHICH ARE SUBJECT TO HIGH RISK, AND SPECULATIVE WITH REGARD TO
PAYMENT OF INTEREST AND RETURN OF PRINCIPAL. INVESTORS SHOULD CAREFULLY
CONSIDER THESE RISKS BEFORE INVESTING IN THESE FUNDS. SEE "CHARACTERISTICS AND
RISKS OF SECURITIES AND INVESTMENT TECHNIQUES--HIGH YIELD SECURITIES ("JUNK
BONDS")."
January 17, 1997 Prospectus
1
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary...................................................... 3
Expense Information..................................................... 8
Financial Highlights.................................................... 10
Investment Objectives and Policies...................................... 16
Investment Restrictions................................................. 25
Characteristics and Risks of Securities and Investment Techniques....... 27
Management of the Trust................................................. 40
Purchase of Shares...................................................... 43
Redemption of Shares.................................................... 46
Portfolio Transactions.................................................. 48
Net Asset Value......................................................... 48
Dividends, Distributions and Taxes...................................... 49
Other Information....................................................... 50
Appendix A -- Description of Duration................................... A-1
Appendix B -- Description of Securities Ratings......................... B-1
</TABLE>
PIMCO Funds: Pacific Investment Management Series
2
<PAGE>
PROSPECTUS SUMMARY
PIMCO Funds (the "Trust") is an open-end management investment company
("mutual fund") organized as a Massachusetts business trust on February 19,
1987. The Trust consists of twenty separate investment portfolios (the
"Funds").
COMPARISON OF PIMCO FUNDS
The following chart provides general information about each of the PIMCO
Funds. It is qualified in its entirety by the more complete descriptions of the
Funds appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
FIXED INCOME FUNDS PRIMARY INVESTMENTS DURATION CREDIT QUALITY(1) FOREIGN(2)
- ------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Money Market Money market instruments Less than or equal to 90 Min 95% Aaa or 0%
days dollar- Prime 1;
weighted Less than or equal to
average 5% Aa
maturity or Prime 2
- ------------------------------------------------------------------------------------------------------------------
Short-Term Money market instruments 0-1 yr B to Aaa; max 0-5%
and short maturity fixed 10% below Baa
income securities
- ------------------------------------------------------------------------------------------------------------------
Low Duration Short and intermediate 1-3 yrs B to Aaa; max 0-20%
maturity fixed income 10% below Baa
securities
- ------------------------------------------------------------------------------------------------------------------
Low Duration II Same as Low Duration 1-3 yrs A to Aaa 0%
Fund, with quality and
foreign issuer
restrictions
- ------------------------------------------------------------------------------------------------------------------
Low Duration III Same as Low Duration 1-3 yrs B to Aaa; max 0-20%
Fund, with prohibitions 10% below Baa
on firms engaged in
socially sensitive
practices
- ------------------------------------------------------------------------------------------------------------------
Moderate Duration Short and intermediate 2-5 yrs B to Aaa; max 0-20%
maturity fixed income 10% below Baa
securities
- ------------------------------------------------------------------------------------------------------------------
High Yield Higher yielding fixed 2-6 yrs B to Aaa; min 0%
income securities 65% below Baa
- ------------------------------------------------------------------------------------------------------------------
Total Return Intermediate maturity 3-6 yrs B to Aaa; max 0-20%
fixed income securities 10% below Baa
- ------------------------------------------------------------------------------------------------------------------
Total Return II Same as Total Return 3-6 yrs Baa to Aaa 0%
Fund, with quality and
foreign issuer
restrictions
- ------------------------------------------------------------------------------------------------------------------
Total Return III Same as Total Return 3-6 yrs B to Aaa; max 0-20%
Fund, with prohibitions 10% below Baa
on firms engaged in
socially sensitive
practices
- ------------------------------------------------------------------------------------------------------------------
Commercial Mortgage Commercial mortgage- 3-8 yrs B to Aaa; max 0%
Securities backed securities 35% below Baa
- ------------------------------------------------------------------------------------------------------------------
Long-Term U.S. Long-term maturity fixed Greater than or equal A to Aaa 0%
Government income securities to 8 yrs
- ------------------------------------------------------------------------------------------------------------------
Real Return Bond Inflation-indexed fixed Not A to Aaa 0-35%
income securities applicable,
but see Fund
description
- ------------------------------------------------------------------------------------------------------------------
Foreign Bond Intermediate maturity 3-6 yrs B to Aaa; max Greater
hedged foreign fixed 10% below Baa than or
income securities equal to 85%
- ------------------------------------------------------------------------------------------------------------------
Global Bond Intermediate maturity 3-6 yrs B to Aaa; max 25-75%
U.S. and foreign fixed 10% below Baa
income securities
- ------------------------------------------------------------------------------------------------------------------
Global Bond II Intermediate maturity 3-6 yrs B to Aaa; max 25-75%
U.S. and hedged foreign 10% below Baa
fixed income securities
- ------------------------------------------------------------------------------------------------------------------
International Bond Foreign fixed income 0-8 yrs Baa to Aaa Greater
securities (Fund offered than or
only to PIMCO private equal to
account clients) 65%
- ------------------------------------------------------------------------------------------------------------------
EQUITY FUNDS PRIMARY INVESTMENTS DURATION CREDIT QUALITY(1) FOREIGN(2)
- ------------------------------------------------------------------------------------------------------------------
StocksPLUS S&P 500 stock index 0-1 yr B to Aaa; max 0-20%
derivatives backed by a 10% below Baa
portfolio of short-term
fixed income securities
- ------------------------------------------------------------------------------------------------------------------
StocksPLUS Short Inversely correlated S&P 0-1 yr B to Aaa; max 0-20%
Strategy 500 derivatives backed 10% below Baa
by
a portfolio of short-
term fixed income
securities
- ------------------------------------------------------------------------------------------------------------------
<CAPTION>
BALANCED FUND PRIMARY INVESTMENTS DURATION CREDIT QUALITY(1) FOREIGN(2)
- ------------------------------------------------------------------------------------------------------------------
<C> <S> <C> <C> <C>
Strategic Balanced Same as Total Return and 0-6 yrs B to Aaa; max 0-20%
StocksPLUS Funds 10% below Baa
according to PIMCO's
allocation strategy
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
1. As rated by Moody's Investors Service, Inc., or if unrated, determined to be
of comparable quality.
2. Percentage limitations relate to foreign currency-denominated securities for
all Funds except the PIMCO Foreign Bond, Global Bond, Global Bond II and
International Bond Funds. Percentage limitations for these four Funds relate to
securities of foreign issuers, denominated in any currency. Each Fund (except
the Low Duration II and Total Return II Funds) may invest beyond these limits
in U.S. dollar-denominated securities of foreign issuers. Neither the Low
Duration Fund II nor the Total Return Fund II may invest in any securities of
foreign issuers.
January 17, 1997 Prospectus
3
<PAGE>
INVESTMENT OBJECTIVES OF THE PIMCO FUNDS
The investment objective of each of the PIMCO Money Market Fund and PIMCO
Short-Term Fund is to seek to obtain maximum current income consistent with
preservation of capital and daily liquidity. The investment objective of the
PIMCO Real Return Bond Fund is to seek to realize maximum real return,
consistent with the preservation of real capital and prudent investment
management. The investment objective of the PIMCO Global Bond Fund II is to
seek maximum total return, consistent with the preservation of capital. The
investment objective of each of the remaining Fixed Income Funds and the PIMCO
Strategic Balanced Fund is to seek to realize maximum total return, consistent
with preservation of capital and prudent investment management. The investment
objective of the PIMCO StocksPLUS Fund is to seek to achieve a total return
which exceeds the total return performance of the Standard & Poor's Composite
Stock Price Index ("S&P 500"). The investment objective of the PIMCO StocksPLUS
Short Strategy Fund is to seek total return through the implementation of short
investment positions on the S&P 500 Index.
INVESTMENT RISKS AND CONSIDERATIONS
The following are some of the primary risks relevant to an investment in the
Funds and to the securities in which the Funds invest. Investors should read
this Prospectus carefully for a more complete discussion of the risks relating
to an investment in the Funds. The value of all securities and other
instruments held by the Funds will vary from time to time in response to a wide
variety of market factors. Consequently, the net asset value per share of each
Fund will vary, except that the PIMCO Money Market Fund shall attempt to
maintain a net asset value of $1.00 per share, although there can be no
assurance that the Fund will be successful in doing so. The net asset value per
share of any Fund may be less at the time of redemption than it was at the time
of investment. Generally, the value of fixed income securities can be expected
to vary inversely with changes in prevailing interest rates, i.e., as interest
rates rise, market value tends to decrease, and vice versa, although this may
not be true in the case of inflation-indexed bonds. In addition, certain of the
Funds may invest in securities rated lower than Baa by Moody's Investors
Service, Inc. ("Moody's") or BBB by Standard & Poor's Corporation ("S&P"). Such
securities carry a high degree of credit risk and are considered speculative by
the major rating agencies.
Certain Funds may invest in securities of foreign issuers, which may be
subject to additional risk factors, including foreign currency and political
risks, not applicable to securities of U.S. issuers. Certain of the Funds'
investment techniques may involve a form of borrowing, which may tend to
exaggerate the effect on net asset value of any increase or decrease in the
market value of a Fund's portfolio and may require liquidation of portfolio
positions when it is not advantageous to do so. Certain Funds may sell
securities short, which exposes the Fund to a risk of loss if the value of the
security sold short should increase.
All Funds (except the PIMCO Money Market Fund) may use derivative
instruments, consisting of futures, options, options on futures, and swap
agreements, for hedging purposes or as part of their investment strategies. Use
of these instruments may involve certain costs and risks, including the risk
that a Fund could not close out a position when it would be most advantageous
to do so, the risk of an imperfect correlation between the value of the
securities being hedged and the value of the particular derivative instrument,
and the risk that unexpected changes in interest rates may adversely affect the
value of a Fund's investments in particular derivative instruments.
Investors should carefully consider the possible tax consequences from
investing in the PIMCO Real Return Bond Fund. The Fund invests primarily in
securities that for tax purposes may be considered to have been issued
originally at a discount. Accordingly, the Fund may be required to make annual
distributions to shareholders in excess of the cash
PIMCO Funds: Pacific Investment Management Series
4
<PAGE>
received by the Fund in a given period from those investments. See
"Characteristics and Risks of Securities and Investment Techniques --
Inflation-Indexed Bonds" and "Dividends, Distributions and Taxes" for
additional information.
The Funds offer their shares to both retail and institutional investors.
Institutional shareholders, some of whom also may be investment advisory
clients of PIMCO, may hold large positions in certain of the Funds. Such
shareholders may on occasion make large redemptions of their holdings in the
Funds to meet their liquidity needs, in connection with strategic adjustments
to their overall portfolio of investments, or for other purposes. Large
redemptions from some Funds could require the Adviser to liquidate portfolio
positions when it is not most desirable to do so. Liquidation of portfolio
holdings also may cause a Fund to realize taxable capital gains.
The PIMCO Commercial Mortgage Securities, Real Return Bond, Foreign Bond,
Global Bond, Global Bond II, and International Bond Funds are "non-diversified"
for purposes of the Investment Company Act of 1940, meaning that they may
invest a greater percentage of their assets in the securities of one issuer
than the other Funds. As "non-diversified" portfolios, these Funds may be more
susceptible to risks associated with a single economic, political or regulatory
occurrence than a diversified portfolio might be. See "Investment Objectives
and Policies" and "Characteristics and Risks of Securities and Investment
Techniques" for additional information.
INVESTMENT ADVISER AND FUND ADMINISTRATOR
Pacific Investment Management Company ("PIMCO") serves as investment adviser
("Adviser") to the Trust, and also serves as the Trust's administrator. The
Adviser is an investment management firm established in 1971 that had
approximately $88.8 billion of assets under management as of November 30, 1996.
The Adviser is a subsidiary of PIMCO Advisors L.P. ("PIMCO Advisors"), which
had approximately $111.2 billion of assets under management as of November 30,
1996. See "Management of the Trust."
PURCHASE OF SHARES
This Prospectus describes two classes of shares of each Fund: the
"Institutional Class" and the "Administrative Class." Shares of the
Institutional Class are offered primarily for direct investment by
institutional investors (Institutional Class shares may also be offered through
certain financial intermediaries that charge their customers transaction or
other fees with respect to the customers' investments in the Funds). Shares of
the Administrative Class are offered primarily through employee benefit plan
alliances, broker-dealers, and other intermediaries, and each Fund pays service
and/or distribution fees to such entities for services they provide to such
Fund's shareholders of that class. Administrative Class shares of certain Funds
are not currently available for investment.
Shares of the Institutional Class and Administrative Class of the Funds are
offered at the relevant next determined net asset value with no sales charge.
The minimum initial investment for shares of either class is $5 million,
subject to certain exceptions. Shares of either class may also be offered to
clients of the Adviser and its affiliates. Shares of the PIMCO International
Bond Fund are offered only to private account clients of PIMCO. See "Purchase
of Shares."
January 17, 1997 Prospectus
5
<PAGE>
REDEMPTIONS AND EXCHANGES
Institutional Class and Administrative Class shares of each Fund may be
redeemed without cost at the relevant net asset value per share of the class of
that Fund next determined after receipt of the redemption request. The PIMCO
StocksPLUS Short Strategy Fund imposes a redemption fee, payable to the Fund,
of 1% on all shares of the Fund held for less than three months. The redemption
price may be more or less than the purchase price.
Institutional Class and Administrative Class shares of any Fund may be
exchanged on the basis of relative net asset values, for shares of the same
class of any other Fund of the Trust offered generally to the public, except
that only private account clients of PIMCO may purchase shares of the PIMCO
International Bond Fund. Shares of a Fund may also be exchanged for shares of
the same class of a series of PIMCO Funds: Multi-Manager Series, an affiliated
mutual fund family, comprised primarily of equity portfolios managed by the
subsidiary partnerships of PIMCO Advisors. See "Redemption of Shares."
DIVIDENDS AND DISTRIBUTIONS
Each Fund will distribute dividends from net investment income at least
monthly (quarterly in the case of the PIMCO International Bond Fund, PIMCO
Strategic Balanced Fund and Equity Funds), and any net realized capital gains
at least annually. All dividends and distributions will be reinvested
automatically at net asset value in additional shares of the same class of the
same Fund, unless cash payment is requested. Dividends from net investment
income with respect to Administrative Class shares will be lower than those
paid with respect to Institutional Class shares, reflecting the payment of
service and/or distribution fees by that class. See "Dividends, Distributions
and Taxes."
PIMCO Funds: Pacific Investment Management Series
6
<PAGE>
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January 17, 1997 Prospectus
7
<PAGE>
EXPENSE INFORMATION
SHAREHOLDER TRANSACTION EXPENSES (INSTITUTIONAL CLASS AND ADMINISTRATIVE
CLASS):
<TABLE>
<S> <C>
Sales Load Imposed on Purchases.......................................... None
Sales Load Imposed on Reinvested Dividends............................... None
Redemption Fee:
StocksPLUS Short Strategy Fund......................................... 1%*
All Other Funds........................................................ None
Exchange Fee............................................................. None
</TABLE>
*On shares held less than 3 months.
ANNUAL FUND OPERATING EXPENSES (AS A PERCENTAGE OF AVERAGE DAILY NET ASSETS):
<TABLE>
<CAPTION>
ADVISORY ADMINISTRATIVE TOTAL
INSTITUTIONAL CLASS SHARES FEE FEE EXPENSES
-------------------------- -------- -------------- --------
<S> <C> <C> <C>
Money Market Fund........................... 0.15% 0.20% 0.35%
Short-Term Fund............................. 0.25 0.20 0.45
Low Duration Fund........................... 0.25 0.18 0.43
Low Duration Fund II........................ 0.25 0.25 0.50
Low Duration Fund III....................... 0.25 0.25 0.50
Moderate Duration Fund...................... 0.25 0.20 0.45
High Yield Fund............................. 0.25 0.25 0.50
Total Return Fund........................... 0.25 0.18 0.43
Total Return Fund II........................ 0.25 0.25 0.50
Total Return Fund III....................... 0.25 0.25 0.50
Commercial Mortgage Securities Fund......... 0.40 0.25 0.65
Long-Term U.S. Government Fund.............. 0.25 0.25 0.50
Real Return Bond Fund....................... 0.25 0.25 0.50
Foreign Bond Fund........................... 0.25 0.25 0.50
Global Bond Fund............................ 0.25 0.30 0.55
Global Bond Fund II......................... 0.25 0.30 0.55
International Bond Fund..................... 0.25 0.25 0.50
StocksPLUS Fund............................. 0.40 0.25 0.65
StocksPLUS Short Strategy Fund.............. 0.40 0.25 0.65
Strategic Balanced Fund..................... 0.40 0.25 0.65
</TABLE>
<TABLE>
<CAPTION>
ADVISORY ADMINISTRATIVE 12B-1 (SERVICE) TOTAL
ADMINISTRATIVE CLASS SHARES FEE FEE FEE EXPENSES
--------------------------- -------- -------------- --------------- --------
<S> <C> <C> <C> <C>
Money Market Fund.......... 0.15% 0.20% 0.25% 0.60%
Short-Term Fund............ 0.25 0.20 0.25 0.70
Low Duration Fund.......... 0.25 0.18 0.25 0.68
Low Duration Fund II....... 0.25 0.25 0.25 0.75
Low Duration Fund III...... 0.25 0.25 0.25 0.75
Moderate Duration Fund..... 0.25 0.20 0.25 0.70
High Yield Fund............ 0.25 0.25 0.25 0.75
Total Return Fund.......... 0.25 0.18 0.25 0.68
Total Return Fund II....... 0.25 0.25 0.25 0.75
Total Return Fund III...... 0.25 0.25 0.25 0.75
Commercial Mortgage
Securities Fund........... 0.40 0.25 0.25 0.90
Long-Term U.S. Government
Fund...................... 0.25 0.25 0.25 0.75
Real Return Bond Fund...... 0.25 0.25 0.25 0.75
Foreign Bond Fund.......... 0.25 0.25 0.25 0.75
Global Bond Fund........... 0.25 0.30 0.25 0.80
Global Bond Fund II........ 0.25 0.30 0.25 0.80
International Bond Fund.... 0.25 0.25 0.25 0.75
StocksPLUS Fund............ 0.40 0.25 0.25 0.90
StocksPLUS Short Strategy
Fund...................... 0.40 0.25 0.25 0.90
Strategic Balanced Fund.... 0.40 0.25 0.25 0.90
</TABLE>
PIMCO Funds: Pacific Investment Management Series
8
<PAGE>
For a more detailed discussion of the Funds' fees and expenses, see "Fund
Administrator," "Advisory and Administrative Fees," and "Service and
Distribution Fees" under the caption "Management of the Trust."
EXAMPLE OF FUND EXPENSES:
An investor would pay the following expenses on a $1,000 investment, assuming
(1) a hypothetical 5% annual return and (2) redemption at the end of each time
period:
<TABLE>
<CAPTION>
INSTITUTIONAL CLASS SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
-------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Market Fund............................ $4 $11 $20 $44
Short-Term Fund.............................. 5 14 25 57
Low Duration Fund............................ 4 14 24 54
Low Duration Fund II......................... 5 16 28 63
Low Duration Fund III........................ 5 16 28 63
Moderate Duration Fund....................... 5 14 25 57
High Yield Fund.............................. 5 16 28 63
Total Return Fund............................ 4 14 24 54
Total Return Fund II......................... 5 16 28 63
Total Return Fund III........................ 5 16 28 63
Commercial Mortgage Securities Fund.......... 7 21 36 81
Long-Term U.S. Government Fund............... 5 16 28 63
Real Return Bond Fund........................ 5 16 28 63
Foreign Bond Fund............................ 5 16 28 63
Global Bond Fund............................. 6 18 31 69
Global Bond Fund II.......................... 6 18 31 69
International Bond Fund...................... 5 16 28 63
StocksPLUS Fund.............................. 7 21 36 81
StocksPLUS Short Strategy Fund............... 7 21 36 81
Strategic Balanced Fund...................... 7 21 36 81
<CAPTION>
ADMINISTRATIVE CLASS SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------- ------ ------- ------- --------
<S> <C> <C> <C> <C>
Money Market Fund............................ $6 $19 $33 $75
Short-Term Fund.............................. 7 22 39 87
Low Duration Fund............................ 7 22 38 85
Low Duration Fund II......................... 8 24 42 93
Low Duration Fund III........................ 8 24 42 93
Moderate Duration Fund....................... 7 22 39 87
High Yield Fund.............................. 8 24 42 93
Total Return Fund............................ 7 22 38 85
Total Return Fund II......................... 8 24 42 93
Total Return Fund III........................ 8 24 42 93
Commercial Mortgage Securities Fund.......... 9 29 50 111
Long-Term U.S. Government Fund............... 8 24 42 93
Real Return Bond Fund........................ 8 24 42 93
Foreign Bond Fund ........................... 8 24 42 93
Global Bond Fund............................. 8 26 44 99
Global Bond Fund II.......................... 8 26 44 99
International Bond Fund...................... 8 24 42 93
StocksPLUS Fund.............................. 9 29 50 111
StocksPLUS Short Strategy Fund............... 9 29 50 111
Strategic Balanced Fund...................... 9 29 50 111
</TABLE>
The above tables are provided to assist investors in understanding the
various expenses which may be borne directly or indirectly in connection with
an investment in the Funds. This example should not be considered a
representation of past or future expenses or performance. Actual expenses may
be higher or lower than those shown.
January 17, 1997 Prospectus
9
<PAGE>
FINANCIAL HIGHLIGHTS
The following information regarding selected per share data and ratios for
shares of certain of the Funds is part of the Trust's financial statements,
which are included in the Trust's Annual Report dated March 31, 1996, and
Semi-Annual Report dated September 30, 1996, and incorporated by reference in
the Statement of Additional Information. The Trust's audited financial
statements and selected per share data and ratios appearing below have been
examined by Price Waterhouse LLP, independent accountants, whose opinion
thereon is also included in the Annual Report, which may be obtained without
charge. Information contained in the Trust's Semi-Annual Report is unaudited.
Information is presented for each Fund of the Trust which had investment
operations during the reporting periods. Information regarding the PIMCO Money
Market Fund and PIMCO Total Return Fund II reflects the operational history of
the Money Market Fund and PIMCO Managed Bond and Income Fund, two former
series of PIMCO Funds: Equity Advisors Series, which were reorganized as
series of the Trust as of November 1, 1995. On that date, the investment
advisory responsibilities of Pacific Mutual Life Insurance Company with
respect to the Money Market Fund were assumed by PIMCO. Information for these
Funds for each of the five years in the period ended October 31, 1995, has
been audited by the Funds' former independent accountants.
Selected data for a share outstanding throughout each period:
<TABLE>
<CAPTION>
NET ASSET NET REALIZED TOTAL INCOME DIVIDENDS DIVIDENDS IN DISTRIBUTIONS DISTRIBUTIONS
YEAR OR VALUE NET AND UNREALIZED (LOSS) FROM FROM NET EXCESS OF NET FROM NET IN EXCESS OF
PERIOD BEGINNING INVESTMENT GAIN (LOSS) ON INVESTMENT INVESTMENT INVESTMENT REALIZED NET REALIZED
ENDED OF PERIOD INCOME INVESTMENTS OPERATIONS INCOME INCOME CAPITAL GAINS CAPITAL GAINS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
MONEY MARKET FUND
Institutional Class
9/30/96* $ 1.00 $0.03 $ 0.00 $0.03 $(0.03) $ 0.00 $ 0.00 $ 0.00
11/1/95-3/31/96 1.00 0.02 0.00 0.02 (0.02) 0.00 0.00 0.00
10/31/95 1.00 0.06 0.00 0.06 (0.06) 0.00 0.00 0.00
10/31/94 1.00 0.03 0.00 0.03 (0.03) 0.00 0.00 0.00
10/31/93 1.00 0.03 0.00 0.03 (0.03) 0.00 0.00 0.00
10/31/92 1.00 0.04 0.00 0.04 (0.04) 0.00 0.00 0.00
10/31/91(a) 1.00 0.04 0.00 0.04 (0.04) 0.00 0.00 0.00
Administrative Class
9/30/96* 1.00 0.02 0.00 0.02 (0.02) 0.00 0.00 0.00
3/31/96 1.00 0.02 0.00 0.02 (0.02) 0.00 0.00 0.00
10/31/95(b) 1.00 0.05 0.00 0.05 (0.05) 0.00 0.00 0.00
SHORT-TERM FUND
Institutional Class
9/30/96* $ 9.92 $0.30 $ 0.05 $0.35 $(0.29) $(0.01) $ 0.00 $ 0.00
3/31/96 9.79 0.69 0.12 0.81 (0.65) (0.03) 0.00 0.00
3/31/95 9.92 0.56 (0.13) 0.43 (0.55) (0.01) 0.00 0.00
3/31/94 10.03 0.48 (0.12) 0.36 (0.47) 0.00 0.00 0.00
3/31/93 10.01 0.37 0.02 0.39 (0.37) 0.00 0.00 0.00
3/31/92 10.02 0.55 0.00 0.55 (0.55) 0.00 (0.01) 0.00
3/31/91 9.99 0.77 0.04 0.81 (0.78) 0.00 0.00 0.00
3/31/90 10.00 0.86 (0.01) 0.85 (0.86) 0.00 0.00 0.00
3/31/89 10.00 0.81 (0.01) 0.80 (0.80) 0.00 0.00 0.00
3/31/88(c) 10.00 0.33 0.00 0.33 (0.33) 0.00 0.00 0.00
Administrative Class
9/30/96* 9.92 0.29 0.05 0.34 (0.28) (0.01) 0.00 0.00
3/31/96(d) 9.98 0.11 (0.07) 0.04 (0.10) 0.00 0.00 0.00
LOW DURATION FUND
Institutional Class
9/30/96* $ 9.95 $0.33 $ 0.01 $0.34 $(0.31) $(0.02) $ 0.00 $ 0.00
3/31/96 9.76 0.66 0.21 0.87 (0.68) 0.00 0.00 0.00
3/31/95 10.04 0.65 (0.30) 0.35 (0.54) 0.00 0.00 0.00
3/31/94 10.30 0.62 (0.16) 0.46 (0.64) (0.03) (0.05) 0.00
3/31/93 10.20 0.75 0.22 0.97 (0.74) 0.00 (0.13) 0.00
3/31/92 10.02 0.83 0.25 1.08 (0.82) 0.00 (0.08) 0.00
3/31/91 9.89 0.89 0.12 1.01 (0.88) 0.00 0.00 0.00
3/31/90 9.70 0.88 0.20 1.08 (0.88) 0.00 (0.01) 0.00
3/31/89 9.99 0.89 (0.25) 0.64 (0.90) 0.00 (0.03) 0.00
3/31/88(e) 10.00 0.74 (0.01) 0.73 (0.74) 0.00 0.00 0.00
Administrative Class
9/30/96* 9.95 0.31 0.01 0.32 (0.30) (0.01) 0.00 0.00
3/31/96 9.76 0.63 0.21 0.84 (0.65) 0.00 0.00 0.00
3/31/95(f) 9.67 0.18 0.07 0.25 (0.14) 0.00 0.00 0.00
LOW DURATION FUND II
Institutional Class
9/30/96* $ 9.82 $0.32 $(0.02) $0.30 $(0.26) $(0.06) $ 0.00 $ 0.00
3/31/96 9.77 0.66 0.04 0.70 (0.60) (0.03) 0.00 0.00
3/31/95 9.94 0.62 (0.16) 0.46 (0.58) (0.03) 0.00 0.00
3/31/94 10.25 0.60 (0.28) 0.32 (0.58) 0.00 (0.05) 0.00
3/31/93 10.04 0.63 0.25 0.88 (0.64) 0.00 (0.03) 0.00
3/31/92(g) 10.00 0.28 0.03 0.31 (0.27) 0.00 0.00 0.00
</TABLE>
- --------
<TABLE>
<S> <C>
(a) From commencement of operations, March 1, 1991. (e) From commencement of operations, May 11, 1987.
(b) From commencement of operations, January 24, 1995. (f) From commencement of operations, December 31, 1994.
(c) From commencement of operations, October 7, 1987. (g) From commencement of operations, November 1, 1991.
(d) From commencement of operations, February 1, 1996.
</TABLE>
*Unaudited.
10
PIMCO Funds: Pacific Investment Management Series
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
Selected data for a share outstanding throughout each period:
<TABLE>
<CAPTION>
RATIO OF NET
NET ASSET NET ASSETS RATIO OF INVESTMENT
TAX BASIS VALUE END EXPENSES TO INCOME TO PORTFOLIO
RETURN TOTAL END TOTAL OF PERIOD AVERAGE AVERAGE TURNOVER
OF CAPITAL DISTRIBUTIONS OF PERIOD RETURN (000'S) NET ASSETS NET ASSETS RATE
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 0.00 $(0.03) $ 1.00 2.61% $ 28,300 0.35%+ 5.15%+ N/A
0.00 (0.02) 1.00 2.58 25,935 0.33+ 5.44+ N/A
0.00 (0.06) 1.00 5.67 7,741 0.40 5.53 N/A
0.00 (0.03) 1.00 3.53 7,454 0.40 3.52 N/A
0.00 (0.03) 1.00 2.83 5,836 0.40 2.78 N/A
0.00 (0.04) 1.00 3.85 7,817 0.40 4.02 N/A
0.00 (0.04) 1.00 3.78 45,406 0.53+ 5.20 N/A
0.00 (0.02) 1.00 2.49 12 0.60+ 5.00+ N/A
0.00 (0.02) 1.00 2.47 10 0.61+ 5.95+ N/A
0.00 (0.05) 1.00 4.21 10 0.68+ 5.94+ N/A
$ 0.00 $(0.30) $ 9.97 3.63% $ 128,198 0.45%+ 6.28%+ 56.87%
0.00 (0.68) 9.92 8.49 101,797 0.58 6.86 214.78
0.00 (0.56) 9.79 4.46 90,114 0.50 5.67 79.30
0.00 (0.47) 9.92 3.66 73,176 0.50 4.87 45.81
0.00 (0.37) 10.03 3.94 46,905 0.50 3.67 54.50
0.00 (0.56) 10.01 5.66 44,172 0.50 5.52 94.62
0.00 (0.78) 10.02 8.44 44,820 0.50 7.83 115.26
0.00 (0.86) 9.99 8.86 13,649 0.50 8.61 140.28
0.00 (0.80) 10.00 8.29 14,401 0.50 8.57 178.21
0.00 (0.33) 10.00 7.17+ 5,546 0.50+ 6.99+ 11.57
0.00 (0.29) 9.97 3.50 2,361 0.70+ 6.08+ 56.87
0.00 (0.10) 9.92 0.41 3,999 0.52+ 4.44+ 214.78
$ 0.00 $(0.33) $ 9.96 3.46% $2,685,682 0.43%+ 6.60%+ 114.52%
0.00 (0.68) 9.95 9.13 2,677,574 0.42 6.88 208.79
(0.09) (0.63) 9.76 3.60 2,332,032 0.41 6.46 77.14
0.00 (0.72) 10.04 4.56 2,298,255 0.43 6.05 42.69
0.00 (0.87) 10.30 9.91 1,403,594 0.45 7.21 67.51
0.00 (0.90) 10.20 11.30 906,650 0.50 8.08 37.21
0.00 (0.88) 10.02 10.60 516,325 0.57 8.97 44.31
0.00 (0.89) 9.89 11.36 317,425 0.60 8.83 161.91
0.00 (0.93) 9.70 6.49 172,046 0.60 8.83 56.23
0.00 (0.74) 9.99 8.64+ 115,865 0.60+ 8.85+ 77.88
0.00 (0.31) 9.96 3.33 3,935 0.68+ 6.40+ 114.52
0.00 (0.65) 9.95 8.83 2,536 0.69 6.73 208.79
(0.02) (0.16) 9.76 2.53 771 0.66+ 6.93+ 77.14
$ 0.00 $(0.32) $ 9.80 3.09% $ 256,720 0.50%+ 6.42%+ 147.94%
(0.02) (0.65) 9.82 7.30 253,299 0.48 6.61 225.02
(0.02) (0.63) 9.77 4.80 170,866 0.47 6.35 102.43
0.00 (0.63) 9.94 3.15 141,411 0.50 5.73 53.78
0.00 (0.67) 10.25 8.95 101,025 0.50 6.16 95.33
0.00 (0.27) 10.04 7.72+ 31,027 0.51+ 6.80+ 12.57
</TABLE>
- --------
+ Annualized.
January 17, 1997 Prospectus
11
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
Selected data for a share outstanding throughout each period:
<TABLE>
<CAPTION>
NET ASSET NET REALIZED TOTAL INCOME DIVIDENDS DIVIDENDS IN DISTRIBUTIONS DISTRIBUTIONS
YEAR OR VALUE NET AND UNREALIZED (LOSS) FROM FROM NET EXCESS OF NET FROM NET IN EXCESS OF
PERIOD BEGINNING INVESTMENT GAIN (LOSS) ON INVESTMENT INVESTMENT INVESTMENT REALIZED NET REALIZED
ENDED OF PERIOD INCOME INVESTMENTS OPERATIONS INCOME INCOME CAPITAL GAINS CAPITAL GAINS
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
HIGH YIELD FUND
Institutional Class
9/30/96* $10.94 $0.46 $ 0.19 $ 0.65 $ (0.48) $ 0.00 $ 0.00 $ 0.00
3/31/96 10.42 1.04 0.54 1.58 (1.01) 0.00 (0.05) 0.00
3/31/95 10.52 0.99 (0.12) 0.87 (0.93) (0.02) 0.00 (0.02)
3/31/94 10.41 0.90 0.18 1.08 (0.90) 0.00 (0.07) 0.00
3/31/93(h) 10.00 0.24 0.41 0.65 (0.24) 0.00 0.00 0.00
Administrative Class
9/30/96* 10.94 0.45 0.19 0.64 (0.47) 0.00 0.00 0.00
3/31/96 10.41 1.02(+) 0.54(+) 1.56 (0.98) 0.00 (0.05) 0.00
3/31/95(i) 10.14 0.23 0.25 0.48 (0.21) 0.00 0.00 0.00
TOTAL RETURN FUND
Institutional Class
9/30/96* $10.29 $0.34 $ 0.00 $ 0.34 $ (0.32) $(0.02) $ 0.00 $ 0.00
3/31/96 10.02 0.81 0.29 1.10 (0.61) (0.10) (0.12) 0.00
3/31/95 10.25 0.64 (0.24) 0.40 (0.56) (0.05) 0.00 0.00
3/31/94 10.91 0.68 (0.16) 0.52 (0.71) (0.15) (0.30) (0.02)
3/31/93 10.46 0.76 0.76 1.52 (0.76) 0.00 (0.31) 0.00
3/31/92 10.15 0.86 0.60 1.46 (0.86) 0.00 (0.29) 0.00
3/31/91 9.77 0.90 0.39 1.29 (0.90) 0.00 (0.01) 0.00
3/31/90 9.62 0.87 0.21 1.08 (0.87) 0.00 (0.06) 0.00
3/31/89 10.04 0.90 (0.23) 0.67 (0.91) 0.00 (0.18) 0.00
3/31/88(e) 10.00 0.67 0.04 0.71 (0.67) 0.00 0.00 0.00
Administrative Class
9/30/96* 10.29 0.33 0.00 0.33 (0.31) (0.02) 0.00 0.00
3/31/96 10.01 0.80 0.29 1.09 (0.60) (0.09) (0.12) 0.00
3/31/95(j) 10.00 0.31 0.06 0.37 (0.32) (0.03) 0.00 0.00
TOTAL RETURN FUND II
Institutional Class
9/30/96* $ 9.89 $0.31 $(0.04) $ 0.27 $ (0.30) $(0.01) $ 0.00 $ 0.00
11/1/95-3/31/96 10.21 0.25 (0.17) 0.08 (0.26) 0.00 (0.09) (0.05)
10/31/95 9.39 0.69 0.76 1.45 (0.62) 0.00 (0.01) 0.00
10/31/94 10.38 0.51 (0.88) (0.37) (0.51) 0.00 (0.05) 0.00
10/31/93 9.99 0.61 0.74 1.35 (0.61) 0.00 (0.35) 0.00
10/31/92(k) 10.00 0.49 0.23 0.72 (0.49) 0.00 (0.24) 0.00
Administrative Class
9/30/96* 9.89 0.30 (0.04) 0.26 (0.30) 0.00 0.00 0.00
3/31/96 10.22 0.24 (0.17) 0.07 (0.26) 0.00 (0.09) (0.05)
10/31/95(l) 9.34 0.56 0.88 1.44 (0.55) 0.00 (0.01) 0.00
TOTAL RETURN FUND III
Institutional Class
9/30/96* $ 9.13 $0.29 $ 0.03 $ 0.32 $ (0.26) $(0.02) $ 0.00 $ 0.00
3/31/96 8.99 0.72 0.17 0.89 (0.54) (0.09) (0.12) 0.00
3/31/95 9.18 0.59 (0.16) 0.43 (0.52) (0.02) 0.00 0.00
3/31/94 9.81 0.59 (0.03) 0.56 (0.66) (0.12) (0.20) (0.21)
3/31/93 10.31 0.64 0.75 1.39 (0.64) 0.00 (1.25) 0.00
3/31/92(m) 10.00 0.63 0.58 1.21 (0.63) 0.00 (0.27) 0.00
LONG-TERM U.S. GOV'T FUND
Institutional Class
9/30/96* $ 9.96 $0.38 $(0.23) $ 0.15 $ (0.35) $ 0.00 $ 0.00 $ 0.00
3/31/96 9.85 0.83 0.66 1.49 (0.68) (0.04) (0.50) (0.16)
3/31/95 9.96 0.60 (0.09) 0.51 (0.60) (0.02) 0.00 0.00
3/31/94 11.36 0.62 (0.06) 0.56 (1.05) (0.04) (0.70) (0.17)
3/31/93 10.82 0.70 1.66 2.36 (0.70) 0.00 (1.12) 0.00
3/31/92(n) 10.00 0.64 0.85 1.49 (0.64) 0.00 (0.03) 0.00
FOREIGN BOND FUND
Institutional Class
9/30/96* $10.50 $0.26 $ 0.84 $ 1.10 $ (0.22) $ 0.00 $ 0.00 $ 0.00
3/31/96 9.38 0.96 1.03 1.99 (0.34) (0.25) (0.25) (0.03)
3/31/95 10.18 0.38 (0.57) (0.19) 0.00 0.00 0.00 0.00
3/31/94 10.34 0.55 0.27 0.82 (0.55) 0.00 (0.06) (0.37)
3/31/93(o) 10.00 0.16 0.34 0.50 (0.16) 0.00 0.00 0.00
</TABLE>
- --------
<TABLE>
<S> <C>
(h) From commencement of operations, December 16, 1992. (m) From commencement of operations, May 1, 1991.
(i) From commencement of operations, January 16, 1995. (n) From commencement of operations, July 1, 1991.
(j) From commencement of operations, September 7, 1994. (o) From commencement of operations, December 3, 1992. Formerly the
(k) From commencement of operations, December 30, 1991. PIMCO Foreign Fund.
(l) From commencement of operations, November 30, 1994.
+ Per share amounts based on average number of shares outstanding during the
period.
</TABLE>
12
PIMCO Funds: Pacific Investment Management Series
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
Selected data for a share outstanding throughout each period:
<TABLE>
<CAPTION>
NET ASSET NET ASSETS RATIO OF RATIO OF NET
TAX BASIS VALUE END EXPENSES TO INVESTMENT PORTFOLIO
RETURN TOTAL END TOTAL OF PERIOD AVERAGE INCOME TO AVERAGE TURNOVER
OF CAPITAL DISTRIBUTIONS OF PERIOD RETURN (000'S) NET ASSETS NET ASSETS RATE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 0.00 $(0.48) $11.11 6.17% $ 754,183 0.50%+ 9.00%+ 28.20%
0.00 (1.06) 10.94 15.70 536,983 0.47 9.28 65.79
0.00 (0.97) 10.42 8.81 336,310 0.48 9.37 77.60
0.00 (0.97) 10.52 10.65 219,976 0.50 8.40 112.40
0.00 (0.24) 10.41 24.43+ 24,069 0.50+ 8.24+ 29.74
0.00 (0.47) 11.11 6.04 3,038 0.75+ 8.56+ 28.20
0.00 (1.03) 10.94 15.54 1,007 0.80 9.16 65.79
0.00 (0.21) 10.41 4.66 41 0.73+ 10.12+ 77.60
$ 0.00 $(0.34) $10.29 3.41% $11,373,400 0.43%+ 6.72%+ 89.71%
0.00 (0.83) 10.29 11.14 10,247,605 0.42 6.85 221.13
(0.02) (0.63) 10.02 4.22 7,239,735 0.41 6.72 98.48
0.00 (1.18) 10.25 4.55 5,008,160 0.41 6.27 176.74
0.00 (1.07) 10.91 15.29 3,155,441 0.43 7.07 89.95
0.00 (1.15) 10.46 14.90 1,813,935 0.46 8.18 110.46
0.00 (0.91) 10.15 13.74 975,619 0.49 9.10 98.68
0.00 (0.93) 9.77 11.36 659,663 0.60 8.60 109.90
0.00 (1.09) 9.62 5.96 192,613 0.60 8.53 195.26
0.00 (0.67) 10.04 8.31+ 45,172 0.60+ 7.66+ 75.34
0.00 (0.33) 10.29 3.28 135,539 0.68+ 6.64+ 89.71
0.00 (0.81) 10.29 10.99 104,618 0.68 6.64 221.13
(0.01) (0.36) 10.01 3.76 9,037 0.66+ 6.54+ 98.48
$ 0.00 $(0.31) $ 9.85 2.86% $ 442,834 0.50%+ 6.43%+ 151.18%
0.00 (0.40) 9.89 .78 455,583 0.51+ 6.36+ 73.18
0.00 (0.63) 10.21 15.96 442,091 0.50 6.47 41.05
(0.06) (0.62) 9.39 (3.58) 357,900 0.50 5.22 99.46
0.00 (0.96) 10.38 13.79 371,260 0.50 5.38 49.71
0.00 (0.73) 9.99 7.52 287,113 0.50+ 5.83+ 133.61
0.00 (0.30) 9.85 2.73 4,465 0.75+ 6.15+ 151.18
0.00 (0.40) 9.89 0.57 3,320 0.76+ 6.06+ 73.18
0.00 (0.56) 10.22 15.92 3,163 0.76+ 6.22+ 40.91
$ 0.00 $(0.28) $ 9.17 3.63% $ 158,505 0.50%+ 6.28%+ 74.95%
0.00 (0.75) 9.13 10.06 142,223 0.50 6.82 176.97
(0.08) (0.62) 8.99 4.92 99,497 0.50 6.95 145.98
0.00 (1.19) 9.18 5.64 97,522 0.50 6.00 95.21
0.00 (1.89) 9.81 14.47 65,349 0.51 6.06 161.38
0.00 (0.90) 10.31 13.61+ 47,908 0.60+ 6.75+ 521.14
$ 0.00 $(0.35) $ 9.76 1.61% $ 21,860 0.50%+ 7.43%+ 152.18%
0.00 (1.38) 9.96 14.83 32,511 0.56 6.80 238.32
0.00 (0.62) 9.85 5.50 32,349 0.50 6.62 88.92
0.00 (1.96) 9.96 4.13 25,978 0.50 5.37 97.67
0.00 (1.82) 11.36 23.42 22,946 0.50 6.16 320.08
0.00 (0.67) 10.82 20.57+ 15,900 0.50+ 7.91+ 427.81
$ 0.00 $(0.22) $11.38 10.59% $ 214,911 0.48%+ 4.00%+ 518.75%
0.00 (0.87) 10.50 21.80 258,493 0.52 5.83 1,233.71
(0.61) (0.61) 9.38 (1.85) 232,700 0.47 6.44 299.45
0.00 (0.98) 10.18 7.79 498,521 0.54 5.12 260.34
0.00 (0.16) 10.34 16.23+ 178,895 0.65+ 4.97+ 122.55
</TABLE>
- --------
+ Annualized.
January 17, 1997 Prospectus
13
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
Selected data for a share outstanding throughout each period:
<TABLE>
<CAPTION>
NET ASSET NET REALIZED TOTAL INCOME DIVIDENDS DIVIDENDS IN DISTRIBUTIONS DISTRIBUTIONS
YEAR OR VALUE NET AND UNREALIZED (LOSS) FROM FROM NET EXCESS OF NET FROM NET IN EXCESS OF
PERIOD BEGINNING INVESTMENT GAIN (LOSS) ON INVESTMENT INVESTMENT INVESTMENT REALIZED NET REALIZED
ENDED OF PERIOD INCOME INVESTMENTS OPERATIONS INCOME INCOME CAPITAL GAINS CAPITAL GAINS
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GLOBAL BOND FUND
Institutional Class
9/30/96* $10.05 $0.25 $ 0.43 $ 0.68 $(0.25) $0.00 $0.00 $0.00
3/31/96 9.87 0.45 0.72 1.17 (0.61) 0.00 (0.21) (0.17)
3/31/95 9.85 0.69 (0.14) 0.55 (0.29) (0.24) 0.00 0.00
3/31/94(p) 10.00 0.16 (0.15) 0.01 (0.16) 0.00 0.00 0.00
Administrative Class
9/30/96(q)* 10.28 0.08 0.20 0.28 (0.08) 0.00 0.00 0.00
INTERNATIONAL BOND FUND
Institutional Class
9/30/96* $ 8.04 $0.39 $ 0.37 $ 0.76 $(0.10) $0.00 $0.00 $0.00
3/31/96 7.44 0.63 0.49 1.12 (0.39) (0.13) 0.00 0.00
3/31/95 9.93 2.18 (2.41) (0.23) (2.26) 0.00 0.00 0.00
3/31/94 10.53 0.47 0.24 0.71 (0.96) 0.00 (0.35) 0.00
3/31/93 10.02 0.62 0.42 1.04 (0.48) 0.00 (0.05) 0.00
3/31/92 9.94 0.79 0.27 1.06 (0.78) 0.00 (0.20)++ 0.00
3/31/91 9.78 0.79 0.30 1.09 (0.83) 0.00 (0.10) 0.00
3/31/90(r) 10.00 0.15 (0.27) (0.12) (0.10) 0.00 0.00 0.00
STOCKSPLUS FUND
Institutional Class
9/30/96* $11.16 $0.53 $ 0.33 $ 0.86 $(0.42) $0.00 $0.00 $0.00
3/31/96 10.48 0.91 2.48 3.39 (1.05) 0.00 (1.62) (0.04)
3/31/95 9.52 1.03 0.69 1.72 (0.76) 0.00 0.00 0.00
3/31/94(s) 10.00 0.34 0.10 0.44 (0.34) (0.01) (0.10) (0.47)
STRATEGIC BALANCED FUND
Institutional Class
9/30/96(t)* $10.00 $0.20 $ 0.15 $ 0.35 $ 0.00 $0.00 $0.00 $0.00
</TABLE>
- --------
(p) From commencement of operations, (s) From commencement of operations,
November 23, 1993. Formerly the May 14, 1993.
PIMCO Global Fund. (t) From commencement of operations,
(q) From commencement of operations, June 28, 1996.
August 1, 1996. Formerly the ++ Gain distribution includes $0.14
PIMCO Global Fund. per share characterized for tax
(r) From commencement of operations, purposes as distributions from
December 13, 1989. Formerly the ordinary income.
PIMCO International Fund. * Unaudited.
14
PIMCO Funds: Pacific Investment Management Series
<PAGE>
FINANCIAL HIGHLIGHTS (CONTINUED)
Selected data for a share outstanding throughout each period:
<TABLE>
<CAPTION>
NET ASSET NET ASSETS RATIO OF RATIO OF NET
TAX BASIS VALUE END EXPENSES TO INVESTMENT PORTFOLIO
RETURN TOTAL END TOTAL OF PERIOD AVERAGE INCOME TO AVERAGE TURNOVER
OF CAPITAL DISTRIBUTIONS OF PERIOD RETURN (000'S) NET ASSETS NET ASSETS RATE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$0.00 $(0.25) $10.48 6.91% $ 160,821 0.55%+ 4.99%+ 453.28%
0.00 (0.99) 10.05 12.04 133,833 0.58 5.88 1,082.91
0.00 (0.53) 9.87 10.35 76,476 0.64 5.59 461.48
0.00 (0.16) 9.85 0.08 40,485 0.50+ 4.55+ 132.41
0.00 (0.08) 10.48 3.22 25 0.80+ 1.02+ 453.28
$0.00 $(0.10) $ 8.70 $9.51 $ 948,833 0.50%+ 4.20%+ 463.36
0.00 (0.52) 8.04 15.08 2,271,940 0.50 6.09 1,046.00
0.00 (2.26) 7.44 (1.27) 45,950 0.43 5.90 674.00
0.00 (1.31) 9.93 6.54 2,296,978 0.43 5.51 370.00
0.00 (0.53) 10.53 10.61 2,589,677 0.46 6.67 301.00
0.00 (0.98) 10.02 10.97 1,314,661 0.51 8.24 201.00
0.00 (0.93) 9.94 11.55 609,660 0.55 8.23 202.00
0.00 (0.10) 9.78 (4.18)+ 407,210 0.75+ 7.94+ 49.00
$0.00 $(0.42) $11.60 7.78% $ 181,300 0.65%+ 9.89%+ 27.29%
0.00 (2.71) 11.16 34.07 151,869 0.70 15.23 101.67
0.00 (0.76) 10.48 18.64 46,498 0.50 11.89 176.98
0.00 (0.92) 9.52 1.55 14,330 0.50+ 4.00+ 33.29
$0.00 $ 0.00 $10.35 3.50% $ 10,378 0.64%+ 7.73%+ 36.75%
</TABLE>
- --------
+ Annualized.
January 17, 1997 Prospectus
15
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
The investment objective and general investment policies of each Fund are
described below. There can be no assurance that the investment objective of
any Fund will be achieved. Because the market value of each Fund's investments
will change, the net asset value per share of each Fund (except the PIMCO
Money Market Fund) also will vary. Specific portfolio securities eligible for
purchase by the Funds, investment techniques that may be used by the Funds,
and the risks associated with these securities and techniques are described
more fully under "Characteristics and Risks of Securities and Investment
Techniques" in this Prospectus and "Investment Objectives and Policies" in the
Statement of Additional Information.
FIXED INCOME FUNDS
Each of the Fixed Income Funds differs from the others primarily in the
length of the Fund's duration or the proportion of its investments in certain
types of fixed income securities. For a discussion of the concept of duration,
see "Appendix A--Description of Duration."
The investment objective of the PIMCO Money Market Fund and PIMCO Short-Term
Fund is to seek to obtain maximum current income consistent with preservation
of capital and daily liquidity. The PIMCO Money Market Fund also attempts to
maintain a stable net asset value of $1.00 per share, although there can be no
assurance that it will be successful in doing so. The investment objective of
the PIMCO Real Return Bond Fund is to seek to realize maximum real return,
consistent with the preservation of real capital and prudent investment
management. For a discussion of "real return," see "Total Return and Real
Return," below. The investment objective of the PIMCO Global Bond Fund II is
to seek maximum total return, consistent with the preservation of capital.
Each of the remaining Fixed Income Funds seeks to maximize total return,
consistent with preservation of capital and prudent investment management.
In selecting securities for each Fixed Income Fund, the Adviser utilizes
economic forecasting, interest rate anticipation, credit and call risk
analysis, foreign currency exchange rate forecasting, and other security
selection techniques. The proportion of each Fund's assets committed to
investment in securities with particular characteristics (such as maturity,
type and coupon rate) will vary based on the Adviser's outlook for the U.S.
and foreign economies, the financial markets, and other factors.
Each of the Fixed Income Funds will invest at least 65% of its assets in the
following types of securities, which, unless specifically provided otherwise
in the descriptions of the Funds that follows, may be issued by domestic or
foreign entities and denominated in U.S. dollars or foreign currencies:
securities issued or guaranteed by the U.S. Government, its agencies or
instrumentalities ("U.S. Government securities"), corporate debt securities,
including convertible securities and corporate commercial paper; mortgage-
backed and other asset-backed securities; inflation-indexed bonds issued by
both governments and corporations; structured notes and loan participations;
bank certificates of deposit, fixed time deposits and bankers' acceptances;
repurchase agreements and reverse repurchase agreements; obligations of
foreign governments or their subdivisions, agencies and instrumentalities; and
obligations of international agencies or supranational entities. Fixed income
securities may have fixed, variable, or floating rates of interest, including
rates of interest that vary inversely at a multiple of a designated or
floating rate, or that vary according to changes in relative values of
currencies. Each of the Fixed Income Funds may hold different percentages of
its assets in these various types of securities, and each Fund, except the
PIMCO Money Market Fund, may invest all of its assets in derivative
instruments or in mortgage- or asset-backed securities.
16
PIMCO Funds: Pacific Investment Management Series
<PAGE>
The compositions of the Fixed Income Funds differ as follows:
PIMCO MONEY MARKET FUND seeks maximum current income consistent with the
preservation of capital and daily liquidity. It attempts to achieve this
objective by investing at least 95% of its total assets, measured at the time
of investment, in a diversified portfolio of the highest quality money market
securities. The Fund may also invest up to 5% of its total assets, measured at
the time of investment, in money market securities that are in the second-
highest rating category for short-term obligations. The Fund's investments in
securities will be limited to U.S. dollar-denominated securities that mature
in 397 days or less from the date of purchase. The Fund may invest in the
following: obligations of the U.S. Government (including its agencies and
instrumentalities); short-term corporate debt securities of domestic and
foreign corporations; obligations of domestic and foreign commercial banks,
savings banks, and savings and loan associations; and commercial paper. The
Fund may invest more than 25% of its total assets in securities or obligations
issued by U.S. banks. The dollar-weighted average portfolio maturity of the
Fund will not exceed 90 days.
The PIMCO Money Market Fund may invest only in U.S. dollar-denominated money
market instruments that present minimal credit risk and, with respect to at
least 95% of its total assets, measured at the time of investment, that are of
the highest quality. The Adviser will make a determination as to whether a
security presents minimal credit risk under procedures adopted by the Board of
Trustees. A money market instrument will be considered to be of the highest
quality (1) if rated in the highest rating category (i) by any two nationally
recognized statistical rating organizations ("NRSROs") (e.g., Aaa or Prime-1
by Moody's, AAA or A-1 by S&P, or, (ii) if rated by only one NRSRO, by that
NRSRO, and whose acquisition is approved or ratified by the Board of Trustees;
(2) if unrated but issued by an issuer that has short-term debt obligations of
comparable maturity, priority, and security, and that are rated in the highest
rating category by (i) any two NRSROs or, (ii) if rated by only one NRSRO, by
that NRSRO, and whose acquisition is approved or ratified by the Board of
Trustees; or (3) an unrated security that is of comparable quality to a
security rated in the highest rating category as determined by the Adviser and
whose acquisition is approved or ratified by the Board of Trustees. With
respect to no more than 5% of its total assets, measured at the time of
investment, the Fund may also invest in money market instruments that are in
the second-highest rating category for short-term debt obligations (e.g.,
rated Aa or Prime-2 by Moody's or AA or A-2 by S&P). A money market instrument
will be considered to be in the second-highest rating category under the
criteria described above with respect to instruments considered to be of the
highest quality, as applied to instruments in the second-highest rating
category. See "Appendix B--Description of Securities Ratings" for a
description of Moody's and S&P's ratings applicable to fixed income
securities.
The PIMCO Money Market Fund may not invest more than 5% of its total assets,
measured at the time of investment, in securities of any one issuer that are
of the highest quality, except that (1) the Fund may invest more than 5% of
its total assets in the securities of a single issuer if rated in the highest
rating category for a period of up to three business days after purchase,
provided that the Fund may not make more than one investment at a time in
accordance with this exception, and (2) this limitation shall not apply to
U.S. Government securities and repurchase agreements with respect thereto. The
Fund may not invest more than the greater of 1% of its total assets or
$1,000,000, measured at the time of investment, in securities of any one
issuer that are in the second-highest rating category, except that this
limitation shall not apply to U.S. Government securities. In the event that an
instrument acquired by the Fund is downgraded or otherwise ceases to be of the
quality that is required for securities purchased by the Fund, the Adviser,
under procedures approved by the Board of Trustees (or the Board of Trustees
itself if the Adviser becomes aware an unrated security is downgraded below
high quality and the Adviser does not dispose of the security or such security
does not mature within five business days) shall promptly reassess whether
such security presents minimal credit risk and determine whether to retain the
instrument.
January 17, 1997 Prospectus
17
<PAGE>
PIMCO SHORT-TERM FUND invests in a diversified portfolio of fixed income
securities of varying maturities. The average portfolio duration of this Fund
will normally not exceed one year. The Fund may invest up to 10% of its assets
in fixed income securities that are rated below investment grade (rated below
Baa by Moody's or BBB by S&P) but rated B or higher by Moody's or S&P (or, if
unrated, determined by the Adviser to be of comparable quality). Securities
rated below investment grade may be referred to colloquially as "junk bonds."
For information on the risks associated with investments in securities rated
below investment grade, see "Appendix B--Description of Securities Ratings."
The Fund may invest up to 5% of its assets in securities denominated in
foreign currencies, and may invest beyond this limit in U.S. dollar-
denominated securities of foreign issuers.
PIMCO LOW DURATION FUND invests in a diversified portfolio of fixed income
securities of varying maturities. The average portfolio duration of this Fund
will normally vary within a one- to three-year time frame based on the
Adviser's forecast for interest rates. The Fund may invest up to 10% of its
assets in fixed income securities that are rated below investment grade but
rated B or higher by Moody's or S&P (or, if unrated, determined by the Adviser
to be of comparable quality). For information on the risks associated with
investments in securities rated below investment grade, see "Appendix B--
Description of Securities Ratings." The Fund may invest up to 20% of its
assets in securities denominated in foreign currencies, and may invest beyond
this limit in U.S. dollar-denominated securities of foreign issuers. The total
rate of return for this Fund is expected to exhibit less volatility than that
of the PIMCO Moderate Duration Fund or the PIMCO Total Return Fund because its
duration will be shorter.
PIMCO LOW DURATION FUND II has the same policies as the PIMCO Low Duration
Fund, except that its investments in fixed income securities are limited to
those of domestic (U.S.) issuers that are rated at least A by Moody's or S&P
(or, if unrated, determined by the Adviser to be of comparable quality).
PIMCO LOW DURATION FUND III has the same policies as the PIMCO Low Duration
Fund, except that it limits its investments with respect to certain socially
sensitive issues. As a matter of non-fundamental policy, the Fund will not
invest in the securities of any issuer determined by the Adviser to be engaged
principally in the provision of healthcare services, the manufacture of
alcoholic beverages, tobacco products, pharmaceuticals or military equipment,
or the operation of gambling casinos. The Fund will also avoid, to the extent
possible on the basis of information available to the Adviser, the purchase of
securities of issuers engaged in the production or trade of pornographic
materials. An issuer will be deemed to be principally engaged in an activity
if it derives more than 10% of its gross revenues from such activities.
PIMCO MODERATE DURATION FUND invests in a diversified portfolio of fixed
income securities of varying maturities. The average portfolio duration of
this Fund will normally vary within a two- to five-year time frame based on
the Adviser's forecast for interest rates. The Fund may invest up to 10% of
its assets in fixed income securities that are rated below investment grade
but rated B or higher by Moody's or S&P (or, if unrated, determined by the
Adviser to be of comparable quality). For information on the risks associated
with investments in securities rated below investment grade, see "Appendix B--
Description of Securities Ratings." The Fund may invest up to 20% of its
assets in securities denominated in foreign currencies, and may invest beyond
this limit in U.S. dollar-denominated securities of foreign issuers. The total
rate of return for this Fund is expected to exhibit less volatility than that
of the PIMCO Total Return Fund because its duration will normally be shorter.
However, the total rate of return for this Fund is expected to exhibit more
volatility than that of the PIMCO Low Duration Fund because its duration will
normally be longer.
PIMCO HIGH YIELD FUND invests under normal circumstances at least 65% of its
assets in a diversified portfolio of fixed income securities rated lower than
Baa by Moody's or lower than BBB by S&P but rated at least B by Moody's or S&P
(or, if unrated, determined by the Adviser to be of comparable quality). Such
securities are colloquially referred to
18
PIMCO Funds: Pacific Investment Management Series
<PAGE>
as "junk bonds." The remainder of the Fund's assets may be invested in
investment grade fixed income securities (i.e., securities rated at least Baa
by Moody's or BBB by S&P, or, if unrated, deemed by the Adviser to be of
comparable quality). The average portfolio duration of this Fund will normally
vary within a two- to six-year time frame depending on the Adviser's view of
the potential for total return offered by a particular duration strategy. The
Fund may invest in securities of foreign issuers, but only those that are U.S.
dollar-denominated. The Fund may also engage in hedging strategies involving
equity options.
Investments in high yield securities, while generally providing greater
potential opportunity for capital appreciation and higher yields than
investments in higher rated securities, also entail greater risk, including
the possibility of default or bankruptcy of the issuer of such securities.
Risk of default or bankruptcy may be greater in periods of economic
uncertainty or recession, as the issuers of high yield securities may be less
able to withstand general economic downturns. The Adviser seeks to reduce risk
through diversification, credit analysis and attention to current developments
and trends in both the economy and financial markets. The value of all fixed
income securities, including those held by the Fund, can be expected to change
inversely with interest rates. For a further discussion of the special risks
of investing in lower rated securities, see "Characteristics and Risks of
Securities and Investment Techniques--High Yield Securities."
PIMCO TOTAL RETURN FUND invests under normal circumstances at least 65% of
its assets in a diversified portfolio of fixed income securities of varying
maturities. The average portfolio duration of this Fund will normally vary
within a three- to six-year time frame based on the Adviser's forecast for
interest rates. The Fund may invest up to 10% of its assets in fixed income
securities that are rated below investment grade but rated B or higher by
Moody's or S&P (or, if unrated, determined by the Adviser to be of comparable
quality). For information on the risks associated with investments in
securities rated below investment grade, see "Appendix B--Description of
Securities Ratings." The Fund may also invest up to 20% of its assets in
securities denominated in foreign currencies, and may invest beyond this limit
in U.S. dollar-denominated securities of foreign issuers. Portfolio holdings
will be concentrated in areas of the bond market (based on quality, sector,
coupon or maturity) which the Adviser believes to be relatively undervalued.
The total rate of return for this Fund is expected to exhibit less volatility
than that of the PIMCO Long-Term U.S. Government Fund because its duration
will normally be shorter.
PIMCO TOTAL RETURN FUND II has the same policies as the PIMCO Total Return
Fund, except that its investments in fixed income securities are limited to
those of domestic (U.S.) issuers that are rated at least Baa by Moody's or BBB
by S&P (or, if unrated, determined by the Adviser to be of comparable
quality).
PIMCO TOTAL RETURN FUND III has the same policies as the PIMCO Total Return
Fund, except that it limits its investments with respect to certain socially
sensitive issues in the same manner as the PIMCO Low Duration Fund III.
PIMCO COMMERCIAL MORTGAGE SECURITIES FUND invests at least 65% of its assets
in commercial mortgage-backed securities rated at least Baa by Moody's or BBB
by S&P (or, if unrated, determined by the Adviser to be of comparable
quality). The Fund also may invest up to 35% of its assets in lower-rated
securities (but rated at least B, or, if unrated, determined by the Adviser to
be of comparable quality) if such securities are considered by the Adviser to
have attractive investment characteristics. For information on the risks
associated with investments in securities rated below investment grade, see
"Appendix B--Description of Securities Ratings." The average portfolio
duration of this Fund will normally vary within a three- to eight-year time
frame depending on the Adviser's view of the potential for total return
offered by a particular duration strategy. The Fund may invest in securities
of foreign issuers, but only those that are U.S. dollar-denominated.
PIMCO LONG-TERM U.S. GOVERNMENT FUND invests in a diversified portfolio of
primarily U.S. Government securities, which may be represented by futures
contracts (including related options) with respect to such securities, and
options on
January 17, 1997 Prospectus
19
<PAGE>
such securities, when the Adviser deems it appropriate to do so. The Fund will
have a minimum average portfolio duration of eight years. For point of
reference, the dollar-weighted average portfolio maturity of the Fund is
normally expected to be more than ten years. The total rate of return is
expected to exhibit more volatility than that of the other Fixed Income Funds
due to the greater investment risk normally associated with longer duration
investments. The PIMCO Long-Term U.S. Government Fund's investments in fixed
income securities are limited to those of U.S. dollar-denominated securities
of domestic and foreign issuers that are rated at least A by Moody's or S&P
(or, if unrated, determined by the Adviser to be of comparable quality). In
addition, the Fund will not acquire a security if, as a result, more than 10%
of the Fund's total assets would be invested in securities rated below Aa by
Moody's or below AA by S&P, or if more than 25% of the Fund's total assets
would be invested in securities rated Aa by Moody's or AA by S&P.
PIMCO REAL RETURN BOND FUND invests under normal circumstances at least 65%
of its total assets, measured at the time of investment, in inflation-indexed
bonds issued by U.S. and foreign governments, their agencies or
instrumentalities. All securities purchased by the Fund must be rated at least
A by Moody's or S&P (or, if unrated, determined by the Adviser to be of
comparable quality), and the Fund will maintain a minimum average quality of
Aa. The Fund may invest up to 35% of its assets in other types of fixed income
instruments, including securities denominated in foreign currencies, (and the
Fund may also invest beyond this limit in U.S. dollar-denominated securities
of foreign issuers).
Inflation-indexed bonds are fixed income securities whose principal value is
periodically adjusted according to the rate of inflation. Such bonds generally
are issued at an interest rate lower than non-inflation related bonds, but are
expected to retain their value against inflation over time. For a more
complete discussion of inflation-indexed bonds, including the risks associated
with investing in such securities, see "Characteristics and Risks of
Securities and Investment Techniques--Inflation-Indexed Bonds." See
"Dividends, Distributions and Taxes" for information about the possible tax
consequences of investing in the Fund and in inflation-indexed bonds.
In managing fixed income securities, one of the principal tools generally
used by the Adviser is "duration," which is a measure of the expected life of
a fixed income security on a present value basis, incorporating a bond's
yield, coupon interest payments, final maturity and call features. See
"Appendix A--Description of Duration." Because of the unique features of
inflation-indexed bonds, the Adviser utilizes a modified form of duration for
the PIMCO Real Return Bond Fund ("modified real duration") which measures
price changes in such bonds as a result of changes in real, rather than
nominal, interest rates. Although there is no limit on the modified real
duration of the PIMCO Real Return Bond Fund, it is expected that the average
modified real duration of the Fund will normally vary approximately with the
range of the average modified real duration of all inflation-indexed bonds
issued by the U.S. Treasury in the aggregate.
PIMCO FOREIGN BOND FUND invests in a portfolio of fixed income securities
primarily denominated in major foreign currencies and baskets of foreign
currencies (such as the European Currency Unit, or "ECU"). The Adviser will
invest the assets of the Fund in a number of international bond markets so
that, under normal circumstances, the Fund will invest at least 85% of its
assets in securities of issuers located outside the United States,
representing at least three foreign countries, which may be represented by
futures contracts (including related options) with respect to such securities,
and options on such securities, when the Adviser deems it appropriate to do
so. The Fund may invest up to 10% of its assets in fixed income securities
that are rated below investment grade but rated B or higher by Moody's or S&P
(or, if unrated, determined by the Adviser to be of comparable quality). For
information on the risks associated with investments in securities rated below
investment grade, see "Appendix B--Description of Securities Ratings." The
average portfolio duration of this Fund will normally vary within a three- to
six-year time frame.
20
PIMCO Funds: Pacific Investment Management Series
<PAGE>
PIMCO GLOBAL BOND FUND invests in a portfolio of fixed income securities
denominated in major foreign currencies, baskets of foreign currencies (such
as the ECU), and the U.S. dollar. Under normal circumstances, at least 65% of
its assets will be invested in fixed income securities of issuers located in
at least three countries (one of which may be the United States), which may be
represented by futures contracts (including related options) with respect to
such securities, and options on such securities, when the Adviser deems it
appropriate to do so. Depending on the Adviser's current opinion as to the
proper allocation of assets among domestic and foreign issuers, investments in
the securities of issuers located outside the United States will normally vary
between 25% and 75% of the Fund's assets. The Fund may invest up to 10% of its
assets in fixed income securities that are rated below investment grade but
rated B or higher by Moody's or S&P (or, if unrated, determined by the Adviser
to be of comparable quality). For information on the risks associated with
investments in securities rated below investment grade, see "Appendix B--
Description of Securities Ratings." The average portfolio duration of this
Fund will normally vary within a three- to six-year time frame.
PIMCO GLOBAL BOND FUND II has the same policies as the PIMCO Global Bond
Fund, except as set forth below. The PIMCO Global Bond Fund II expects to
hedge its foreign currency exposure so that generally no more than 25% of the
Fund's total net assets will be invested in unhedged foreign currency-
denominated securities. The PIMCO Global Bond Fund II may not borrow in excess
of 10% of the value of its total assets and then only from banks as a
temporary measure to facilitate the meeting of redemption requests (not for
leverage), or for extraordinary or emergency purposes. The PIMCO Global Bond
Fund II may only engage in short sales that are "against the box," and may not
loan its portfolio securities if their market value exceeds 25% of the total
assets of the Fund. In addition, the PIMCO Global Bond Fund II is subject to
different fundamental and non-fundamental investment restrictions than the
PIMCO Global Bond Fund. See "Investment Restrictions" in this Prospectus and
in the Statement of Additional Information.
The PIMCO Foreign Bond Fund differs from the PIMCO Global Bond and Global
Bond II Funds primarily in the extent to which assets are invested in the
securities of issuers located outside the United States. The Adviser will
select these Funds' foreign country and currency compositions based on an
evaluation of relative interest rates, exchange rates, monetary and fiscal
policies, trade and current account balances, and any other specific factors
the Adviser believes to be relevant.
PIMCO INTERNATIONAL BOND FUND invests in a portfolio of fixed income
securities denominated in major foreign currencies, baskets of foreign
currencies, and the U.S. dollar. The PIMCO International Bond Fund is
available only to private account clients of PIMCO. The Adviser will invest
the assets of the Fund in a number of international bond markets so that,
under normal conditions, the Fund will invest at least 65% of its assets in
fixed income securities of foreign issuers representing at least three foreign
countries or currencies, which may be represented by futures contracts
(including related options) with respect to such securities, and options on
such securities, when the Adviser deems it appropriate to do so. The PIMCO
International Bond Fund will invest only in investment grade securities, i.e.,
in securities rated at least Baa by Moody's or BBB by S&P (or, if unrated,
deemed by the Adviser to be of comparable quality). The average portfolio
duration of this Fund will vary based on the strategy currently being used by
the Adviser in managing the assets of the Fund within the overall PIMCO
private account management program, but is normally not expected to exceed
eight years. The Adviser will select the Fund's foreign country and currency
composition based on its evaluation of relative interest rates, inflation
rates, exchange rates, monetary and fiscal policies, trade and current account
balances, and any other specific factors the Adviser believes to be relevant.
Each of the PIMCO Real Return Bond, Foreign Bond, Global Bond, Global Bond
II and International Bond Funds will normally invest at least 65% of its total
assets in "bonds." For this purpose, each of these Funds considers the various
types of debt or fixed income securities in which it invests, as specifically
described elsewhere in this Prospectus, to be
January 17, 1997 Prospectus
21
<PAGE>
"bonds" as referenced in that Fund's name. The use of this name is not meant
to restrict a Fund's investment to the narrow category of debt securities that
are formally called "bonds."
As a non-fundamental, operating policy, the Adviser intends to use foreign
currency-related derivative instruments (currency futures and related options,
currency options, forward contracts and swap agreements) in an effort to hedge
foreign currency risk with respect to at least 75% of the assets of the Fixed
Income Funds (other than the PIMCO Global Bond Fund) denominated in currencies
other than the U.S. dollar. There can be no assurance that the Adviser will be
successful in doing so. The active use of currency derivatives involves
transaction costs which may adversely effect yield and return.
The PIMCO Real Return Bond, Commercial Mortgage Securities, Foreign Bond,
Global Bond, Global Bond II and International Bond Funds are "non-diversified"
for purposes of the Investment Company Act of 1940 ("1940 Act"), meaning that
they may invest a greater percentage of their assets in the securities of one
issuer than the other Funds. As "non-diversified" portfolios, these Funds may
be more susceptible to risks associated with a single economic, political or
regulatory occurrence than a diversified portfolio might be.
EQUITY FUNDS
The Equity Funds are the PIMCO StocksPLUS Fund and the PIMCO StocksPLUS
Short Strategy Fund. The investment objective of PIMCO StocksPLUS Fund is to
seek to achieve a total return which exceeds the total return performance of
the S&P 500 Index. The investment objective of the PIMCO StocksPLUS Short
Strategy Fund is to seek total return through the implementation of short
investment positions on the S&P 500 Index.
Each of the Equity Funds invests in common stocks, options, futures, options
on futures and swaps consistent with its portfolio management strategy as set
forth below. Assets not invested in equity securities may be invested in
securities eligible for purchase by the Fixed Income Funds. Each of the Equity
Funds may invest up to 10% of its assets in fixed income securities that are
below "investment grade," i.e., rated below Baa by Moody's or BBB by S&P, but
at least B (or, if unrated, determined by the Adviser to be of comparable
quality). In addition, each of the Equity Funds may lend its portfolio
securities to brokers, dealers and other financial institutions in order to
earn income. Each of the Equity Funds may invest all of its assets in
derivative instruments, as described below and under "Characteristics of
Securities and Investment Techniques--Derivative Instruments." Each of the
Equity Funds may invest up to 20% of its assets in securities of foreign
issuers, may purchase and sell options and futures on foreign currencies, and
may enter into forward currency contracts.
The Equity Funds differ in composition or strategy as follows:
PIMCO STOCKSPLUS FUND invests only in common stocks that are represented in
the S&P 500 ("S&P 500 stocks"), stock index futures, options on stock indexes,
and options on stock index futures that are based on the S&P 500 and swap
agreements with respect to the S&P 500 ("S&P 500 derivatives"). StocksPLUS is
the name of a proprietary portfolio management strategy which utilizes S&P 500
derivatives in addition to or in place of S&P 500 stocks to equal or exceed
the performance of the S&P 500. The Fund will seek to remain invested in S&P
500 stocks and S&P 500 derivatives even when the S&P 500 is declining.
The percentage of the PIMCO StocksPLUS Fund's assets invested directly in
S&P 500 stocks will vary depending primarily on whether S&P 500 derivatives
appear, in the Adviser's opinion, overvalued or undervalued with respect to
the stocks underlying the S&P 500. The Adviser expects that under normal
market conditions, the Fund will invest
22
PIMCO Funds: Pacific Investment Management Series
<PAGE>
100% of its assets in S&P 500 derivatives, backed by a portfolio of fixed
income securities. The Fund will maintain a segregated account consisting of
assets determined to be liquid by the Adviser in accordance with procedures
established by the Board of Trustees, or otherwise maintain offsetting
positions, to cover its open positions in S&P 500 derivatives. The Adviser
will actively manage the fixed income assets serving as cover for derivatives,
as well as any other fixed income assets held by the Fund, with a view toward
enhancing the Fund's total return investment performance, subject to an
overall portfolio duration which is normally not expected to exceed one year.
See "Appendix A--Description of Duration."
The S&P 500 is composed of 500 selected common stocks, most of which are
listed on the New York Stock Exchange. Standard and Poor's Corporation ("S&P")
chooses the stocks to be included in the S&P 500 solely on a statistical
basis. The weightings of stocks in the index are based on each stock's
relative total market value, that is, its market price per share times the
number of shares outstanding. Stocks represented currently in the S&P 500
represent approximately two-thirds of the total market value of all U.S.
common stocks. The Fund is neither sponsored by nor affiliated with S&P.
When S&P 500 derivatives appear to be overvalued relative to the S&P 500,
the Fund may invest up to 100% of its assets in a "basket" of S&P 500 stocks.
The composition of this basket will be determined by standard statistical
techniques that analyze the historical correlation between the return of every
stock currently in the S&P 500 and the return on the S&P 500 itself. The
Adviser may employ fundamental stock analysis only to choose among stocks that
have already satisfied the statistical correlation tests. Stocks chosen for
the Fund are not limited to those with any particular weighting in the S&P
500.
Positions in S&P 500 futures and options on futures will be entered into
only to the extent they constitute permissible positions for the Fund
according to applicable rules of the Commodity Futures Trading Commission
("CFTC"). From time to time, the Adviser may be constrained in its ability to
use S&P 500 derivatives either by requirements of the Internal Revenue Code or
by an unanticipated inability to close out positions when it would be most
advantageous to do so. A large number of investors use S&P 500 derivatives for
both hedging and speculative purposes, and although generally this helps
guarantee a liquid market in those instruments, at times liquidity may be
limited. For more information about S&P 500 derivatives, see "Characteristics
and Risks of Securities and Investment Techniques--Derivative Instruments."
PIMCO STOCKSPLUS SHORT STRATEGY FUND invests primarily in S&P 500 short
positions such that the Fund's net asset value is generally expected to vary
inversely to the value of the S&P 500. The Fund is designed for investors
seeking to take advantage of declines in the value of the S&P 500, or
investors wishing to hedge existing long equity positions. The Fund will
generally realize gains only when the price of the S&P 500 Index is declining.
When the S&P 500 is rising, the Fund will generally incur a loss.
The Fund will maintain short positions through the use of a combination of
S&P 500 derivatives, including options, futures and swap agreements. All S&P
500 derivatives will be covered by the maintenance of a segregated account
consisting of assets determined to be liquid by the Adviser in accordance with
procedures established by the Board of Trustees, or through the maintenance of
offsetting positions. It is anticipated that the Fund will generally remain
fully invested in S&P 500 short positions at all times, even during periods
when the S&P 500 is rising. However, the Fund may purchase call options on S&P
500 futures contracts from time to time in an effort to limit the total
potential decline in the Fund's net asset value. There can be no assurance
that the use of such call options would be effective in limiting the potential
decline in net asset value of the Fund.
January 17, 1997 Prospectus
23
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The Adviser will actively manage the fixed income portion of the Fund's
investment portfolio that is used as coverage for S&P 500 derivatives in an
attempt to provide incremental returns. Thus, there will not be a perfect
inverse correlation between the performance of the S&P 500 and the performance
of the Fund. A perfect inverse correlation would exist if the net asset value
of the Fund, including the value of its dividend and capital gains
distributions, increased in exact proportion to decreases in the S&P 500 (or
decreased in exact proportion to increases in the S&P 500). Rather, because of
the Adviser's management of the fixed income securities that are held by the
Fund as cover for the Fund's short positions, it is expected that, if the
value of the S&P 500 were to decrease by 10%, for example, the amount by which
the Fund's net asset value would increase would be an amount slightly in
excess of 10%. Conversely, an increase in the S&P 500 of 10% would result in a
loss to the Fund of slightly less than this amount. There can be no assurance
that the use of such active fixed income management techniques will produce
the intended results.
BALANCED FUND
PIMCO STRATEGIC BALANCED FUND has as its investment objective the
maximization of total return, consistent with preservation of capital and
prudent investment management. In seeking to achieve this objective, the Fund
invests in the securities eligible for purchase by the PIMCO StocksPLUS Fund
and the PIMCO Total Return Fund. The percentage of the Fund's assets allocated
to equity or fixed income exposure will vary in accordance with an asset
allocation methodology developed by the Adviser. The methodology builds upon
the Adviser's long-standing process of economic forecasting of business cycle
stages by applying to this process a disciplined asset allocation model which
employs certain statistical variance techniques. Depending on the outcome of
this asset allocation methodology, the Fund's equity exposure will vary
between 45% and 75% of its total assets, and its fixed income exposure will
vary between 25% and 55%. There can be no assurance that the Adviser's asset
allocation methodology will be successful.
TOTAL RETURN AND REAL RETURN
The "total return" sought by certain of the Funds will consist of interest
and dividends from underlying securities, capital appreciation reflected in
unrealized increases in value of portfolio securities (realized by the
shareholder only upon selling shares), or realized from the purchase and sale
of securities and use of futures and options, or gains from favorable changes
in foreign currency exchange rates. Generally, over the long term, the total
return obtained by a portfolio investing primarily in fixed income securities
is not expected to be as great as that obtained by a portfolio that invests
primarily in equity securities. At the same time, the market risk and price
volatility of a fixed income portfolio is expected to be less than that of an
equity portfolio, so that a fixed income portfolio is generally considered to
be a more conservative investment. The change in market value of fixed income
securities (and therefore their capital appreciation or depreciation) is
largely a function of changes in the current level of interest rates.
Generally, when interest rates are falling, a portfolio with a shorter
duration will not generate as high a level of total return as a portfolio with
a longer duration. Conversely, when interest rates are rising, a portfolio
with a shorter duration will generally outperform longer duration portfolios.
When interest rates are flat, shorter duration portfolios generally will not
generate as high a level of total return as longer duration portfolios
(assuming that long-term interest rates are higher than short-term rates,
which is commonly the case). With respect to the composition of any fixed
income portfolio, the longer the duration of the portfolio, the greater the
anticipated potential for total return, with, however, greater attendant
market risk and price volatility than for a portfolio with a shorter duration.
The market value of fixed income securities denominated in currencies other
than the U.S. dollar also may be affected by movements in foreign currency
exchange rates.
The change in market value of equity securities (and therefore their capital
appreciation or depreciation) may depend upon a number of factors, including:
conditions in the securities markets, the business success of the security's
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issuer, changing interest rates, real or perceived economic and competitive
industry conditions, and foreign currency exchange rates. Historically, the
total return performance of equity-oriented portfolios has generally been
greater over the long term than fixed income portfolios. However, the market
risk and price volatility of an equity portfolio is generally greater than
that of a fixed income portfolio, and is generally considered to be a more
aggressive investment.
"Real Return," or "Inflation Adjusted Return," as referenced in the name and
investment objective of the PIMCO Real Return Bond Fund, is a measure of the
change in purchasing power of money invested in a particular instrument after
adjusting for inflation. An investment in a security generating a high nominal
return (such as a typical U.S. Government Treasury bond) may not generate a
high real return once inflation is considered. For example, an instrument
generating a 9% nominal return at a time when inflation is 6% has a real
return of approximately 3%; that is, the purchasing power of the money
invested in that instrument would only increase by approximately 3%. On the
other hand, an inflation-indexed instrument generating a 5% real return would
generate a 5% increase in purchasing power regardless of the rate of
inflation. As stated above, the investment objective of the Fund is to seek to
achieve maximum real return. The total return (not adjusted for inflation)
attained by this Fund may be less than the total return attained by other of
the PIMCO Funds that do not invest primarily in inflation-indexed securities.
In the case of inflation-indexed bonds, changes in market value are tied to
the relationship between nominal interest rates and the rate of inflation. If
inflation were to rise at a faster rate than nominal interest rates, real
interest rates might decline, leading to an increase in value of inflation-
indexed bonds. In contrast, if nominal interest rates increase at a faster
rate than inflation, real interest rates might increase, leading to a decrease
in value of inflation-indexed bonds.
INVESTMENT RESTRICTIONS
Each Fund's investment objective (except the PIMCO Global Bond Fund II) as
set forth under "Investment Objectives and Policies," and the investment
restrictions set forth below are fundamental policies of the Fund and may not
be changed with respect to a Fund without shareholder approval by vote of a
majority of the outstanding shares of that Fund. Under these restrictions, a
Fund may not:
(1) (a) invest in a security if, as a result of such investment, more
than 25% of its total assets (taken at market value at the time of such
investment) would be invested in the securities of issuers in any
particular industry, except that this restriction does not apply (a) to
securities issued or guaranteed by the U.S. Government or its agencies or
instrumentalities (or repurchase agreements with respect thereto) and
(b) with respect to the Money Market Fund, to securities or obligations
issued by U.S. banks;
(b) for the Global Bond Fund II, concentrate more than 25% of the
value of its total assets in any one industry (The SEC staff takes the
position that investments in government securities of a single foreign
country, including agencies and instrumentalities of such government, to
the extent such obligations are backed by the assets and revenues of such
government, represent investments in a separate industry for these
purposes.);
(2) with respect to 75% of its assets, invest in a security if, as a
result of such investment, more than 5% of its total assets (taken at
market value at the time of such investment) would be invested in the
securities of any one issuer, except that this restriction does not apply
to securities issued or guaranteed by the U.S. Government or its agencies
or instrumentalities (This investment restriction is not applicable to the
Commercial Mortgage Securities Fund, the Real Return Bond Fund, the Foreign
Bond Fund, the Global Bond Fund, the Global Bond Fund II or the
International Bond Fund.);
January 17, 1997 Prospectus
25
<PAGE>
(3) with respect to 75% of its assets, invest in a security if, as a
result of such investment, it would hold more than 10% (taken at the time
of such investment) of the outstanding voting securities of any one issuer
(This restriction is not applicable to the Commercial Mortgage Securities
Fund, the Real Return Bond Fund, the Foreign Bond Fund, the Global Bond
Fund, the Global Bond Fund II or the International Bond Fund.);
(4)(a) purchase or sell real estate, although it may purchase securities
secured by real estate or interests therein, or securities issued by
companies which invest in real estate or interests therein;
(b) for the Global Bond Fund II, purchase or sell real estate, although
it may purchase securities of issuers which deal in real estate, including
securities of real estate investment trusts, and may purchase securities
which are secured by interests in real estate;
(5) purchase or sell commodities or commodities contracts or oil, gas or
mineral programs. This restriction shall not prohibit a Fund, subject to
restrictions described in this Prospectus and in the Statement of
Additional Information, from purchasing, selling or entering into futures
contracts, options on futures contracts, foreign currency forward
contracts, foreign currency options, or any interest rate, securities-
related or foreign currency-related hedging instrument, including swap
agreements and other derivative instruments, subject to compliance with any
applicable provisions of the federal securities or commodities laws (this
restriction is not applicable to the Global Bond Fund II.);
(6) for the High Yield, Total Return III, International Bond and
StocksPLUS Funds: purchase securities on margin, except for use of short-
term credit necessary for clearance of purchases and sales of portfolio
securities, but it may make margin deposits in connection with transactions
in options, futures, and options on futures;
(7)(a) borrow money, issue senior securities, or pledge, mortgage or
hypothecate its assets, except that a Fund may (i) borrow from banks or
enter into reverse repurchase agreements, or employ similar investment
techniques, and pledge its assets in connection therewith, but only if
immediately after each borrowing there is asset coverage of 300% and (ii)
enter into transactions in options, futures, options on futures, and other
derivative instruments as described in this Prospectus and in the Statement
of Additional Information (the deposit of assets in escrow in connection
with the writing of covered put and call options and the purchase of
securities on a when-issued or delayed delivery basis, collateral
arrangements with respect to initial or variation margin deposits for
futures contracts, and commitments entered into under swap agreements or
other derivative instruments will not be deemed to be pledges of a Fund's
assets);
(b) for the Global Bond Fund II: (i) borrow money in excess of 10% of the
value (taken at the lower of cost or current value) of the Fund's total
assets (not including the amount borrowed) at the time the borrowing is
made, and then only from banks as a temporary measure to facilitate the
meeting of redemption requests (not for leverage) which might otherwise
require the untimely disposition of portfolio investments or for
extraordinary or emergency purposes (Such borrowings will be repaid before
any additional investments are purchased.); or (ii) pledge, hypothecate,
mortgage or otherwise encumber its assets in excess of 10% of the Fund's
total assets (taken at cost) and then only to secure borrowings permitted
above; (The deposit of securities or cash or cash equivalents in escrow in
connection with the writing of covered call or put options, respectively,
is not deemed to be pledges or other encumbrances.) (For the purpose of
this restriction, collateral arrangements with respect to the writing of
options, futures contracts, options on futures contracts, and collateral
arrangements with respect to initial and variation margin are not deemed to
be a pledge of assets and neither such arrangements nor the purchase or
sale of futures or related options are deemed to be the issuance of a
senior security.)
(8) lend any funds or other assets, except that a Fund may, consistent
with its investment objective and policies: (a) invest in debt obligations,
including bonds, debentures, or other debt securities, bankers' acceptances
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and commercial paper, even though the purchase of such obligations may be
deemed to be the making of loans, (b) enter into repurchase agreements, and
(c) lend its portfolio securities in an amount not to exceed one-third of
the value of its total assets, provided such loans are made in accordance
with applicable guidelines established by the Securities and Exchange
Commission and the Trustees of the Trust. (This restriction is not
applicable to the Global Bond Fund II.)
(9)(a) act as an underwriter of securities of other issuers, except to
the extent that in connection with the disposition of portfolio securities,
it may be deemed to be an underwriter under the federal securities laws; or
(b) for the Global Bond Fund II, underwrite securities issued by other
persons except to the extent that, in connection with the disposition of
its portfolio investments, it may be deemed to be an underwriter under
federal securities laws; or
(10)(a) for the High Yield, Total Return III, and StocksPLUS Funds:
maintain a short position, or purchase, write or sell puts, calls,
straddles, spreads or combinations thereof, except as set forth in this
Prospectus and in the Statement of Additional Information for transactions
in options, futures, options on futures, and transactions arising under
swap agreements or other derivative instruments;
(b) for the Money Market, Short-Term, Low Duration, Low Duration II, Low
Duration III, Moderate Duration, Total Return, Total Return II, Commercial
Mortgage Securities, Long-Term U.S. Government, Real Return Bond, Foreign
Bond, Global Bond, International Bond, StocksPLUS Short Strategy, and
Strategic Balanced Funds: maintain a short position, or purchase, write or
sell puts, calls, straddles, spreads or combinations thereof, except on
such conditions as may be set forth in this Prospectus and in the Statement
of Additional Information.
Each Fund is also subject to non-fundamental restrictions and policies
(which may be changed without shareholder approval) relating to the investment
of its assets and activities. As indicated above, certain fundamental
investment restrictions do not apply to certain Funds. However, the Trust's
non-fundamental restrictions, set forth in the Statement of Additional
Information, may place comparable limitations on these Funds. See "Investment
Restrictions" in the Statement of Additional Information.
Unless otherwise indicated, all limitations applicable to Fund investments
(as stated above and elsewhere in this Prospectus and in the Statement of
Additional Information) apply only at the time a transaction is entered into.
Any subsequent change in a rating assigned by any rating service to a security
(or, if unrated, deemed to be of comparable quality), or change in the
percentage of Fund assets invested in certain securities or other instruments,
or change in the average duration of a Fund's investment portfolio, resulting
from market fluctuations or other changes in a Fund's total assets will not
require a Fund to dispose of an investment until the Adviser determines that
it is practicable to sell or close out the investment without undue market or
tax consequences to the Fund. In the event that ratings services assign
different ratings to the same security, the Adviser will determine which
rating it believes best reflects the security's quality and risk at that time,
which may be the higher of the several assigned ratings.
CHARACTERISTICS AND RISKS OF SECURITIES AND INVESTMENT TECHNIQUES
The following describes in greater detail different types of securities and
investment techniques used by the individual Funds, and discusses certain
concepts relevant to the investment policies of the Funds. Additional
information about the Funds' investments and investment practices may be found
in the Statement of Additional Information.
January 17, 1997 Prospectus
27
<PAGE>
U.S. GOVERNMENT SECURITIES
U.S. Government securities are obligations of, or guaranteed by, the U.S.
Government, its agencies or instrumentalities. The U.S. Government does not
guarantee the net asset value of the Funds' shares. Some U.S. Government
securities, such as Treasury bills, notes and bonds, and securities guaranteed
by the Government National Mortgage Association ("GNMA"), are supported by the
full faith and credit of the United States; others, such as those of the
Federal Home Loan Banks, are supported by the right of the issuer to borrow
from the U.S. Treasury; others, such as those of the Federal National Mortgage
Association ("FNMA"), are supported by the discretionary authority of the U.S.
Government to purchase the agency's obligations; and still others, such as
those of the Student Loan Marketing Association, are supported only by the
credit of the instrumentality. U.S. Government securities include securities
that have no coupons, or have been stripped of their unmatured interest
coupons, individual interest coupons from such securities that trade
separately, and evidences of receipt of such securities. Such securities may
pay no cash income, and are purchased at a deep discount from their value at
maturity. Because interest on zero coupon securities is not distributed on a
current basis but is, in effect, compounded, zero coupon securities tend to be
subject to greater market risk than interest-paying securities of similar
maturities. Custodial receipts issued in connection with so-called trademark
zero coupon securities, such as CATs and TIGRs, are not issued by the U.S.
Treasury, and are therefore not U.S. Government securities, although the
underlying bond represented by such receipt is a debt obligation of the U.S.
Treasury. Other zero coupon Treasury securities (STRIPs and CUBEs) are direct
obligations of the U.S. Government. The U.S. Treasury has recently begun
issuing inflation indexed bonds. These securities are described below under
"Inflation-Indexed Bonds."
CORPORATE DEBT SECURITIES
Corporate debt securities include corporate bonds, debentures, notes and
other similar corporate debt instruments, including convertible securities.
Debt securities may be acquired with warrants attached. Corporate income-
producing securities may also include forms of preferred or preference stock.
The rate of interest on a corporate debt security may be fixed, floating or
variable, and may vary inversely with respect to a reference rate. See
"Variable and Floating Rate Securities" below. The rate of return or return of
principal on some debt obligations may be linked or indexed to the level of
exchange rates between the U.S. dollar and a foreign currency or currencies.
Investments in corporate debt securities that are rated below investment
grade (rated below Baa (Moody's) or BBB (S&P)) are described as "speculative"
both by Moody's and S&P. Such securities are sometimes referred to as "junk
bonds," and may be subject to greater market fluctuations, less liquidity and
greater risk of loss of income or principal, including a greater possibility
of default or bankruptcy of the issuer of such securities, than are more
highly rated debt securities. Moody's also describes securities rated Baa as
having speculative characteristics. The Adviser seeks to minimize these risks
through diversification, in-depth credit analysis and attention to current
developments in interest rates and market conditions. See "Appendix B--
Description of Securities Ratings." Investments in high yield securities are
discussed separately below under "High Yield Securities ("Junk Bonds")."
VARIABLE AND FLOATING RATE SECURITIES
Variable and floating rate securities provide for a periodic adjustment in
the interest rate paid on the obligations. The terms of such obligations must
provide that interest rates are adjusted periodically based upon an interest
rate adjustment index as provided in the respective obligations. The
adjustment intervals may be regular, and range from daily up to annually, or
may be event based, such as based on a change in the prime rate. The PIMCO
Money Market Fund may invest in a variable rate security having a stated
maturity in excess of 397 calendar days if the interest rate will be adjusted,
and the Fund may demand payment of principal from the issuer, within that
period.
Each of the Fixed Income Funds may invest in floating rate debt instruments
("floaters"). The interest rate on a floater is a variable rate which is tied
to another interest rate, such as a money-market index or Treasury bill rate.
The
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interest rate on a floater resets periodically, typically every six months.
While, because of the interest rate reset feature, floaters provide a Fund
with a certain degree of protection against rises in interest rates, a Fund
will participate in any declines in interest rates as well.
Each of the Fixed Income Funds (except the PIMCO Money Market Fund) may also
invest in inverse floating rate debt instruments ("inverse floaters"). The
interest rate on an inverse floater resets in the opposite direction from the
market rate of interest to which the inverse floater is indexed. An inverse
floating rate security may exhibit greater price volatility than a fixed rate
obligation of similar credit quality. The Funds have adopted a policy under
which no Fund will invest more than 5% of its net assets in any combination of
inverse floater, interest only ("IO"), or principal only ("PO") securities.
See "Mortgage-Related and Other Asset-Backed Securities" for a discussion of
IOs and POs.
INFLATION-INDEXED BONDS
Inflation-indexed bonds are fixed income securities whose principal value is
periodically adjusted according to the rate of inflation. The interest rate on
these bonds is generally fixed at issuance at a rate lower than typical bonds.
Over the life of an inflation-indexed bond, however, interest will be paid
based on a principal value which is adjusted for inflation.
Inflation-indexed securities issued by the U.S. Treasury will initially have
maturities of ten years, although it is anticipated that securities with other
maturities will be issued in the future. The securities will pay interest on a
semi-annual basis, equal to a fixed percentage of the inflation-adjusted
principal amount. For example, if a Fund purchased an inflation-indexed bond
with a par value of $1,000 and a 3% real rate of return coupon (payable 1.5%
semi-annually), and inflation over the first six months were 1%, the mid-year
par value of the bond would be $1,010 and the first semi-annual interest
payment would be $15.15 ($1,010 times 1.5%). If inflation during the second
half of the year reached 3%, the end-of-year par value of the bond would be
$1,030 and the second semi-annual interest payment would be $15.45 ($1,030
times 1.5%).
If the periodic adjustment rate measuring inflation falls, the principal
value of inflation-indexed bonds will be adjusted downward, and consequently
the interest payable on these securities (calculated with respect to a smaller
principal amount) will be reduced. Repayment of the original bond principal
upon maturity (as adjusted for inflation) is guaranteed in the case of U.S.
Treasury inflation-indexed bonds, even during a period of deflation. However,
the current market value of the bonds is not guaranteed, and will fluctuate.
The Funds may also invest in other inflation related bonds which may or may
not provide a similar guarantee. If a guarantee of principal is not provided,
the adjusted principal value of the bond repaid at maturity may be less than
the original principal.
The value of inflation-indexed bonds is expected to change in response to
changes in real interest rates. Real interest rates in turn are tied to the
relationship between nominal interest rates and the rate of inflation.
Therefore, if inflation were to rise at a faster rate than nominal interest
rates, real interest rates might decline, leading to an increase in value of
inflation-indexed bonds. In contrast, if nominal interest rates increased at a
faster rate than inflation, real interest rates might rise, leading to a
decrease in value of inflation-indexed bonds.
While these securities are expected to be protected from long-term
inflationary trends, short-term increases in inflation may lead to a decline
in value. If interest rates rise due to reasons other than inflation (for
example, due to changes in currency exchange rates), investors in these
securities may not be protected to the extent that the increase is not
reflected in the bond's inflation measure.
The U.S. Treasury has only recently begun issuing inflation-indexed bonds.
As such, there is no trading history of these securities, and there can be no
assurance that a liquid market in these instruments will develop, although one
is
January 17, 1997 Prospectus
29
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expected. Lack of a liquid market may impose the risk of higher transaction
costs and the possibility that a Fund may be forced to liquidate positions
when it would not be advantageous to do so. There also can be no assurance
that the U.S. Treasury will issue any particular amount of inflation-indexed
bonds. Certain foreign governments, such as the United Kingdom, Canada and
Australia, have a longer history of issuing inflation-indexed bonds, and there
may be a more liquid market in certain of these countries for these
securities.
The periodic adjustment of U.S. inflation-indexed bonds is tied to the
Consumer Price Index for Urban Consumers ("CPI-U"), which is calculated
monthly by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of
changes in the cost of living, made up of components such as housing, food,
transportation and energy. Inflation-indexed bonds issued by a foreign
government are generally adjusted to reflect a comparable inflation index,
calculated by that government. There can be no assurance that the CPI-U or any
foreign inflation index will accurately measure the real rate of inflation in
the prices of goods and services. Moreover, there can be no assurance that the
rate of inflation in a foreign country will be correlated to the rate of
inflation in the United States.
Any increase in the principal amount of an inflation-indexed bond will be
considered taxable ordinary income, even though investors do not receive their
principal until maturity. See "Dividends, Distributions and Taxes" for
information about the possible tax consequences of investing in the PIMCO Real
Return Bond Fund and in inflation-indexed bonds.
MORTGAGE-RELATED AND OTHER ASSET-BACKED SECURITIES
Each of the Funds (except the PIMCO Money Market Fund) may invest all of its
assets in mortgage- or other asset-backed securities. The value of some
mortgage- or asset-backed securities in which the Funds invest may be
particularly sensitive to changes in prevailing interest rates, and, like the
other investments of the Funds, the ability of a Fund to successfully utilize
these instruments may depend in part upon the ability of the Adviser to
forecast interest rates and other economic factors correctly.
Mortgage Pass-Through Securities are securities representing interests in
"pools" of mortgage loans secured by residential or commercial real property
in which payments of both interest and principal on the securities are
generally made monthly, in effect "passing through" monthly payments made by
the individual borrowers on the mortgage loans which underlie the securities
(net of fees paid to the issuer or guarantor of the securities). Early
repayment of principal on some mortgage-related securities (arising from
prepayments of principal due to sale of the underlying property, refinancing,
or foreclosure, net of fees and costs which may be incurred) may expose a Fund
to a lower rate of return upon reinvestment of principal. Also, if a security
subject to prepayment has been purchased at a premium, the value of the
premium would be lost in the event of prepayment. Like other fixed income
securities, when interest rates rise, the value of a mortgage-related security
generally will decline; however, when interest rates are declining, the value
of mortgage-related securities with prepayment features may not increase as
much as other fixed income securities. The rate of prepayments on underlying
mortgages will affect the price and volatility of a mortgage-related security,
and may have the effect of shortening or extending the effective maturity of
the security beyond what was anticipated at the time of purchase. To the
extent that unanticipated rates of prepayment on underlying mortgages increase
the effective maturity of a mortgage-related security, the volatility of such
security can be expected to increase.
Payment of principal and interest on some mortgage pass-through securities
(but not the market value of the securities themselves) may be guaranteed by
the full faith and credit of the U.S. Government (in the case of securities
guaranteed by GNMA); or guaranteed by agencies or instrumentalities of the
U.S. Government (in the case of securities
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guaranteed by FNMA or the Federal Home Loan Mortgage Corporation ("FHLMC"),
which are supported only by the discretionary authority of the U.S. Government
to purchase the agency's obligations). Mortgage-related securities created by
non-governmental issuers (such as commercial banks, savings and loan
institutions, private mortgage insurance companies, mortgage bankers and other
secondary market issuers) may be supported by various forms of insurance or
guarantees, including individual loan, title, pool and hazard insurance and
letters of credit, which may be issued by governmental entities, private
insurers or the mortgage poolers.
Collateralized Mortgage Obligations ("CMOs") are hybrid mortgage-related
instruments. Similar to a bond, interest and pre-paid principal on a CMO are
paid, in most cases, semi-annually. CMOs may be collateralized by whole
mortgage loans but are more typically collateralized by portfolios of mortgage
pass-through securities guaranteed by GNMA, FHLMC, or FNMA. CMOs are
structured into multiple classes, with each class bearing a different stated
maturity. Monthly payments of principal, including prepayments, are first
returned to investors holding the shortest maturity class; investors holding
the longer maturity classes receive principal only after the first class has
been retired. CMOs that are issued or guaranteed by the U.S. Government or by
any of its agencies or instrumentalities will be considered U.S. Government
securities by the Funds, while other CMOs, even if collateralized by U.S.
Government securities, will have the same status as other privately issued
securities for purposes of applying a Fund's diversification tests.
Commercial Mortgage-Backed Securities include securities that reflect an
interest in, and are secured by, mortgage loans on commercial real property.
The market for commercial mortgage-backed securities developed more recently
and in terms of total outstanding principal amount of issues is relatively
small compared to the market for residential single-family mortgage-backed
securities. Many of the risks of investing in commercial mortgage-backed
securities reflect the risks of investing in the real estate securing the
underlying mortgage loans. These risks reflect the effects of local and other
economic conditions on real estate markets, the ability of tenants to make
loan payments, and the ability of a property to attract and retain tenants.
Commercial mortgage-backed securities may be less liquid and exhibit greater
price volatility than other types of mortgage-related or asset-backed
securities.
Mortgage-Related Securities include securities other than those described
above that directly or indirectly represent a participation in, or are secured
by and payable from, mortgage loans on real property, such as CMO residuals or
stripped mortgage-backed securities ("SMBS"), and may be structured in classes
with rights to receive varying proportions of principal and interest.
A common type of SMBS will have one class receiving some of the interest and
most of the principal from the mortgage assets, while the other class will
receive most of the interest and the remainder of the principal. In the most
extreme case, one class will receive all of the interest (the interest-only,
or "IO" class), while the other class will receive all of the principal (the
principal-only, or "PO" class). The yield to maturity on an IO class is
extremely sensitive to the rate of principal payments (including prepayments)
on the related underlying mortgage assets, and a rapid rate of principal
payments may have a material adverse effect on a Fund's yield to maturity from
these securities. The Funds have adopted a policy under which no Fund will
invest more than 5% of its net assets in any combination of IO, PO, or inverse
floater securities. The Funds may invest in other asset-backed securities that
have been offered to investors. For a discussion of the characteristics of
some of these instruments, see the Statement of Additional Information.
REPURCHASE AGREEMENTS
For the purpose of achieving income, each of the Funds may enter into
repurchase agreements, which entail the purchase of a portfolio-eligible
security from a bank or broker-dealer that agrees to repurchase the security
at the Fund's
January 17, 1997 Prospectus
31
<PAGE>
cost plus interest within a specified time (normally one day). If the party
agreeing to repurchase should default, as a result of bankruptcy or otherwise,
the Fund will seek to sell the securities which it holds, which action could
involve procedural costs or delays in addition to a loss on the securities if
their value should fall below their repurchase price. No Fund will invest more
than 15% of its net assets (10% in the case of the PIMCO Money Market Fund)
(taken at current market value) in repurchase agreements maturing in more than
seven days.
REVERSE REPURCHASE AGREEMENTS, DOLLAR ROLLS, AND OTHER BORROWINGS
A reverse repurchase agreement may for some purposes be considered borrowing
that involves the sale of a security by a Fund and its agreement to repurchase
the instrument at a specified time and price. The Fund will maintain a
segregated account consisting of assets determined to be liquid by the Adviser
in accordance with procedures established by the Board of Trustees, maturing
not later than the expiration of the reverse repurchase agreement, to cover
its obligations under reverse repurchase agreements.
A Fund may enter into dollar rolls, in which the Fund sells mortgage-backed
or other securities for delivery in the current month and simultaneously
contracts to purchase substantially similar securities on a specified future
date. In the case of dollar rolls involving mortgage-backed securities, the
mortgage-backed securities that are purchased will be of the same type and
will have the same interest rate as those sold, but will be supported by
different pools of mortgages. The Fund forgoes principal and interest paid
during the roll period on the securities sold in a dollar roll, but the Fund
is compensated by the difference between the current sales price and the lower
price for the future purchase as well as by any interest earned on the
proceeds of the securities sold. The Fund also could be compensated through
the receipt of fee income equivalent to a lower forward price. The Fund will
maintain a segregated account consisting of assets determined to be liquid by
the Adviser in accordance with procedures established by the Board of
Trustees, to cover its obligations under dollar rolls.
Dollar rolls and reverse repurchase agreements will be subject to the Funds'
limitations on borrowings, which will restrict the aggregate of such
transactions (plus any other borrowings) to 33 1/3% (for each Fund except the
PIMCO Global Bond Fund II ) of a Fund's total assets. Apart from transactions
involving reverse repurchase agreements and dollar rolls, a Fund will not
borrow money, except for temporary administrative purposes. The PIMCO Global
Bond Fund II may not borrow in excess of 10% of the value of its total assets
and then only from banks as a temporary measure to facilitate the meeting of
redemption requests (not for leverage) or for extraordinary or emergency
purposes.
LOANS OF PORTFOLIO SECURITIES
For the purpose of achieving income, the Funds may lend their portfolio
securities to brokers, dealers, and other financial institutions, provided:
(i) the loan is secured continuously by collateral consisting of U.S.
Government securities, cash or cash equivalents (negotiable certificates of
deposit, bankers' acceptances or letters of credit) maintained on a daily
mark-to-market basis in an amount at least equal to the current market value
of the securities loaned; (ii) the Fund may at any time call the loan and
obtain the return of the securities loaned; (iii) the Fund will receive any
interest or dividends paid on the loaned securities; and (iv) the aggregate
market value of securities loaned will not at any time exceed 33 1/3% (25% in
the case of the PIMCO Global Bond Fund II) of the total assets of the Fund.
Each Fund's performance will continue to reflect changes in the value of the
securities loaned and will also reflect the receipt of either interest through
investment of cash collateral by the Fund in permissible investments, or a
fee, if the collateral is U.S. Government securities. Securities lending
involves the risk of loss of rights in the collateral or delay in recovery of
the collateral should the borrower fail to return the securities loaned or
become insolvent. The Funds may pay lending fees to the party arranging the
loan.
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WHEN-ISSUED, DELAYED DELIVERY AND FORWARD COMMITMENT TRANSACTIONS
Each of the Funds may purchase or sell securities on a when-issued, delayed
delivery, or forward commitment basis. These transactions involve a commitment
by the Fund to purchase or sell securities for a predetermined price or yield,
with payment and delivery taking place more than seven days in the future, or
after a period longer than the customary settlement period for that type of
security. When such purchases are outstanding, the Fund will set aside and
maintain until the settlement date in a segregated account assets determined
to be liquid by the Adviser in accordance with procedures established by the
Board of Trustees, in an amount sufficient to meet the purchase price.
Typically, no income accrues on securities a Fund has committed to purchase
prior to the time delivery of the securities is made, although a Fund may earn
income on securities it has deposited in a segregated account. When purchasing
a security on a when-issued, delayed delivery, or forward commitment basis,
the Fund assumes the rights and risks of ownership of the security, including
the risk of price and yield fluctuations, and takes such fluctuations into
account when determining its net asset value. Because the Fund is not required
to pay for the security until the delivery date, these risks are in addition
to the risks associated with the Fund's other investments. If the Fund remains
substantially fully invested at a time when when-issued, delayed delivery, or
forward commitment purchases are outstanding, the purchases may result in a
form of leverage. When the Fund has sold a security on a when-issued, delayed
delivery, or forward commitment basis, the Fund does not participate in future
gains or losses with respect to the security. If the other party to a
transaction fails to deliver or pay for the securities, the Fund could miss a
favorable price or yield opportunity or could suffer a loss. A Fund may
dispose of or renegotiate a transaction after it is entered into, and may sell
when-issued or forward commitment securities before they are delivered, which
may result in a capital gain or loss. There is no percentage limitation on the
extent to which the Funds may purchase or sell securities on a when-issued,
delayed delivery, or forward commitment basis.
SHORT SALES
Each of the Funds (except the PIMCO High Yield, Total Return III and
StocksPLUS Funds), and particularly the PIMCO StocksPLUS Short Strategy Fund,
may from time to time effect short sales as part of their overall portfolio
management strategies, including the use of derivative instruments, or to
offset potential declines in value of long positions in similar securities as
those sold short. A short sale (other than a short sale against the box) is a
transaction in which a Fund sells a security it does not own at the time of
the sale in anticipation that the market price of that security will decline.
To the extent that a Fund engages in short sales, it must (except in the case
of short sales "against the box") maintain asset coverage in the form of
assets determined to be liquid by the Adviser in accordance with procedures
established by the Board of Trustees, in a segregated account, or otherwise
cover its position in a permissible manner. A short sale is "against the box"
to the extent that the Fund contemporaneously owns, or has the right to obtain
at no added cost, securities identical to those sold short. The PIMCO Global
Bond Fund II may only engage in short sales that are "against the box."
FOREIGN SECURITIES
Each of the Funds (except the PIMCO Low Duration II and Total Return II
Funds) may invest directly in fixed income securities of non-U.S. issuers. The
PIMCO Money Market, High Yield, Commercial Mortgage Securities and Long-Term
U.S. Government Funds may only invest in U.S. dollar-denominated fixed income
securities of non-U.S. issuers. Each of the Equity Funds may invest directly
in foreign equity securities.
Each of the Funds will limit its foreign investments to securities of
issuers based in developed countries (including Newly Industrialized Countries
("NICs"), such as Taiwan, South Korea and Mexico). The PIMCO Short-Term, Low
Duration and Low Duration III Funds limit their investments in securities of
issuers based in NICs to 5% of their assets,
January 17, 1997 Prospectus
33
<PAGE>
and the remaining Fixed Income Funds (except the PIMCO Foreign Bond, Global
Bond, Global Bond II and International Bond Funds), limit their investments in
securities of issuers based in NICs to 10% of their assets. For the purposes
of this restriction, the term "NIC" is not meant to include a defined set of
countries selected according to specific criteria, but rather is a broadly
defined term which includes countries which are considered by the Adviser to
have sound economies and the potential for positive growth. In determining
which countries will be considered NICs, the Adviser will not be limited by
any determination made by any other investment adviser, institution,
government or supranational agency regarding which countries are considered to
be developing or emerging markets by such entities. As such, the Funds may
invest in securities issued in countries which may be considered by other
advisers or analysts to be developing or emerging markets.
Investing in the securities of issuers in any foreign country involves
special risks and considerations not typically associated with investing in
U.S. companies. Shareholders should consider carefully the substantial risks
involved in investing in securities issued by companies and governments of
foreign nations. These risks include: differences in accounting, auditing and
financial reporting standards; generally higher commission rates on foreign
portfolio transactions; the possibility of nationalization, expropriation or
confiscatory taxation; adverse changes in investment or exchange control
regulations (which may include suspension of the ability to transfer currency
from a country); and political instability which could affect U.S. investments
in foreign countries. Additionally, foreign securities and dividends and
interest payable on those securities may be subject to foreign taxes,
including taxes withheld from payments on those securities. Foreign securities
often trade with less frequency and volume than domestic securities and
therefore may exhibit greater price volatility. Additional costs associated
with an investment in foreign securities may include higher custodial fees
than apply to domestic custodial arrangements and transaction costs of foreign
currency conversions. Changes in foreign exchange rates also will affect the
value of securities denominated or quoted in currencies other than the U.S.
dollar.
Each of the Fixed Income Funds (except the PIMCO Low Duration II and Total
Return II Funds) may invest in Brady Bonds. Brady Bonds are securities created
through the exchange of existing commercial bank loans to sovereign entities
for new obligations in connection with debt restructurings under a debt
restructuring plan introduced by former U.S. Secretary of the Treasury,
Nicholas F. Brady. Brady Bonds have been issued only recently, and for that
reason do not have a long payment history. Brady Bonds may be collateralized
or uncollateralized, are issued in various currencies (but primarily the U.S.
dollar), and are actively traded in the over-the-counter secondary market.
Brady Bonds are not considered to be U.S. Government securities. In light of
the residual risk of Brady Bonds and, among other factors, the history of
defaults with respect to commercial bank loans by public and private entities
in countries issuing Brady Bonds, investments in Brady Bonds may be viewed as
speculative. There can be no assurance that Brady Bonds acquired by a Fund
will not be subject to restructuring arrangements or to requests for new
credit, which may cause the Fund to suffer a loss of interest or principal on
any of its holdings. For further information, see the Statement of Additional
Information.
FOREIGN CURRENCY TRANSACTIONS
Foreign currency exchange rates may fluctuate significantly over short
periods of time. They generally are determined by the forces of supply and
demand in the foreign exchange markets and the relative merits of investments
in different countries, actual or perceived changes in interest rates and
other complex factors, as seen from an international perspective. Currency
exchange rates also can be affected unpredictably by intervention (or the
failure to intervene) by U.S. or foreign governments or central banks, by
currency controls or political developments in the U.S. or abroad. Currencies
in which the Funds' assets are denominated may be devalued against the U.S.
dollar, resulting in a loss to the Funds.
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PIMCO Funds: Pacific Investment Management Series
<PAGE>
All Funds that may invest in securities denominated in foreign currencies
may buy and sell foreign currencies on a spot and forward basis to reduce the
risks of adverse changes in foreign exchange rates. A forward foreign currency
exchange contract involves an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of days from the date
of the contract agreed upon by the parties, at a price set at the time of the
contract. By entering into a forward foreign currency exchange contract, the
Fund "locks in" the exchange rate between the currency it will deliver and the
currency it will receive for the duration of the contract. As a result, a Fund
reduces its exposure to changes in the value of the currency it will deliver
and increases its exposure to changes in the value of the currency it will
exchange into. The effect on the value of a Fund is similar to selling
securities denominated in one currency and purchasing securities denominated
in another. Contracts to sell foreign currency would limit any potential gain
which might be realized by a Fund if the value of the hedged currency
increases. A Fund may enter into these contracts for the purpose of hedging
against foreign exchange risk arising from the Fund's investment or
anticipated investment in securities denominated in foreign currencies. A Fund
also may enter into these contracts for purposes of increasing exposure to a
foreign currency or to shift exposure to foreign currency fluctuations from
one country to another. A Fund may use one currency (or a basket of
currencies) to hedge against adverse changes in the value of another currency
(or a basket of currencies) when exchange rates between the two currencies are
positively correlated. Each Fund will segregate assets determined to be liquid
by the Adviser in accordance with procedures established by the Board of
Trustees, in a segregated account to cover its obligations under forward
foreign currency exchange contracts entered into for non-hedging purposes.
All Funds that may invest in securities denominated in foreign currencies
may invest in options on foreign currencies and foreign currency futures and
options thereon. The Funds also may invest in foreign currency exchange-
related securities, such as foreign currency warrants and other instruments
whose return is linked to foreign currency exchange rates. Each Fund that may
invest in securities denominated in foreign currencies, except the PIMCO
Global Bond Fund, will use these techniques to hedge at least 75% of its
exposure to foreign currency. For a description of these instruments, see
"Derivative Instruments" below and the Statement of Additional Information.
HIGH YIELD SECURITIES ("JUNK BONDS")
The PIMCO High Yield Fund invests at least 65% of its assets, and the PIMCO
Commercial Mortgage Securities Fund may invest up to 35% of its assets, in
fixed income securities rated lower than Baa by Moody's or lower than BBB by
S&P but rated at least B by Moody's or S&P (or, if not rated, of comparable
quality). In addition, each of the PIMCO Short-Term, Low Duration, Low
Duration III, Moderate Duration, Total Return, Total Return III, Foreign Bond,
Global Bond, Global Bond II, StocksPLUS, StocksPLUS Short Strategy and
Strategic Balanced Funds may invest up to 10% of its assets in such
securities. Securities rated lower than Baa by Moody's or lower than BBB by
S&P are sometimes referred to as "high yield" or "junk" bonds. Securities
rated Baa are considered by Moody's to have some speculative characteristics.
Investors should consider the following risks associated with high yield
securities before investing in these Funds.
Investing in high yield securities involves special risks in addition to the
risks associated with investments in higher rated fixed income securities.
High yield securities may be regarded as predominately speculative with
respect to the issuer's continuing ability to meet principal and interest
payments. Analysis of the creditworthiness of issuers of high yield securities
may be more complex than for issuers of higher quality debt securities, and
the ability of a Fund to achieve its investment objective may, to the extent
of its investments in high yield securities, be more dependent upon such
creditworthiness analysis than would be the case if the Fund were investing in
higher quality securities.
High yield securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than higher grade securities. The
prices of high yield securities have been found to be less sensitive to
interest
January 17, 1997 Prospectus
35
<PAGE>
rate changes than more highly rated investments, but more sensitive to adverse
economic downturns or individual corporate developments. A projection of an
economic downturn or of a period of rising interest rates, for example, could
cause a decline in high yield security prices because the advent of a
recession could lessen the ability of a highly leveraged company to make
principal and interest payments on its debt securities. If the issuer of high
yield securities defaults, a Fund may incur additional expenses to seek
recovery. In the case of high yield securities structured as zero coupon or
payment-in-kind securities, the market prices of such securities are affected
to a greater extent by interest rate changes, and therefore tend to be more
volatile than securities which pay interest periodically and in cash.
The secondary markets on which high yield securities are traded may be less
liquid than the market for higher grade securities. Less liquidity in the
secondary trading markets could adversely affect and cause large fluctuations
in the daily net asset value of a Fund's shares. Adverse publicity and
investor perceptions, whether or not based on fundamental analysis, may
decrease the values and liquidity of high yield securities, especially in a
thinly traded market.
The use of credit ratings as the sole method of evaluating high yield
securities can involve certain risks. For example, credit ratings evaluate the
safety of principal and interest payments, not the market value risk of high
yield securities. Also, credit rating agencies may fail to change credit
ratings in a timely fashion to reflect events since the security was last
rated. The Adviser does not rely solely on credit ratings when selecting
securities for the Funds, and develops its own independent analysis of issuer
credit quality. If a credit rating agency changes the rating of a portfolio
security held by a Fund, the Fund may retain the portfolio security if the
Adviser deems it in the best interest of shareholders.
During the year ended March 31, 1996 (September 30, 1996 for the PIMCO
Global Bond Fund II), based upon the dollar-weighted average ratings of the
Funds' portfolio holdings at the end of each month in the Funds' fiscal year,
each operational Fund that may invest greater than 5% of its assets in
securities rated below investment grade had the following percentages of its
net assets invested in securities rated in the categories indicated as rated
by Moody's (or, if unrated, determined by the Adviser to be of comparable
quality). See "Appendix B--Description of Securities Ratings," for further
information.
<TABLE>
<CAPTION>
RATING
--------------------------------------------------------------
BELOW
FUND PRIME 1 AAA AA A PRIME 1 BAA BA B CAA
- ---- ------- ----- ----- ----- ------- ----- ----- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Short-Term 12.89% 46.13% 2.85% 17.35% 0.00% 10.96% 6.63% 2.87% 0.31%
Low Duration 9.65 58.17 2.80 10.10 0.00 8.02 10.71 0.54 0.00
High Yield 2.66 1.20 0.00 0.90 0.00 4.17 41.24 49.84 0.00
Total Return 9.80 62.57 6.12 7.35 0.00 5.92 6.23 2.00 0.01
Total Return III 10.22 69.93 1.91 6.49 0.00 4.78 5.36 1.31 0.00
Foreign Bond 2.72 46.26 30.18 8.62 0.51 2.88 5.18 3.65 0.00
Global Bond 15.05 40.36 29.03 5.45 0.50 2.62 2.06 4.92 0.00
Global Bond II* 0.00 78.68 15.49 1.59 0.00 2.42 1.82 0.00 0.00
StocksPLUS 10.17 59.79 4.28 6.45 0.00 11.00 7.60 0.72 0.00
</TABLE>
- --------
* Reflects portfolio holdings of the PIMCO Advisors Global Income Fund for
its fiscal year ended September 30, 1996. The Global Income Fund was
reorganized as the Trust's Global Bond Fund II on January 17, 1996.
These figures are intended solely to provide disclosure about each Fund's
asset composition during its most recent fiscal year. The asset composition
after this time may or may not be approximately the same as represented by
such figures. In addition, the categories reflect ratings by Moody's, and
ratings assigned by S&P may not be consistent with ratings assigned by
Moody's or other credit ratings services, and the Adviser may not necessarily
agree with a rating assigned by any credit rating agency.
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<PAGE>
DERIVATIVE INSTRUMENTS
To the extent permitted by the investment objectives and policies of the
Funds, the Funds may (except the PIMCO Money Market Fund) purchase and write
call and put options on securities, securities indexes and foreign currencies,
and enter into futures contracts and use options on futures contracts as
further described below. The Funds (except the PIMCO Money Market Fund) also
may enter into swap agreements with respect to foreign currencies, interest
rates, and securities indexes. The Funds may use these techniques to hedge
against changes in interest rates, foreign currency exchange rates or
securities prices or as part of their overall investment strategies. The Funds
(except the PIMCO Money Market Fund) may also purchase and sell options
relating to foreign currencies for purposes of increasing exposure to a
foreign currency or to shift exposure to foreign currency fluctuations from
one country to another. Each Fund will maintain a segregated account
consisting of assets determined to be liquid by the Adviser in accordance with
procedures established by the Board of Trustees (or, as permitted by
applicable regulation, enter into certain offsetting positions) to cover its
obligations under options, futures, and swaps to avoid leveraging of the Fund.
The Funds consider derivative instruments to consist of securities or other
instruments whose value is derived from or related to the value of some other
instrument or asset, and not to include those securities whose payment of
principal and/or interest depend upon cash flows from underlying assets, such
as mortgage-related or asset-backed securities. Each Fund (except the PIMCO
Money Market Fund) may invest all of its assets in derivative instruments,
subject only to the Fund's investment objective and policies. The value of
some derivative instruments in which the Funds invest may be particularly
sensitive to changes in prevailing interest rates, and, like the other
investments of the Funds, the ability of a Fund to successfully utilize these
instruments may depend in part upon the ability of the Adviser to forecast
interest rates and other economic factors correctly. If the Adviser
incorrectly forecasts such factors and has taken positions in derivative
instruments contrary to prevailing market trends, the Funds could be exposed
to the risk of loss.
The Funds might not employ any of the strategies described below, and no
assurance can be given that any strategy used will succeed. If the Adviser
incorrectly forecasts interest rates, market values or other economic factors
in utilizing a derivatives strategy for a Fund, the Fund might have been in a
better position if it had not entered into the transaction at all. The use of
these strategies involves certain special risks, including a possible
imperfect correlation, or even no correlation, between price movements of
derivative instruments and price movements of related investments. While some
strategies involving derivative instruments can reduce the risk of loss, they
can also reduce the opportunity for gain or even result in losses by
offsetting favorable price movements in related investments, or due to the
possible inability of a Fund to purchase or sell a portfolio security at a
time that otherwise would be favorable for it to do so, or the possible need
for a Fund to sell a portfolio security at a disadvantageous time, because the
Fund is required to maintain asset coverage or offsetting positions in
connection with transactions in derivative instruments, and the possible
inability of a Fund to close out or to liquidate its derivatives positions.
Options on Securities, Securities Indexes, and Currencies A Fund may
purchase put options on securities and indexes. One purpose of purchasing put
options is to protect holdings in an underlying or related security against a
substantial decline in market value. A Fund may also purchase call options on
securities and indexes. One purpose of purchasing call options is to protect
against substantial increases in prices of securities the Fund intends to
purchase pending its ability to invest in such securities in an orderly
manner. An option on a security (or index) is a contract that gives the holder
of the option, in return for a premium, the right to buy from (in the case of
a call) or sell to (in the case of a put) the writer of the option the
security underlying the option (or the cash value of the index) at a specified
exercise price at any time during the term of the option. The writer of an
option on a security has the obligation upon exercise of the option to deliver
the underlying security upon payment of the exercise price or to pay the
exercise price upon delivery of
January 17, 1997 Prospectus
37
<PAGE>
the underlying security. Upon exercise, the writer of an option on an index is
obligated to pay the difference between the cash value of the index and the
exercise price multiplied by the specified multiplier for the index option. An
index is designed to reflect specified facets of a particular financial or
securities market, a specific group of financial instruments or securities, or
certain economic indicators.
A Fund may sell put or call options it has previously purchased, which could
result in a net gain or loss depending on whether the amount realized on the
sale is more or less than the premium and other transaction costs paid on the
put or call option which is sold. A Fund may write a call or put option only
if the option is "covered" by the Fund holding a position in the underlying
securities or by other means which would permit immediate satisfaction of the
Fund's obligation as writer of the option. Prior to exercise or expiration, an
option may be closed out by an offsetting purchase or sale of an option of the
same series.
The Funds may write covered straddles consisting of a combination of a call
and a put written on the same underlying security. A straddle will be covered
when sufficient assets are deposited to meet the Funds' immediate obligations.
The Funds may use the same liquid assets to cover both the call and put
options where the exercise price of the call and put are the same, or the
exercise price of the call is higher than that of the put. In such cases, the
Funds will also segregate liquid assets equivalent to the amount, if any, by
which the put is "in the money."
The purchase and writing of options involves certain risks. During the
option period, the covered call writer has, in return for the premium on the
option, given up the opportunity to profit from a price increase in the
underlying security above the exercise price, but, as long as its obligation
as a writer continues, has retained the risk of loss should the price of the
underlying security decline. The writer of an option has no control over the
time when it may be required to fulfill its obligation as a writer of the
option. Once an option writer has received an exercise notice, it cannot
effect a closing purchase transaction in order to terminate its obligation
under the option and must deliver the underlying security at the exercise
price. If a put or call option purchased by the Fund is not sold when it has
remaining value, and if the market price of the underlying security remains
equal to or greater than the exercise price (in the case of a put), or remains
less than or equal to the exercise price (in the case of a call), the Fund
will lose its entire investment in the option. Also, where a put or call
option on a particular security is purchased to hedge against price movements
in a related security, the price of the put or call option may move more or
less than the price of the related security. There can be no assurance that a
liquid market will exist when a Fund seeks to close out an option position.
Furthermore, if trading restrictions or suspensions are imposed on the options
markets, a Fund may be unable to close out a position.
Funds that invest in foreign currency-denominated securities may buy or sell
put and call options on foreign currencies. Currency options traded on U.S. or
other exchanges may be subject to position limits which may limit the ability
of a Fund to reduce foreign currency risk using such options. Over-the-counter
options differ from traded options in that they are two-party contracts, with
price and other terms negotiated between buyer and seller, and generally do
not have as much market liquidity as exchange-traded options. The Funds may be
required to treat as illiquid over-the-counter options purchased and
securities being used to cover certain written over-the-counter options.
Swap Agreements The Funds may enter into interest rate, index, equity and
currency exchange rate swap agreements. These transactions would be entered
into in an attempt to obtain a particular return when it is considered
desirable to do so, possibly at a lower cost to the Fund than if the Fund had
invested directly in the asset that yielded the desired return. Swap
agreements are two-party contracts entered into primarily by institutional
investors for periods ranging from a few weeks to more than one year. In a
standard swap transaction, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on particular
predetermined investments or instruments,
38
PIMCO Funds: Pacific Investment Management Series
<PAGE>
which may be adjusted for an interest factor. The gross returns to be
exchanged or "swapped" between the parties are generally calculated with
respect to a "notional amount," i.e., the return on or increase in value of a
particular dollar amount invested at a particular interest rate, in a
particular foreign currency, or in a "basket" of securities representing a
particular index. Forms of swap agreements include interest rate caps, under
which, in return for a premium, one party agrees to make payments to the other
to the extent that interest rates exceed a specified rate, or "cap"; interest
rate floors, under which, in return for a premium, one party agrees to make
payments to the other to the extent that interest rates fall below a specified
level, or "floor"; and interest rate collars, under which a party sells a cap
and purchases a floor or vice versa in an attempt to protect itself against
interest rate movements exceeding given minimum or maximum levels.
Most swap agreements entered into by the Funds calculate the obligations of
the parties to the agreement on a "net basis." Consequently, a Fund's current
obligations (or rights) under a swap agreement will generally be equal only to
the net amount to be paid or received under the agreement based on the
relative values of the positions held by each party to the agreement (the "net
amount"). A Fund's current obligations under a swap agreement will be accrued
daily (offset against amounts owed to the Fund), and any accrued but unpaid
net amounts owed to a swap counterparty will be covered by the maintenance of
a segregated account consisting of assets determined to be liquid by the
Adviser in accordance with procedures established by the Board of Trustees, to
limit any potential leveraging of the Fund's portfolio. Obligations under swap
agreements so covered will not be construed to be "senior securities" for
purposes of the Funds' investment restriction concerning senior securities. A
Fund will not enter into a swap agreement with any single party if the net
amount owed or to be received under existing contracts with that party would
exceed 5% of the Fund's assets.
Whether a Fund's use of swap agreements will be successful in furthering its
investment objective will depend on the Adviser's ability to predict correctly
whether certain types of investments are likely to produce greater returns
than other investments. Because they are two-party contracts and because they
may have terms of greater than seven days, swap agreements may be considered
to be illiquid investments. Moreover, a Fund bears the risk of loss of the
amount expected to be received under a swap agreement in the event of the
default or bankruptcy of a swap agreement counterparty. The Funds will enter
into swap agreements only with counterparties that meet certain standards for
creditworthiness (generally, such counterparties would have to be eligible
counterparties under the terms of the Funds' repurchase agreement guidelines).
Certain restrictions imposed on the Funds by the Internal Revenue Code may
limit the Funds' ability to use swap agreements. The swaps market is a
relatively new market and is largely unregulated. It is possible that
developments in the swaps market, including potential government regulation,
could adversely affect a Fund's ability to terminate existing swap agreements
or to realize amounts to be received under such agreements.
Futures Contracts and Options on Futures Contracts Each of the Fixed Income
Funds (except the PIMCO Money Market Fund) may invest in interest rate futures
contracts and options thereon ("futures options"), and to the extent it may
invest in foreign currency-denominated securities, may also invest in foreign
currency futures contracts and options thereon. Each of the Equity Funds and
the PIMCO Strategic Balanced Fund may invest in interest rate, stock index and
foreign currency futures contracts and options thereon.
There are several risks associated with the use of futures and futures
options for hedging purposes. There can be no guarantee that there will be a
correlation between price movements in the hedging vehicle and in the
portfolio securities being hedged. An incorrect correlation could result in a
loss on both the hedged securities in a Fund and the hedging vehicle, so that
the portfolio return might have been greater had hedging not been attempted.
There can be no assurance that a liquid market will exist at a time when a
Fund seeks to close out a futures contract or a futures option position.
January 17, 1997 Prospectus
39
<PAGE>
Most futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single day; once the daily limit
has been reached on a particular contract, no trades may be made that day at a
price beyond that limit. In addition, certain of these instruments are
relatively new and without a significant trading history. As a result, there
is no assurance that an active secondary market will develop or continue to
exist. Lack of a liquid market for any reason may prevent a Fund from
liquidating an unfavorable position, and the Fund would remain obligated to
meet margin requirements until the position is closed.
The Funds may write covered straddles consisting of a call and a put written
on the same underlying futures contract. A straddle will be covered when
sufficient assets are deposited to meet the Funds' immediate obligations. A
Fund may use the same liquid assets to cover both the call and put options
where the exercise price of the call and put are the same, or the exercise
price of the call is higher than that of the put. In such cases, the Funds
will also segregate liquid assets equivalent to the amount, if any, by which
the put is "in the money."
The Funds will only enter into futures contracts or futures options which
are standardized and traded on a U.S. or foreign exchange or board of trade,
or similar entity, or quoted on an automated quotation system. Each Fund will
use financial futures contracts and related options only for "bona fide
hedging" purposes, as such term is defined in applicable regulations of the
CFTC, or, with respect to positions in financial futures and related options
that do not qualify as "bona fide hedging" positions, will enter such
positions only to the extent that aggregate initial margin deposits plus
premiums paid by it for open futures option positions, less the amount by
which any such positions are "in-the-money," would not exceed 5% of the Fund's
net assets.
ILLIQUID SECURITIES
Each of the Funds may invest up to 15% of its net assets in illiquid
securities (10% in the case of the PIMCO Money Market Fund). Certain illiquid
securities may require pricing at fair value as determined in good faith under
the supervision of the Board of Trustees. The Adviser may be subject to
significant delays in disposing of illiquid securities, and transactions in
illiquid securities may entail registration expenses and other transaction
costs that are higher than transactions in liquid securities. The term
"illiquid securities" for this purpose means securities that cannot be
disposed of within seven days in the ordinary course of business at
approximately the amount at which a Fund has valued the securities. Illiquid
securities are considered to include, among other things, written over-the-
counter options, securities or other liquid assets being used as cover for
such options, repurchase agreements with maturities in excess of seven days,
certain loan participation interests, fixed time deposits which are not
subject to prepayment or provide for withdrawal penalties upon prepayment
(other than overnight deposits), securities that are subject to legal or
contractual restrictions on resale (such as privately placed debt securities)
and other securities whose disposition is restricted under the federal
securities laws (other than securities issued pursuant to Rule 144A under the
Securities Act of 1933 and certain commercial paper that PIMCO has determined
to be liquid under procedures approved by the Board of Trustees).
MANAGEMENT OF THE TRUST
The business affairs of the Trust are managed under the direction of the
Board of Trustees. The Trustees are Guilford C. Babcock, Thomas P. Kemp, Brent
R. Harris, Vern O. Curtis, and William J. Popejoy. Additional information
about the Trustees and the Trust's executive officers may be found in the
Statement of Additional Information under the heading "Management--Trustees
and Officers."
INVESTMENT ADVISER
Pacific Investment Management Company ("PIMCO") serves as investment adviser
("Adviser") to the Funds pursuant to an investment advisory contract. The
Adviser is an investment counseling firm founded in 1971, and had
40
PIMCO Funds: Pacific Investment Management Series
<PAGE>
approximately $88.8 billion in assets under management as of November 30,
1996. PIMCO is a subsidiary partnership of PIMCO Advisors L.P. ("PIMCO
Advisors"). A majority interest in PIMCO Advisors is held by PIMCO Partners,
G.P., a general partnership between Pacific Investment Management Company, a
California corporation and indirect wholly owned subsidiary of Pacific Mutual
Life Insurance Company ("Pacific Mutual"), and PIMCO Partners, LLC, a limited
liability company controlled by the PIMCO Managing Directors. PIMCO's address
is 840 Newport Center Drive, Suite 360, Newport Beach, California 92660. PIMCO
is registered as an investment adviser with the Securities and Exchange
Commission ("SEC") and as a commodity trading advisor with the CFTC.
The Adviser manages the investment and reinvestment of the assets of each
Fund. The Adviser is responsible for placing orders for the purchase and sale
of each Fund's investments directly with brokers or dealers selected by it in
its discretion. See "Portfolio Transactions."
Information about the individual portfolio managers responsible for
management of the Trust's currently operational Funds, including their
occupations for the past five years, is provided below.
<TABLE>
<CAPTION>
PORTFOLIO MANAGER AND BUSINESS EXPERIENCE (PAST
FUND FIVE YEARS)
---- -----------------------------------------------
<C> <S>
Money Market Fund Leslie Barbi, Vice President, PIMCO. A Fixed
Income Portfolio Manager, Ms. Barbi has managed
the PIMCO Money Market Fund since November 1,
1995. Prior to joining PIMCO in 1993, Ms. Barbi
was associated with Salomon Brothers as a
proprietary Portfolio Manager.
Short-Term Fund David H. Edington, Managing Director, PIMCO. A
StocksPLUS Fund Fixed Income Portfolio Manager, Mr. Edington
Strategic Balanced Fund joined PIMCO in 1987 and has managed the PIMCO
Moderate Duration Fund Short-Term, StocksPLUS, Strategic Balanced and
Moderate Duration Funds since their inception,
October 7, 1987, May 14, 1993, June 28, 1996,
and January 2, 1997, respectively.
Low Duration Fund William H. Gross, Managing Director, PIMCO. A
Low Duration Fund II Fixed Income Portfolio Manager, Mr. Gross is
Low Duration Fund III one of the founders of PIMCO and has managed
Total Return Fund the PIMCO Low Duration, Low Duration II, Low
Total Return Fund II Duration III, Total Return, Total Return II and
Total Return Fund III Total Return III Funds since their inception,
May 11, 1987, November 1, 1991, December 27,
1996, May 11, 1987, December 30, 1991, and May
1, 1991, respectively.
High Yield Fund Benjamin Trosky, Managing Director, PIMCO. A
Fixed Income Portfolio Manager, Mr. Trosky
joined PIMCO in 1990 and has managed the PIMCO
High Yield Fund since its inception, December
16, 1992.
Long-Term U.S. Government Fund Frank B. Rabinovitch, Managing Director, PIMCO.
A Fixed Income Portfolio Manager, Mr.
Rabinovitch joined PIMCO in 1984 and has
managed the PIMCO Long-Term U.S. Government
Fund since its inception, July 1, 1991.
Real Return Bond Fund John Brynjolfsson, Vice President, PIMCO. A
Fixed Income Portfolio Manager, Mr.
Brynjolfsson joined PIMCO in 1989, and has
managed the PIMCO Real Return Bond Fund since
its inception, January 29, 1997.
Foreign Bond Fund Lee R. Thomas, III, Executive Vice President
Global Bond Fund and Senior International Portfolio Manager,
Global Bond Fund II PIMCO. A Fixed Income Portfolio Manager,
International Bond Fund Mr. Thomas has managed the PIMCO Foreign Bond,
Global Bond and International Bond Funds since
July 13, 1995, and the PIMCO Global Bond Fund
II since October 1, 1995. Prior to joining
PIMCO in 1995, Mr. Thomas was associated with
Investcorp as a member of the management
committee responsible for global securities and
foreign exchange trading. Prior to Investcorp,
he was associated with Goldman Sachs as an
Executive Director in foreign fixed income.
</TABLE>
January 17, 1997 Prospectus
41
<PAGE>
FUND ADMINISTRATOR
PIMCO also serves as administrator to the Funds pursuant to an
administration agreement with the Trust. PIMCO provides administrative
services to the Funds, which include clerical help and accounting,
bookkeeping, internal audit services, and certain other services required by
the Funds, preparation of reports to the Funds' shareholders and regulatory
filings. In addition, PIMCO, at its own expense, arranges for the provision of
legal, audit, custody, transfer agency and other services for the Funds, and
is responsible for the costs of registration of the Trust's shares and the
printing of prospectuses and shareholder reports for current shareholders.
The Funds (and not PIMCO) are responsible for the following expenses:
(i) salaries and other compensation of any of the Trust's executive officers
and employees who are not officers, directors, stockholders or employees of
PIMCO or its subsidiaries or affiliates; (ii) taxes and governmental fees;
(iii) brokerage fees and commissions and other portfolio transaction expenses;
(iv) the costs of borrowing money, including interest expenses; (v) fees and
expenses of the Trustees who are not "interested persons" of PIMCO or the
Trust, and any counsel retained exclusively for their benefit; (vi)
extraordinary expenses, including costs of litigation and indemnification
expenses; (vii) expenses, such as organizational expenses, which are
capitalized in accordance with generally accepted accounting principles; and
(viii) any expenses allocated or allocable to a specific class of shares,
which include fees payable with respect to the Administrative Class shares,
and may include certain other expenses as permitted by the Trust's Multi-Class
Plan adopted pursuant to Rule 18f-3 under the 1940 Act and subject to review
and approval by the Trustees.
ADVISORY AND ADMINISTRATIVE FEES
The Funds feature fixed advisory and administrative fee rates. For providing
investment advisory and administrative services to the Funds as described
above, PIMCO receives monthly fees from each Fund at an annual rate based on
the average daily net assets of the Fund as follows:
<TABLE>
<CAPTION>
ADVISORY
FUND FEE RATE
---- --------
<S> <C>
Money Market Fund............................................ 0.15%
Commercial Mortgage Securities, StocksPLUS, StocksPLUS Short
Strategy, and Strategic Balanced Funds...................... 0.40%
All other Funds.............................................. 0.25%
<CAPTION>
ADMINISTRATIVE
FUND FEE RATE
---- --------------
<S> <C>
Money Market, Short-Term and Moderate Duration Funds......... 0.20%
Low Duration Fund and Total Return Fund...................... 0.18%
Global Bond and Global Bond II Funds......................... 0.30%
All other Funds.............................................. 0.25%
</TABLE>
Both the investment advisory contract and administration agreement for the
Funds may be terminated by the Trustees at any time on 60 days' written
notice. The investment advisory contract may be terminated by PIMCO on 60
days' written notice. Following the expiration of the two-year period
commencing with the effectiveness of the administration agreement, it may be
terminated by PIMCO on 60 days' written notice. Following their initial two-
year terms, the investment advisory contract and administration agreement will
continue from year to year if approved by the Trustees.
SERVICE AND DISTRIBUTION FEES
The Trust has adopted an Administrative Services Plan and a Distribution
Plan (the "Plans") with respect to the Administrative Class shares of each
Fund. Under the terms of each Plan, the Trust is permitted to reimburse, out
of the
42
PIMCO Funds: Pacific Investment Management Series
<PAGE>
Administrative Class assets of each Fund, in an amount up to 0.25% on an
annual basis of the average daily net assets of that class, financial
intermediaries that provide services in connection with the distribution of
shares or administration of plans or programs that use Fund shares as their
funding medium, and to reimburse certain other distribution-related expenses.
The same entity may not receive both distribution and administrative services
fees with respect to the same assets but may with respect to separate assets
receive fees under both a Distribution Plan and Administrative Services Plan.
Fees paid pursuant to either type of Plan may be paid for shareholder service
and the maintenance of accounts and therefore may constitute "service fees"
for purposes of applicable rules of the National Association of Securities
Dealers, Inc. Each Plan has been adopted in accordance with the requirements
of Rule 12b-1 under the 1940 Act and will be administered in accordance with
the provisions of that rule, except that shareholders will not have the voting
rights set forth in Rule 12b-1 with respect to the Administrative Services
Plan that they will have with respect to the Distribution Plan. For more
complete disclosure regarding the Plans and their terms, see the Statement of
Additional Information.
Institutional Class shares of the Trust may also be offered through certain
brokers and financial intermediaries ("service agents") that have established
a shareholder servicing relationship with the Trust on behalf of their
customers. The Trust pays no compensation to such entities. Service agents may
impose additional or different conditions on the purchase or redemption of
Fund shares by their customers and may charge their customers transaction or
other account fees on the purchase and redemption of Fund shares. Each service
agent is responsible for transmitting to its customers a schedule of any such
fees and information regarding any additional or different conditions
regarding purchases and redemptions. Shareholders who are customers of service
agents should consult their service agent for information regarding these fees
and conditions.
DISTRIBUTOR
Shares of the Trust are distributed through PIMCO Funds Distribution Company
(the "Distributor"), a wholly owned subsidiary of PIMCO Advisors. The
Distributor, which is located at 2187 Atlantic Street, Stamford, Connecticut
06902, is a broker-dealer registered with the SEC.
PURCHASE OF SHARES
Each Fund offers its shares in up to five classes: "Institutional Class,"
"Administrative Class," "Class A," "Class B," and "Class C." This Prospectus
relates only to the Institutional Class and Administrative Class shares of the
Funds. For information regarding Class A, Class B, and Class C shares, see
"Other Information--Multiple Classes of Shares" below.
Shares of the Institutional Class are offered primarily for direct
investment by investors such as pension and profit-sharing plans, employee
benefit trusts, endowments, foundations, corporations and high net worth
individuals (Institutional Class shares may also be offered through certain
financial intermediaries that charge their customers transaction or other fees
with respect to their customers' investments in the Funds). Shares of the
Administrative Class are offered primarily through employee benefit plan
alliances broker-dealers, and other intermediaries, and each Fund pays service
and/or distribution fees to such entities for services they provide to
shareholders of that class.
Shares of either the Institutional Class or the Administrative Class of the
Funds may be purchased at the relevant net asset value of that class without a
sales charge. The minimum initial investment for shares of either class is $5
million. Shares of either class may also be offered to clients of the Adviser
and its affiliates. Shares of the PIMCO International Bond Fund are offered
only to clients of PIMCO who maintain separately managed private accounts. In
addition, the minimum initial investment does not apply to shares of the
Institutional Class offered through fee-based programs
January 17, 1997 Prospectus
43
<PAGE>
sponsored and maintained by a registered broker-dealer and approved by the
Distributor pursuant to which each investor pays an asset based fee at an
annual rate of at least .50% of the assets in the account to a financial
intermediary for investment advisory and/or administrative services.
Pension and profit-sharing plans, employee benefit trusts and employee
benefit plan alliances and "wrap account" programs established with broker-
dealers or other financial intermediaries may purchase shares of either class
only if the plan or program for which the shares are being acquired will
maintain an omnibus or pooled account for each Fund and will not require a
Fund to pay any type of administrative payment per participant account to any
third party.
INITIAL INVESTMENT
An account may be opened by completing and signing a Client Registration
Application and mailing it to PIMCO Funds at the following address: 840
Newport Center Drive, Suite 360, Newport Beach, California 92660. A Client
Registration Application may be obtained by calling (800) 800-0952.
Except as provided below, purchases of shares can only be made by wiring
federal funds to Investors Fiduciary Trust Company (the "Transfer Agent"), 127
West 10th Street, Kansas City, Missouri 64105. Before wiring federal funds,
the investor must first telephone the Trust at (800) 927-4648 to receive
instructions for wire transfer, and the following information will be
requested: name of authorized person; shareholder name; shareholder account
number; name of Fund and share class; amount being wired; and wiring bank
name.
Shares may be purchased without first wiring federal funds if the proceeds
of the investment are derived from an advisory account maintained by the
investor with PIMCO, PIMCO Advisors or one of their affiliates; from surrender
or other payment from an annuity, insurance, or other contract held by Pacific
Mutual Life Insurance Company; or from an investment by broker-dealers,
institutional clients or other financial intermediaries which have established
a shareholder servicing relationship with the Trust on behalf of their
customers.
A purchase order, together with payment in proper form, received by the
Transfer Agent prior to the close of business (ordinarily 4:00 p.m., Eastern
time) on a day the Trust is open for business will be effected at that day's
net asset value. In order to facilitate efficient operation of the PIMCO
StocksPLUS, StocksPLUS Short Strategy and Strategic Balanced Funds, the Trust
requests that all purchase or exchange orders for these Funds be received by
the Transfer Agent prior to 3:00 p.m., Eastern time. An order received after
the close of business will generally be effected at the net asset value
determined on the next business day. However, orders received by certain
retirement plans and other financial intermediaries by the close of business
and communicated to the Transfer Agent by 9:00 a.m., Eastern time, on the
following business day will be effected at the net asset value determined on
the prior business day. The Trust is "open for business" on each day the New
York Stock Exchange (the "Exchange") is open for trading, which excludes the
following holidays: New Year's Day, Presidents' Day, Good Friday, Memorial
Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Purchase
orders will be accepted only on days on which the Trust is open for business.
With respect to the Funds whose policy is to declare dividends daily (i.e.,
each of the Fixed Income Funds except the PIMCO International Bond Fund), if a
purchase order for shares is received prior to 12:00 noon, Eastern time, and
payment in federal funds is received by the Transfer Agent by the close of the
federal funds wire on the day the purchase order is received, dividends will
accrue starting that day. If a purchase order is received after 12:00 noon,
Eastern time, and payment in federal funds is received by the Transfer Agent
by the close of the federal funds wire on the day the purchase order is
received, or as otherwise agreed to by the Trust, the order will be effected
at that day's net asset value, but dividends will not begin to accrue until
the following business day.
44
PIMCO Funds: Pacific Investment Management Series
<PAGE>
ADDITIONAL INVESTMENTS
Additional investments may be made at any time at the relevant net asset
value for that class by calling the Trust and wiring federal funds to the
Transfer Agent as outlined above.
OTHER PURCHASE INFORMATION
Purchases of a Fund's Institutional Class and Administrative Class shares
will be made in full and fractional shares. In the interest of economy and
convenience, certificates for shares will not be issued.
The Trust and the Distributor each reserves the right, in its sole
discretion, to suspend the offering of shares of the Funds or to reject any
purchase order, in whole or in part, when, in the judgment of management, such
suspension or rejection is in the best interests of the Trust; to waive the
minimum initial investment for certain investors; and to redeem shares if
information provided in the Client Registration Application should prove to be
incorrect in any manner judged by the Trust to be material (e.g., in a manner
such as to render the shareholder ineligible to purchase shares of the Trust).
Purchases and sales of Fund shares should be made for long-term investment
purposes only. The Trust and Adviser each reserves the right to restrict
purchases of Fund shares (including exchanges) when a pattern of frequent
purchases and sales made in response to short-term fluctuations in share price
appears evident.
Institutional Class and Administrative Class shares of the Trust are not
qualified or registered for sale in all states. Prospective investors should
inquire as to whether shares of a particular Fund are available for offer and
sale in their state of residence. Shares of the Trust may not be offered or
sold in any state unless registered or qualified in that jurisdiction or
unless an exemption from registration or qualification is available.
Investors may, subject to the approval of the Trust, purchase shares of a
Fund with liquid securities that are eligible for purchase by the Fund
(consistent with such Fund's investment policies and restrictions) and that
have a value that is readily ascertainable in accordance with the Trust's
valuation policies. These transactions will be effected only if the Adviser
intends to retain the security in the Fund as an investment. Assets so
purchased by a Fund will be valued in generally the same manner as they would
be valued for purposes of pricing the Fund's shares, if such assets were
included in the Fund's assets at the time of purchase. The Trust reserves the
right to amend or terminate this practice at any time.
RETIREMENT PLANS
Shares of the Funds are available for purchase by retirement plans,
including Keogh plans, 401(k) plans, 403(b) plans and Individual Retirement
Accounts. The administrator of a plan or employee benefits office can provide
participants or employees with detailed information on how to participate in
the plan and how to elect a Fund as an investment option. Participants in a
retirement or savings plan may be permitted to elect different investment
options, alter the amounts contributed to the plan, or change how
contributions are allocated among investment options in accordance with the
plan's specific provisions. The plan administrator or employee benefits office
should be consulted for details. For questions about participant accounts,
participants should contact their employee benefits office, the plan
administrator, or the organization that provides recordkeeping services for
the plan. Investors who purchase shares through retirement plans should be
aware that plan administrators may aggregate purchase and redemption orders
for participants in the plan. Therefore, there may be a delay between the time
the investor places an order with the plan administrator, and the time the
order is forwarded to the Transfer Agent for execution.
January 17, 1997 Prospectus
45
<PAGE>
REDEMPTION OF SHARES
REDEMPTIONS BY MAIL
Institutional Class and Administrative Class shares may be redeemed by
submitting a written request to PIMCO Funds, 840 Newport Center Drive, Suite
360, Newport Beach, California 92660, stating the Fund from which the shares
are to be redeemed, the class of shares, the number or dollar amount of the
shares to be redeemed and the account number. The request must be signed
exactly as the names of the registered owners appear on the Trust's account
records, and the request must be signed by the minimum number of persons
designated on the Client Registration Application that are required to effect
a redemption. In order to discourage short-term trading, the PIMCO StocksPLUS
Short Strategy Fund imposes a redemption fee, payable to the Fund, of 1% on
all shares of the Fund held for less than three months.
REDEMPTIONS BY TELEPHONE OR OTHER WIRE COMMUNICATION
If an election is made on the Client Registration Application (or
subsequently in writing), redemptions of shares may be requested by calling
the Trust at (800) 927-4648, by sending a facsimile to (714) 760-4456, or by
other means of wire communication. Investors should state the Fund and class
from which the shares are to be redeemed, the number or dollar amount of the
shares to be redeemed and the account number. Redemption requests of an amount
of $10 million or more may be initiated by telephone, but must be confirmed in
writing by an authorized party prior to processing.
In electing a telephone redemption, the investor authorizes PIMCO and the
Transfer Agent to act on telephone instructions from any person representing
himself to be the investor, and reasonably believed by PIMCO and the Transfer
Agent to be genuine. Neither the Trust nor its Transfer Agent will be liable
for any loss, cost or expense for acting on instructions (whether in writing
or by telephone) believed by the party receiving such instructions to be
genuine and in accordance with the procedures described in this Prospectus.
Shareholders should realize that by electing the telephone or wire redemption
option, they may be giving up a measure of security that they might have if
they were to redeem their shares in writing. Furthermore, interruptions in
telephone service may mean that a shareholder will be unable to effect a
redemption by telephone when desired. The Transfer Agent provides written
confirmation of transactions initiated by telephone as a procedure designed to
confirm that telephone instructions are genuine (written confirmation is also
provided for redemption requests received in writing). All telephone
transactions are recorded, and PIMCO or the Transfer Agent may request certain
information in order to verify that the person giving instructions is
authorized to do so. All redemptions, whether initiated by letter or
telephone, will be processed in a timely manner and proceeds will be forwarded
by wire in accordance with the redemption policies of the Trust detailed
below. See "Redemption of Shares--Other Redemption Information."
Shareholders may decline telephone exchange or redemption privileges after
an account is opened by instructing the Transfer Agent in writing at least
seven business days prior to the date the instruction is to be effective.
Shareholders may experience delays in exercising telephone redemption
privileges during periods of abnormal market activity. During periods of
volatile economic or market conditions, shareholders may wish to consider
transmitting redemption orders by telegram, facsimile or overnight courier.
OTHER REDEMPTION INFORMATION
Payment of the redemption price will ordinarily be wired to the investor's
bank one business day after the redemption request, but may take up to seven
business days. Redemption proceeds will be sent by wire only to the bank name
designated on the Client Registration Application. The Trust may suspend the
right of redemption or postpone the payment date at times when the Exchange is
closed, or during certain other periods as permitted under the federal
securities laws.
46
PIMCO Funds: Pacific Investment Management Series
<PAGE>
For shareholder protection, a request to change information contained in an
account registration (for example, a request to change the bank designated to
receive wire redemption proceeds) must be received in writing, signed by the
minimum number of persons designated on the Client Registration Application
that are required to effect a redemption, and accompanied by a signature
guarantee from any eligible guarantor institution, as determined in accordance
with the Trust's procedures. Shareholders should inquire as to whether a
particular institution is an eligible guarantor institution. A signature
guarantee cannot be provided by a notary public. In addition, corporations,
trusts, and other institutional organizations are required to furnish evidence
of the authority of the persons designated on the Client Registration
Application to effect transactions for the organization.
Due to the relatively high cost of maintaining small accounts, the Trust
reserves the right to redeem Institutional Class and Administrative Class
shares in any account for their then-current value (which will be promptly
paid to the investor) if at any time, due to redemption by the investor, the
shares in the account do not have a value of at least $100,000 ($10,000 with
respect to accounts opened before January 1, 1995). A shareholder will receive
advance notice of a mandatory redemption and will be given at least 30 days to
bring the value of its account up to at least $100,000, or $10,000, as the
case may be.
The Trust agrees to redeem shares of each Fund solely in cash up to the
lesser of $250,000 or 1% of the net assets during any 90-day period for any
one shareholder. In consideration of the best interests of the remaining
shareholders, the Trust reserves the right to pay any redemption proceeds
exceeding this amount in whole or in part by a distribution in kind of
securities held by a Fund in lieu of cash. It is highly unlikely that shares
would ever be redeemed in kind. If shares are redeemed in kind, however, the
redeeming shareholder should expect to incur transaction costs upon the
disposition of the securities received in the distribution.
EXCHANGE PRIVILEGE
Shares of a Fund may be exchanged for shares of the same class of any other
Fund based on the respective net asset values of the shares involved, except
that shares of the PIMCO International Fund are available only to private
account clients of PIMCO. An exchange may be made by following the redemption
procedure described above under "Redemptions by Mail" or, if the telephone
redemption option has been elected, by calling the Trust at (800) 927-4648.
Shares of a Fund may also be exchanged for shares of the same class of a
series (except the Opportunity Fund) of PIMCO Funds: Multi-Manager Series, an
affiliated mutual fund family comprised primarily of equity portfolios managed
by the subsidiary partnerships of PIMCO Advisors. Shareholders interested in
such an exchange may request a prospectus for these funds by contacting PIMCO
Funds at the same address and telephone number as the Trust.
Exchanges may be made only with respect to Funds, or series of PIMCO Funds:
Multi-Manager Series, registered in the state of residence of the investor or
where an exemption from registration is available. An exchange order is
treated the same for tax purposes as a redemption followed by a purchase and
may result in a capital gain or loss, and special rules may apply in computing
tax basis when determining gain or loss. See "Taxation" in the Statement of
Additional Information.
The Trust reserves the right to modify or revoke the exchange privilege of
any shareholder or to limit or reject any exchange. Although each Fund will
attempt to give shareholders prior notice whenever it is reasonably able to do
so, it may impose these restrictions at any time.
January 17, 1997 Prospectus
47
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PORTFOLIO TRANSACTIONS
Pursuant to the advisory contract, the Adviser places orders for the
purchase and sale of portfolio investments for the Funds' accounts with
brokers or dealers selected by it in its discretion. In effecting purchases
and sales of portfolio securities for the account of the Funds, the Adviser
will seek the best price and execution of the Funds' orders. In doing so, a
Fund may pay higher commission rates than the lowest available when the
Adviser believes it is reasonable to do so in light of the value of the
brokerage and research services provided by the broker effecting the
transaction. The Adviser also may consider sales of shares of the Trust as a
factor in the selection of broker-dealers to execute portfolio transactions
for the Trust.
The Adviser manages the Funds without regard generally to restrictions on
portfolio turnover, except those imposed on its ability to engage in short-
term trading by provisions of the federal tax laws. The use of futures
contracts and other derivative instruments with relatively short maturities
may tend to exaggerate the portfolio turnover rate for some of the Funds.
Trading in fixed income securities does not generally involve the payment of
brokerage commissions, but does involve indirect transaction costs. The use of
futures contracts may involve the payment of commissions to futures commission
merchants. The higher the rate of portfolio turnover of a Fund, the higher all
these transaction costs borne by the Fund generally will be. The portfolio
turnover rate for each Fund for which financial highlights are provided in
this Prospectus is set forth under "Financial Highlights." Portfolio turnover
for the remaining Funds is incorporated by reference in the Statement of
Additional Information.
Some securities considered for investment by the Funds may also be
appropriate for other clients served by the Adviser. If a purchase or sale of
securities consistent with the investment policies of a Fund and one or more
of these clients served by the Adviser is considered at or about the same
time, transactions in such securities will be allocated among the Fund and
clients in a manner deemed fair and reasonable by the Adviser.
NET ASSET VALUE
The net asset value per share of each of the Institutional Class and
Administrative Class of each Fund is determined as of the close of trading on
the Exchange (ordinarily 4:00 p.m., Eastern time) by dividing the total market
value of a Fund's portfolio investments and other assets attributable to that
class, less any liabilities, by the number of total outstanding shares of that
class. Net asset value will not be determined on days on which the Exchange is
closed.
The PIMCO Money Market Fund's securities are normally valued using the
amortized cost method of valuation. This involves valuing a security at cost
on the date of acquisition and thereafter assuming a constant accretion of a
discount or amortization of a premium to maturity. See the Statement of
Additional Information for a description of certain conditions and procedures
followed by the PIMCO Money Market Fund in connection with amortized cost
valuation. For all other Funds, portfolio securities and other assets for
which market quotations are readily available are stated at market value.
Market value is determined on the basis of last reported sales prices, or if
no sales are reported, as is the case for most securities traded over-the-
counter, at the mean between representative bid and asked quotations obtained
from a quotation reporting system or from established market makers. Fixed
income securities, including those to be purchased under firm commitment
agreements (other than obligations having a maturity of 60 days or less), are
normally valued on the basis of quotations obtained from brokers and dealers
or pricing services, which take into account appropriate factors such as
institutional-sized trading in similar groups of securities, yield, quality,
coupon rate, maturity, type of issue, trading characteristics, and other
market data.
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Quotations of foreign securities in foreign currency are converted to U.S.
dollar equivalents using foreign exchange quotations received from independent
dealers. Short-term investments having a maturity of 60 days or less are
valued at amortized cost, when the Board of Trustees determines that amortized
cost is their fair value. Certain fixed income securities for which daily
market quotations are not readily available may be valued, pursuant to
guidelines established by the Board of Trustees, with reference to fixed
income securities whose prices are more readily obtainable and whose durations
are comparable to the securities being valued. Subject to the foregoing, other
securities for which market quotations are not readily available are valued at
fair value as determined in good faith by the Board of Trustees.
Each Fund's liabilities are allocated among its classes. The total of such
liabilities allocated to a class plus that class's distribution and/or
servicing fees and any other expenses specially allocated to that class are
then deducted from the class's proportionate interest in the Fund's assets,
and the resulting amount for each class is divided by the number of shares of
that class outstanding to produce the "net asset value" per share. Under
certain circumstances, the per share net asset value of the Administrative
Class shares of the Funds that do not declare regular income dividends on a
daily basis may be lower than the per share net asset value of the
Institutional Class shares as a result of the daily expense accruals of the
service and/or distribution fees applicable to the Administrative Class
shares. Generally, for Funds that pay income dividends, those dividends are
expected to differ over time by approximately the amount of the expense
accrual differential between a particular Fund's classes.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Shares begin earning dividends on the effective date of purchase, provided
notification deadlines are met. See "Purchase of Shares." For the Fixed Income
Funds (other than the PIMCO International Bond Fund), dividends are declared
daily from net investment income to shareholders of record at the close of the
previous business day, and distributed to shareholders monthly. The PIMCO
International Bond, Strategic Balanced and Equity Funds intend to declare and
pay as a dividend substantially all of their net investment income on a
quarterly basis. Any net realized capital gains from the sale of portfolio
securities will be distributed no less frequently than once yearly. Dividend
and capital gain distributions of a Fund will be reinvested in additional
shares of that Fund unless the shareholder elects to have them paid in cash.
Dividends from net investment income with respect to Administrative Class
shares will be lower than those paid with respect to Institutional Class
shares, reflecting the payment of service and/or distribution fees by that
class.
Each Fund intends to qualify as a regulated investment company annually and
to elect to be treated as a regulated investment company under the Internal
Revenue Code of 1986, as amended. As such, a Fund generally will not pay
federal income tax on the income and gains it pays as dividends to its
shareholders. In order to avoid a 4% federal excise tax, each Fund intends to
distribute each year substantially all of its net income and gains.
Distributions received by tax-exempt shareholders will not be subject to
federal income tax to the extent permitted under applicable tax law. To the
extent that a shareholder is not exempt from tax on Fund distributions, such
shareholder will be subject to tax on dividends received from a Fund,
regardless of whether received in cash or reinvested in additional shares. All
shareholders must treat dividends, other than capital gain dividends or
dividends that represent a return of capital to shareholders, as ordinary
income. Dividends designated by a Fund as capital gain dividends are taxable
to shareholders as long-term capital gain except as provided by an applicable
tax exemption. Any distributions that are not from a Fund's net investment
income or net capital gain may be characterized as a return of capital to
shareholders or, in some cases, as capital gain. Certain dividends declared in
October, November or December of a calendar year are taxable
January 17, 1997 Prospectus
49
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to shareholders (who otherwise are subject to tax on dividends) as though
received on December 31 of that year if paid to shareholders during January of
the following calendar year. For state income tax purposes, interest on some
Federal obligations generally is not exempt from taxation, whether received
directly by a shareholder or through distributions of investment company
taxable income (for example, interest on FNMA and GNMA Certificates). Each
Fund will advise shareholders annually of the amount and nature of the
dividends paid to them.
Coupon payments received by a Fund from inflation-indexed bonds will be
includable in the Fund's gross income in the period in which they accrue.
Periodic adjustments for inflation in the principal value of these securities
also may give rise to original issue discount, which, likewise, will be
includable in the Fund's gross income on a current basis. See "Taxation--
Original Issue Discount" in the Statement of Additional Information. Amounts
includable in a Fund's gross income become subject to tax-related distribution
requirements. Accordingly, a Fund may be required to make annual distributions
to shareholders in excess of the cash received in a given period from these
investments. As a result, the Fund may be required to liquidate certain
investments at a time when it is not advantageous to do so. If the principal
value of an inflation-indexed bond is adjusted downward in any period as a
result of deflation, the reduction may be treated as a loss to the extent the
reduction exceeds coupon payments received in that period; in that case, the
amount distributable by the Fund may be reduced and amounts distributed
previously in the taxable year may be characterized in some circumstances as a
return of capital.
Taxable shareholders should note that the timing of their investment could
have undesirable tax consequences. If shares are purchased on or just before
the record date of a dividend, taxable shareholders will pay full price for
the shares and may receive a portion of their investment back as a taxable
distribution.
The preceding discussion relates only to federal income tax; the
consequences under other tax laws may differ. For additional information
relating to the tax aspects of investing in a Fund, see the Statement of
Additional Information.
OTHER INFORMATION
CAPITALIZATION
The Trust was organized as a Massachusetts business trust on February 19,
1987. The Board of Trustees may establish additional portfolios in the future.
The capitalization of the Trust consists solely of an unlimited number of
shares of beneficial interest with a par value of $0.0001 each. When issued,
shares of the Trust are fully paid, non-assessable and freely transferable.
Under Massachusetts law, shareholders could, under certain circumstances, be
held personally liable for the obligations of the Trust. However, the
Declaration of Trust disclaims liability of the shareholders, Trustees or
officers of the Trust for acts or obligations of the Trust, which are binding
only on the assets and property of the Trust, and requires that notice of the
disclaimer be given in each contract or obligation entered into or executed by
the Trust or the Trustees. The Declaration of Trust also provides for
indemnification out of Trust property for all loss and expense of any
shareholder held personally liable for the obligations of the Trust. The risk
of a shareholder incurring financial loss on account of shareholder liability
is limited to circumstances in which such disclaimer is inoperative or the
Trust itself is unable to meet its obligations, and thus should be considered
remote.
MULTIPLE CLASSES OF SHARES
In addition to Institutional Class and Administrative Class shares, certain
Funds offer Class A shares, Class B shares, and Class C shares. These other
classes of the Funds may have different sales charges and expense levels,
which will
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affect performance accordingly. Investors may contact the Distributor at (800)
426-0107 for more information concerning other classes of shares of the Funds.
This Prospectus relates only to the Institutional Class shares and
Administrative Class shares of the Funds.
VOTING
Shareholders have the right to vote on the election of Trustees and on any
and all matters on which the law or the Declaration of Trust states they may
be entitled to vote. The Trust is not required to hold regular annual meetings
of Trust shareholders and does not intend to do so. Shareholders of a class of
shares or Fund have separate voting rights with respect to matters that only
affect that class or Fund. See "Other Information--Voting Rights" in the
Statement of Additional Information.
The Declaration of Trust provides that the holders of not less than two-
thirds of the outstanding shares of the Trust may remove a person serving as
Trustee either by declaration in writing or at a meeting called for such
purpose. The Trustees are required to call a meeting for the purpose of
considering the removal of a person serving as Trustee if requested in writing
to do so by the holders of not less than 10% of the outstanding shares of the
Trust.
Shares entitle their holders to one vote per share (with proportionate
voting for fractional shares). As of December 17, 1996, the following were
shareholders of record of at least 25% of the outstanding voting securities of
the indicated Funds: California Community Foundation (Los Angeles, California)
and Marin Community Foundation (Larkspur, California) with respect to the
PIMCO Money Market Fund; Sprint Corporation (Westwood, Kansas) with respect to
PIMCO Low Duration Fund II; Archdiocese of Los Angeles (Los Angeles,
California) with respect to the PIMCO Total Return Fund III; Wendel & Co. (New
York, New York) with respect to the PIMCO Long-Term U.S. Government Fund;
Donaldson, Lufkin & Jenrette (Jersey City, New Jersey) and Charles Schwab &
Co., Inc. (San Francisco, California) with respect to the PIMCO Foreign Bond
Fund; and Pacific Financial Asset Management Corporation with respect to the
PIMCO Strategic Balanced Fund and the Global Income Fund (the predecessor of
the PIMCO Global Bond Fund II). To the extent such shareholders are also the
beneficial owners of such securities, they may be deemed to control (as that
term is defined in the 1940 Act) the relevant Fund. As used in this
Prospectus, the phrase "vote of a majority of the outstanding shares" of a
Fund (or the Trust) means the vote of the lesser of: (1) 67% of the shares of
the Fund (or the Trust) present at a meeting, if the holders of more than 50%
of the outstanding shares are present in person or by proxy; or (2) more than
50% of the outstanding shares of the Fund (or the Trust).
PERFORMANCE INFORMATION
From time to time, the yield and total return for each class of shares of
the Funds may be included in advertisements or reports to shareholders or
prospective investors. Yield quotations for the PIMCO Money Market Fund may
include current yield and effective yield. Current yield will be based on
income received by a hypothetical investment over a given seven-day period
(less expenses accrued during the period) and "annualized" (i.e., assuming
that the seven-day yield would be received for 52 weeks, stated in terms of an
annual percentage return on the investment). Effective yield for the Fund is
calculated in the manner similar to that used to calculate current yield, but
reflects the compounding effect on earnings of reinvested dividends. For the
remaining Funds, quotations of yield for a Fund or class will be based on the
investment income per share (as defined by the SEC) during a particular 30-day
(or one-month) period (including dividends and interest), less expenses
accrued during the period ("net investment income"), and will be computed by
dividing net investment income by the maximum public offering price per share
on the last day of the period. Quotations of average annual total return for a
Fund or class will be expressed in terms of the average annual compounded rate
of return of a hypothetical investment in the Fund or class over periods of
one, five and ten years (up to the life of the Fund), reflect the deduction of
a proportional share of Fund or class expenses (on an annual basis), and
assume that all
January 17, 1997 Prospectus
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dividends and distributions are reinvested when paid. Consistent with
Securities and Exchange Commission rules and informal guidance, for periods
prior to the initial offering date of a particular class, total return
presentations for the class may be based on the historical performance of an
older class of the Fund (the older class to be used in each case is set forth
in the Statement of Additional Information), restated to reflect current sales
charges or redemption fees (if any), but not reflecting different operating
expenses (such as service or distribution fees and administrative fee charges)
associated with the newer class. All other things being equal, higher expenses
of an older class would have adversely affected (i.e., reduced) total return
for a newer class (i.e., if the newer class had been issued since the
inception of the Fund) by the amount of such higher expenses, compounded over
the relevant period. Total return for each class is measured by comparing the
value of an investment in the Fund at the beginning of the relevant period to
the redemption value of the investment in the Fund at the end of the period
(assuming immediate reinvestment of any dividends or capital gains
distributions at net asset value). Total return may be advertised using
alternative methods that reflect all elements of return, but that may be
adjusted to reflect the cumulative impact of alternative fee and expense
structures, such as the currently effective advisory and administrative fees
for the Funds.
Current distribution information may also be provided to the Trust's
shareholders in shareholder reports or other shareholder communications, or in
certain types of sales literature provided to prospective investors. Current
distribution information for a particular class of a Fund will be based on
distributions for a specified period (i.e., total dividends from net
investment income), divided by the relevant class net asset value per share on
the last day of the period and annualized. The rate of current distributions
does not reflect deductions for unrealized losses from transactions in
derivative instruments such as options and futures, which may reduce total
return. Current distribution rates differ from standardized yield rates in
that they represent what a class of a Fund has declared and paid to
shareholders as of the end of a specified period rather than the Fund's actual
net investment income for that period.
Performance information for the Trust may also be compared to various
unmanaged indices, such as the Standard & Poor's 500 Composite Stock Price
Index, the Lehman Brothers Aggregate Bond Index, the Merrill Lynch 1 to 3 Year
Treasury Index, the Lehman Intermediate and 20+ Year Treasury Blend Index, the
Lehman BB Intermediate Corporate Index, indexes prepared by Lipper Analytical
Services, the J.P. Morgan Global Index, the Salomon Brothers World Government
Bond Index-10 Non U.S.-Dollar Hedged and the J.P. Morgan Government Bond Index
Non U.S.-Dollar Hedged, and other entities or organizations which track the
performance of investment companies or investment advisers. Unmanaged indexes
(i.e., other than Lipper) generally do not reflect deductions for
administrative and management costs and expenses. PIMCO may also report to
shareholders or to the public in advertisements concerning the performance of
PIMCO as adviser to clients other than the Trust, and on the comparative
performance or standing of PIMCO in relation to other money managers. Such
comparative information may be compiled or provided by independent ratings
services or by news organizations. Any performance information, whether
related to the Funds or to the Adviser, should be considered in light of a
Fund's investment objectives and policies, characteristics and quality of the
portfolio, and the market conditions during the time period indicated, and
should not be considered to be representative of what may be achieved in the
future. For a description of the methods used to determine yield and total
return for the Funds, see the Statement of Additional Information.
Investment results of the Funds will fluctuate over time, and any
presentation of the Funds' total return or yield for any prior period should
not be considered as a representation of what an investor's total return or
yield may be in any future period. The Trust's Annual Report contains
additional performance information for the Funds and is available upon
request, without charge, by calling (800) 927-4648 (Current Shareholders), or
(800) 800-0952 (New Accounts).
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APPENDIX A
DESCRIPTION OF DURATION
Duration is a measure of the expected life of a fixed income security that
was developed as a more precise alternative to the concept of "term to
maturity." Traditionally, a fixed income security's "term to maturity" has
been used as a proxy for the sensitivity of the security's price to changes in
interest rates (which is the "interest rate risk" or "volatility" of the
security). However, "term to maturity" measures only the time until a fixed
income security provides its final payment, taking no account of the pattern
of the security's payments prior to maturity. In contrast, duration
incorporates a bond's yield, coupon interest payments, final maturity and call
features into one measure. Duration management is one of the fundamental tools
used by the Adviser.
Duration is a measure of the expected life of a fixed income security on a
present value basis. Duration takes the length of the time intervals between
the present time and the time that the interest and principal payments are
scheduled or, in the case of a callable bond, expected to be received, and
weights them by the present values of the cash to be received at each future
point in time. For any fixed income security with interest payments occurring
prior to the payment of principal, duration is always less than maturity. In
general, all other things being equal, the lower the stated or coupon rate of
interest of a fixed income security, the longer the duration of the security;
conversely, the higher the stated or coupon rate of interest of a fixed income
security, the shorter the duration of the security.
Futures, options and options on futures have durations which, in general,
are closely related to the duration of the securities which underlie them.
Holding long futures or call option positions (backed by a segregated account
of cash and cash equivalents) will lengthen a Fund's duration by approximately
the same amount that holding an equivalent amount of the underlying securities
would.
Short futures or put option positions have durations roughly equal to the
negative duration of the securities that underlie these positions, and have
the effect of reducing portfolio duration by approximately the same amount
that selling an equivalent amount of the underlying securities would.
There are some situations where even the standard duration calculation does
not properly reflect the interest rate exposure of a security. For example,
floating and variable rate securities often have final maturities of ten or
more years; however, their interest rate exposure corresponds to the frequency
of the coupon reset. For inflation-indexed bonds, duration is calculated on
the basis of modified real duration, which measures price changes of
inflation-indexed bonds on the basis of changes in real, rather than nominal,
interest rates. Another example where the interest rate exposure is not
properly captured by duration is the case of mortgage pass-through securities.
The stated final maturity of such securities is generally 30 years, but
current prepayment rates are more critical in determining the securities'
interest rate exposure. Finally, the duration of a fixed income security may
vary over time in response to changes in interest rates and other market
factors. In these and other similar situations, the Adviser will use more
sophisticated analytical techniques that incorporate the anticipated economic
life of a security into the determination of its interest rate exposure.
January 17, 1997 Prospectus
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APPENDIX B
DESCRIPTION OF SECURITIES RATINGS
Certain of the Funds make use of average portfolio credit quality standards
to assist institutional investors whose own investment guidelines limit their
investments accordingly. In determining a Fund's overall dollar-weighted
average quality, unrated securities are treated as if rated, based on the
Adviser's view of their comparability to rated securities. A Fund's use of
average quality criteria is intended to be a guide for those institutional
investors whose investment guidelines require that assets be invested
according to comparable criteria. Reference to an overall average quality
rating for a Fund does not mean that all securities held by the Fund will be
rated in that category or higher. A Fund's investments may range in quality
from securities rated in the lowest category in which the Fund is permitted to
invest to securities rated in the highest category (as rated by Moody's or S&P
or, if unrated, determined by the Adviser to be of comparable quality). The
percentage of a Fund's assets invested in securities in a particular rating
category will vary. Following is a description of Moody's and S&P's ratings
applicable to fixed income securities.
MOODY'S INVESTORS SERVICE, INC.
CORPORATE AND MUNICIPAL BOND RATINGS
Aaa: Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa: Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high-grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present that make the long-term risks appear somewhat larger than with Aaa
securities.
A: Bonds which are rated A possess many favorable investment attributes and
are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present that suggest a susceptibility to impairment sometime in the future.
Baa: Bonds which are rated Baa are considered as medium-grade obligations
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba: Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca: Bonds which are rated Ca represent obligations which are speculative in
a high degree. Such issues are often in default or have other marked
shortcomings.
January 17, 1997 Prospectus
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C: Bonds which are rated C are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers, 1, 2, and 3 in each generic rating
classified from Aa through B in its corporate bond rating system. The modifier
1 indicates that the security ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its generic rating
category.
CORPORATE SHORT-TERM DEBT RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers to
repay punctually senior debt obligations which have an original maturity not
exceeding one year. Obligations relying upon support mechanisms such as
letters of credit and bonds of indemnity are excluded unless explicitly rated.
Moody's employs the following three designations, all judged to be
investment grade, to indicate the relative repayment ability of rated issuers:
PRIME-1: Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
leading market positions in well-established industries; high rates of return
on funds employed; conservative capitalization structure with moderate
reliance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash generation; and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
PRIME-2: Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a
lesser degree. Earnings trends and coverage ratios, while sound, may be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternate liquidity is
maintained.
PRIME-3: Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of senior short-term obligations. The effect
of industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level
of debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
NOT PRIME: Issuers rated Not Prime do not fall within any of the Prime
rating categories.
STANDARD & POOR'S CORPORATION
CORPORATE AND MUNICIPAL BOND RATINGS
Investment Grade
AAA: Debt rated AAA has the highest rating assigned by Standard & Poor's.
Capacity to pay interest and repay principal is extremely strong.
AA: Debt rated AA has a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree.
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A: Debt rated A has a strong capacity to pay interest and repay principal
although it is somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB: Debt rated BBB is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions, or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher-rated categories.
Speculative Grade
Debt rated BB, B, CCC, CC, and C is regarded as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal. BB indicates the least degree of speculation and C the highest.
While such debt will likely have some quality and protective characteristics,
these are outweighed by large uncertainties or major exposures to adverse
conditions.
BB: Debt rated BB has less near-term vulnerability to default than other
speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to
inadequate capacity to meet timely interest and principal payments. The BB
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied BBB- rating.
B: Debt rated B has a greater vulnerability to default but currently has the
capacity to meet interest payments and principal repayments. Adverse business,
financial, or economic conditions will likely impair capacity or willingness
to pay interest and repay principal. The B rating category is also used for
debt subordinated to senior debt that is assigned an actual or implied BB or
BB- rating.
CCC: Debt rated CCC has a currently identifiable vulnerability to default
and is dependent upon favorable business, financial, and economic conditions
to meet timely payment of interest and repayment of principal. In the event of
adverse business, financial or economic conditions, it is not likely to have
the capacity to pay interest and repay principal. The CCC rating category is
also used for debt subordinated to senior debt that is assigned an actual or
implied B or B- rating.
CC: The rating CC is typically applied to debt subordinated to senior debt
that is assigned an actual or implied CCC rating.
C: The rating C is typically applied to debt subordinated to senior debt
that is assigned an actual or implied CCC- debt rating. The C rating may be
used to cover a situation where a bankruptcy petition has been filed, but debt
service payments are continued.
CI: The rating CI is reserved for income bonds on which no interest is being
paid.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period. The D rating will also be used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
Plus (+) or Minus (-): The ratings from AA to CCC may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
January 17, 1997 Prospectus
B-3
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Provisional ratings: The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on
the likelihood of, or the risk of default upon failure of, such completion.
The investor should exercise his own judgment with respect to such likelihood
and risk.
r: The "r" is attached to highlight derivative, hybrid, and certain other
obligations that S&P believes may experience high volatility or high
variability in expected returns due to non-credit risks. Examples of such
obligations are: securities whose principal or interest return is indexed to
equities, commodities, or currencies; certain swaps and options; and interest
only and principal only mortgage securities.
The absence of an "r" symbol should not be taken as an indication that an
obligation will exhibit no volatility or variability in total return.
N.R.: Not rated.
Debt obligations of issuers outside the United States and its territories
are rated on the same basis as domestic corporate and municipal issues. The
ratings measure the creditworthiness of the obligor but do not take into
account currency exchange and related uncertainties.
COMMERCIAL PAPER RATING DEFINITIONS
A Standard & Poor's commercial paper rating is a current assessment of the
likelihood of timely payment of debt having an original maturity of no more
than 365 days. Ratings are graded into several categories, ranging from A for
the highest quality obligations to D for the lowest. These categories are as
follows:
A-1: This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus sign (+) designation.
A-2: Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated A-1.
A-3: Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes
in circumstances than obligations carrying the higher designations.
B: Issues rated B are regarded as having only speculative capacity for
timely payment.
C: This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D: Debt rated D is in payment default. The D rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
A commercial paper rating is not a recommendation to purchase, sell or hold
a security inasmuch as it does not comment as to market price or suitability
for a particular investor. The ratings are based on current information
furnished to Standard & Poor's by the issuer or obtained from other sources it
considers reliable. Standard & Poor's does not perform an audit in connection
with any rating and may, on occasion, rely on unaudited financial information.
The ratings may be changed, suspended, or withdrawn as a result of changes in
or unavailability of such information.
B-4
PIMCO Funds: Pacific Investment Management Series
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[LOGO OF PIMCO APPEARS HERE]
PIMCO FUNDS
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Pacific Investment Management Series
INVESTMENT ADVISER AND ADMINISTRATOR
Pacific Investment Management Company
840 Newport Center Drive, Suite 360
Newport Beach, CA 92660
CUSTODIAN AND TRANSFER AGENT
Investors Fiduciary Trust Company
127 West 10th Street
Kansas City, MO 64105
ACCOUNTANTS
Price Waterhouse LLP
1055 Broadway
Kansas City, MO 64105
COUNSEL
Dechert Price & Rhoads
1500 K Street, N.W., Suite 500
Washington, DC 20005
PROSPECTUS
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January 17, 1997
