<PAGE>
CLASS D SHARES
PIMCO Funds Prospectus
--------------------------------------------------------------
Pacific STOCK FUNDS
Investment
Management StocksPLUS Fund
Series StocksPLUS Short Strategy Fund*
April 1, 1998
--------------------------------------------------------------
STOCK AND BOND FUNDS
Strategic Balanced Fund
--------------------------------------------------------------
LONG-TERM BOND FUNDS
Long-Term U.S. Government Fund*
--------------------------------------------------------------
INTERMEDIATE-TERM BOND FUNDS
Emerging Markets Bond Fund* Total Return Fund II*
Emerging Markets Bond Fund II* Total Return Fund III*
Foreign Bond Fund Total Return Mortgage Fund
Global Bond Fund* Commercial Mortgage
Global Bond Fund II* Securities Fund*
International Bond Fund* Moderate Duration Fund*
High Yield Fund Real Return Bond Fund
Total Return Fund
--------------------------------------------------------------
SHORTER-TERM BOND FUNDS
Low Duration Fund Low Duration Mortgage Fund*
Low Duration Fund II* Short-Term Fund
Low Duration Fund III* Money Market Fund*
--------------------------------------------------------------
TAX EXEMPT FUND
Municipal Bond Fund
* These Funds are not available for investment as of the date
of this Prospectus.
[LOGO OF PIMCO FUNDS APPEARS HERE]
<PAGE>
PIMCO Funds: Pacific Investment Management Series
Prospectus
April 1, 1998
PIMCO Funds: Pacific Investment Management Series (the "Trust") is
an open-end series management investment company offering twenty-
five separate investment portfolios (each a "Fund") in this
prospectus. The Trust is designed to provide access to the profes-
sional investment management services offered by Pacific Investment
Management Company ("Pacific Investment Management"), which serves
as investment adviser (the "Advisor") to the Funds. The address of
PIMCO Funds is 840 Newport Center Drive, Suite 360, Newport Beach,
CA 92660.
Each Fund offers Class D shares in this Prospectus. Through sepa-
rate prospectuses, certain Funds and other series of the Trust of-
fer up to five additional classes of shares, Institutional Class
shares, Administrative Class shares, Class A shares, Class B
shares and Class C shares. See "Description of the Trust--Multiple
Classes of Shares."
This Prospectus concisely describes the information investors
should know before investing in Class D shares of the Funds.
Please read this Prospectus carefully and keep it for further ref-
erence. 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 restric-
tions 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 each Fund's in-
vestments will change, the investment returns and net asset value
per share of each Fund will vary.
Class D shares are offered only to financial service firms, such as
broker-dealers or registered investment advisers, with which the
Funds' distributor has an agreement for the use of the Funds in
particular investment products, programs or accounts for which a fee
may be charged. Other eligible investors are listed under "How to
Buy Shares." If you wish to purchase shares directly from the Trust
or the Funds' distributor, please consider one of the other classes
of shares. See "Description of the Trust--Multiple Classes of
Shares."
A Statement of Additional Information, dated April 1, 1998, as
amended or supplemented from time to time, is available free of
charge by writing to PIMCO Funds Distributors LLC (the "Dis-
tributor"), 2187 Atlantic Street, Stamford, Connecticut 06902, or by
telephoning 800-426-0107. The Statement of Additional Information,
which contains more detailed information about the Trust, has been
filed with the Securities and Exchange Commission and is
incorporated by reference in this Prospectus. The Securities and
Exchange Commission maintains an Internet World Wide Web site (at
http://www.sec.gov) which contains the Statement of Additional
Information, materials that are incorporated by reference into this
Prospectus and the Statement of Additional Information, and other
information about the Funds.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SE-
CURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMIS-
SION, 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 OF-
FENSE.
SHARES OF THE FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARAN-
TEED OR ENDORSED BY, ANY FINANCIAL INSTITUTION, AND THE SHARES ARE
NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORA-
TION, THE FEDERAL RESERVE BOARD OR ANY OTHER AGENCY, AND ENTAIL
RISK, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL.
INVESTMENT IN THE MONEY MARKET FUND (OR IN ANY OTHER FUND) IS NEI-
THER 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.
EACH OF THE FUNDS, EXCEPT THE MONEY MARKET FUND AND THE MUNICIPAL
BOND FUND, MAY INVEST ALL OF ITS ASSETS IN DERIVATIVE INSTRUMENTS,
SOME OF WHICH MAY BE PARTIC-ULARLY SENSITIVE TO CHANGES IN
PREVAILING INTEREST RATES. UNEX-PECTED CHANGES IN INTEREST RATES MAY
ADVERSELY AFFECT THE VALUE OF A FUND'S INVESTMENTS IN PARTICULAR
DERIVATIVE INSTRUMENTS.
THE HIGH YIELD AND EMERGING MARKETS BOND FUNDS MAY INVEST ALL OF
THEIR ASSETS IN JUNK BONDS, WHICH ARE SUBJECT TO HIGH RISK, AND
SPECULATIVE WITH REGARD TO PAYMENT OF INTEREST AND RETURN OF PRIN-
CIPAL. INVESTORS SHOULD CAREFULLY CONSIDER THESE RISKS BEFORE IN-
VESTING IN THE HIGH YIELD FUND. SEE "CHARACTERISTICS AND RISKS OF
SECURITIES AND INVESTMENT TECHNIQUES--HIGH YIELD SECURITIES ("JUNK
BONDS")."
TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C>
PIMCO Funds Overview.............. 3 Distributor....................... 38
Schedule of Fees.................. 4 How Net Asset Value Is Determined
Investment Objectives and .................................. 39
Policies.......................... 6 Distributions..................... 40
Investment Risks and Taxes............................. 42
Considerations.................... 13 Management of the Trust........... 42
Characteristics and Risks of Description of the Trust.......... 45
Securities Mailings to Shareholders.......... 46
and Investment Techniques........ 14 Appendix A--Description of
Performance Information........... 28 Duration.......................... 47
How to Buy Shares................. 30 Appendix B--Description of
Exchange Privilege................ 34 Securities Ratings................ 48
How to Redeem..................... 34
</TABLE>
2 PIMCO Funds: Pacific Investment Management Series
<PAGE>
PIMCO Funds Overview Pacific Investment Management, a subsidiary
partnership of PIMCO Advisors L.P., is the investment adviser of all
of the Funds. Pa-cific Investment Management is one of the premier
fixed income investment management firms in the U.S. As of December
31, 1997, Pacific Investment Management had approximately $118
billion in assets under management. Pacific Investment Management
invests in all sectors of the fixed income market, using its total
return philosophy--seeking capital appreciation as well as yield.
<TABLE>
<CAPTION>
PIMCO PRIMARY
FUND NAME OBJECTIVE DURATION CREDIT QUALITY(/1/)
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LONG-TERM BOND Long-Term U.S. Government Maximum total return, consistent Greater than or A to Aaa
FUNDS with preservation of capital equal to
and prudent investment management 8 years
-----------------------------------------------------------------------------------------------------------------------
INTERMEDIATE- Emerging Markets Bond Maximum total return, consistent 0-8 years B to Aaa
TERM with preservation of capital
BOND FUNDS and prudent investment management
(non-U.S.)
------------------------------------------------------------------------------------------------------
Emerging Markets Bond II Maximum total return, consistent 0-8 years B to Aaa
with preservation of capital and
prudent investment management
------------------------------------------------------------------------------------------------------
Foreign Bond Maximum total return, consistent 3-6 years B to Aaa; max
with preservation of capital 10% below Baa
and prudent investment management
(non-U.S.)
------------------------------------------------------------------------------------------------------
Global Bond Maximum total return, consistent 3-6 years B to Aaa; max
with preservation of capital (U.S. 10% below Baa
and non-U.S.)
------------------------------------------------------------------------------------------------------
Global Bond II Maximum total return, consistent 3-6 years B to Aaa; max
with preservation of capital (U.S. 10% below Baa
and non-U.S.)
------------------------------------------------------------------------------------------------------
International Bond Maximum total return, consistent 0-8 years Baa to Aaa
with preservation of capital (U.S.
and non-U.S.)
------------------------------------------------------------------------------------------------------
High Yield Maximum total return, consistent 2-6 years B to Aaa; min
with preservation of capital 65% below Baa
and prudent investment management
------------------------------------------------------------------------------------------------------
Total Return Maximum total return, consistent 3-6 years B to Aaa; max
with preservation of capital 10% below Baa
and prudent investment management
------------------------------------------------------------------------------------------------------
Total Return II Maximum total return, consistent 3-6 years Baa to Aaa
with preservation of capital
------------------------------------------------------------------------------------------------------
Total Return III Maximum total return, consistent 3-6 years B to Aaa; max
with preservation of capital 10% below Baa
------------------------------------------------------------------------------------------------------
Total Return Mortgage Maximum total return, consistent Lehman Baa to Aaa; max
with preservation of capital and Mortgage 10% below Aaa
prudent investment management Index plus or
minus 1.5 yrs
------------------------------------------------------------------------------------------------------
Commercial Mortgage Maximum total return, consistent 3-8 years B to Aaa; max
Securities with preservation of capital 35% below Baa
------------------------------------------------------------------------------------------------------
Moderate Duration Maximum total return, consistent 2-5 years B to Aaa; max
with preservation of capital 10% below Baa
------------------------------------------------------------------------------------------------------
Real Return Bond Maximum real return, consistent Not applicable, A to Aaa
with preservation of real capital but see Fund
and prudent investment management description
-----------------------------------------------------------------------------------------------------------------------
SHORTER-TERM Low Duration Maximum total return, consistent 1-3 years B to Aaa; max
BOND FUNDS with preservation of capital 10% below Baa
and prudent investment management
------------------------------------------------------------------------------------------------------
Low Duration II Maximum total return, consistent 1-3 years A to Aaa
with preservation of capital
------------------------------------------------------------------------------------------------------
Low Duration III Maximum total return, consistent 1-3 years B to Aaa; max
with preservation of capital 10% below Baa
------------------------------------------------------------------------------------------------------
Low Duration Mortgage Maximum total return, consistent 1-3 years B to Aaa;
with preservation of capital and 10% below Aaa
prudent investment management
------------------------------------------------------------------------------------------------------
Short-Term Maximum current income, consistent 0-1 year B to Aaa; max
with preservation of capital and 10% below Baa
daily liquidity
------------------------------------------------------------------------------------------------------
Money Market Maximum current income, consistent Less than or Min 95% Aaa or
with preservation of capital and equal to 90 days Prime 1; less
daily liquidity dollar-weighted than or equal to
average maturity 5% Aa or Prime 2
-----------------------------------------------------------------------------------------------------------------------
TAX EXEMPT FUND Municipal Bond High current income exempt from 3-10 years Ba to Aaa; max
federal income tax, consistent with 10% below Baa
preservation of capital
-----------------------------------------------------------------------------------------------------------------------
EQUITY FUND StocksPLUS(/2/) Total return which exceeds that of the 0-1 year B to Aaa; max
S&P 500 10% below Baa
------------------------------------------------------------------------------------------------------
StocksPLUS Short Total return through implementation 0-1 year B to Aaa; max
Strategy of short positions on the S&P 500 10% below Baa
-----------------------------------------------------------------------------------------------------------------------
STOCK AND BOND Strategic Balanced Maximum total return, consistent 0-6 years B to Aaa; max
FUNDS with preservation of capital 10% below Baa
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
FUND
PROFILES
1. As rated by Moody's Investors Service, Inc., or if unrated, de-
termined to be of comparable quality. For specific information
concerning the credit quality of the securities in each Fund's
portfolio, see "Investment Objectives and Policies."
2. The StocksPLUS Fund may invest all of its assets in stock index
futures backed by short-term bonds.
April 1, 1998 Prospectus 3
<PAGE>
Schedule of Fees
<TABLE>
<CAPTION>
All Funds-Class D Shares
-------------------------------------------------------------------
<S> <C>
MAXIMUM INITIAL SALES CHARGE IMPOSED ON PURCHASES
(as a percentage of offering price at time of purchase) None
-------------------------------------------------------------------
MAXIMUM SALES CHARGE IMPOSED ON REINVESTED DIVIDENDS
(as a percentage of net asset value at time of purchase) None
-------------------------------------------------------------------
MAXIMUM DEFERRED SALES CHARGE
(as a percentage of original purchase price) None
-------------------------------------------------------------------
EXCHANGE FEE None
</TABLE>
SHAREHOLDER
TRANSACTION
EXPENSES
<TABLE>
<CAPTION>
EXAMPLE: You
would pay the
following
expenses on a
$1,000 investment
assuming (1) 5%
annual return and
ANNUAL FUND OPERATING (2) redemption at
EXPENSES (As a percentage of the end of each
average net assets): time period:
TOTAL
ADMINI- 12b-1 FUND
ADVISORY STRATIVE (SERVICE) OPERATING YEAR
FUND FEE FEE(/1/) FEE(/1/) EXPENSES 1 3 5 10
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LONG-TERM U.S.
GOVERNMENT .25% .40% 0.25% .90% $ 9 $29 $50 $111
--------------------------------------------------------------------------------------------
EMERGING MARKETS BOND .45 .55 0.25 1.25 -- -- -- --
--------------------------------------------------------------------------------------------
EMERGING MARKETS BOND II .45 .55 0.25 1.25 -- -- -- --
--------------------------------------------------------------------------------------------
FOREIGN BOND .25 .45 0.25 .95 10 30 53 117
--------------------------------------------------------------------------------------------
GLOBAL BOND .25 .45 0.25 .95 10 30 53 117
--------------------------------------------------------------------------------------------
GLOBAL BOND II .25 .45 0.25 .95 10 30 53 117
--------------------------------------------------------------------------------------------
INTERNATIONAL BOND .25 .45 0.25 .95 10 30 53 117
--------------------------------------------------------------------------------------------
HIGH YIELD .25 .40 0.25 .90 9 29 50 111
--------------------------------------------------------------------------------------------
TOTAL RETURN .25 .25 0.25 .75 8 24 42 93
--------------------------------------------------------------------------------------------
TOTAL RETURN II .25 .40 0.25 .90 9 29 50 111
--------------------------------------------------------------------------------------------
TOTAL RETURN III .25 .40 0.25 .90 9 29 50 111
--------------------------------------------------------------------------------------------
TOTAL RETURN MORTGAGE .25 .40 0.25 .90 9 29 50 111
--------------------------------------------------------------------------------------------
COMMERCIAL MORTGAGE
SECURITIES .40 .40 0.25 1.05 11 33 58 128
--------------------------------------------------------------------------------------------
MODERATE DURATION .25 .40 0.25 .90 9 29 50 111
--------------------------------------------------------------------------------------------
REAL RETURN BOND .25 .40 0.25 .90 9 29 50 111
--------------------------------------------------------------------------------------------
LOW DURATION .25 .25 0.25 .75 8 24 42 93
--------------------------------------------------------------------------------------------
LOW DURATION II .25 .40 0.25 .90 9 29 50 111
--------------------------------------------------------------------------------------------
LOW DURATION III .25 .40 0.25 .90 9 29 50 111
--------------------------------------------------------------------------------------------
LOW DURATION MORTGAGE .25 .40 0.25 .90 9 29 50 111
--------------------------------------------------------------------------------------------
SHORT-TERM .25 .25 0.25 .75 8 24 42 93
--------------------------------------------------------------------------------------------
MONEY MARKET .15 .20 0.25 .60 -- -- -- --
--------------------------------------------------------------------------------------------
MUNICIPAL BOND .25 .35 0.25 .90 9 27 47 105
--------------------------------------------------------------------------------------------
STOCKSPLUS .40 .40 0.25 1.05 11 33 58 128
--------------------------------------------------------------------------------------------
STOCKSPLUS SHORT
STRATEGY .40 .40 0.25 1.05 11 33 58 128
--------------------------------------------------------------------------------------------
STRATEGIC BALANCED .40 .40 0.25 1.05 11 33 58 128
--------------------------------------------------------------------------------------------
</TABLE>
1. The administration agreement for Class D shares has been adopted
in conformity with the requirements set forth in Rule 12b-1 of the
Investment Company Act of 1940. The plan provides that up to .25%
per annum of the total fees paid under the administration agreement
may represent reimbursement for expenses in respect of activities
("subject activities") that may be deemed to be primarily intended
to result in the sale of Class D shares. The Money Market Fund will
pay a total of .45% per annum, the Short-Term, Low Duration and
Short-Term Funds will pay a total of .50% per annum, the Municipal
Bond Fund will pay a total of .60% per annum, the Foreign Bond,
Global Bond, Global Bond II and International Bond Funds will pay a
total of .70% per annum, the Emerging Markets Bond and Emerging
Markets Bond Fund II will pay a total of .80% per annum, and each
remaining Fund will pay a total of .65% per annum, under the
administration agreement regardless of whether a portion or none of
the .25% authorized under the plan is paid for subject services. To
the extent that any payments are deemed to be made pursuant to the
plan, the funds intend to treat such payments as service fees for
purposes of applicable rules of the National Association of
Securities Dealers, Inc. See "Management of the Trust--Fund
Administrator".
The purpose of the foregoing tables is to assist investors in un-
derstanding the various costs and expenses of the Trust that are
borne directly or indirectly by Class D shareholders of the Funds.
The information is based upon each Fund's current fees and expenses.
NOTE: THE FIGURES SHOWN IN THE EXAMPLE ARE ENTIRELY HYPOTHETICAL.
THEY ARE NOT REPRESENTATIONS OF PAST OR FUTURE PERFORMANCE OR EX-
PENSES; ACTUAL PERFORMANCE AND/OR EXPENSES MAY BE MORE OR LESS THAN
SHOWN.
4 PIMCO Funds: Pacific Investment Management Series
<PAGE>
(This page left blank intentionally)
April 1, 1998 Prospectus 5
<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 in-
vestment objective of any Fund will be achieved. For temporary,
defensive or emergency purposes, a Fund may invest without limit in
U.S. debt securities, including short-term money market securi-
ties, when in the opinion of the Advisor it is appropriate to do
so. It is impossible to predict for how long such alternative
strategies will be utilized. The value of all securities and other
instruments held by the Funds will vary from time to time in re-
sponse to a wide variety of market factors. Consequently, the net
asset value per share of each Fund will vary, except that the Money
Market Fund will 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 investment objective of the Global Bond Fund II described in
this Prospectus may be changed by the Board of Trustees without
shareholder approval. The investment objective of each other Fund
is fundamental and may not be changed without shareholder approval
by vote of a majority of the outstanding shares of that Fund. If
there is a change in a Fund's investment objective, including a
change approved by a shareholder vote, shareholders should con-
sider whether the Fund remains an appropriate investment in light
of their then current financial position and needs.
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 de-
scribed more fully under "Characteristics and Risks of Securities
and Investment Techniques" in this Prospectus and "Investment Ob-
jectives and Policies" in the Statement of Additional Information.
FIXED With the exception of the StocksPLUS, StocksPLUS Short Strategy and
INCOME FUND Strategic Balanced Funds, each remaining Fund (together, the "Fixed
DESCRIPTIONS 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 Global Bond Fund II is to seek
maximum total return, consistent with the preservation of capital.
The investment objective of the Municipal Bond Fund is to seek high
current income exempt from federal income tax, consistent with
preservation of capital. Capital appreciation is a secondary
objective of the Municipal Bond Fund. The investment objective of
the 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 Short-Term Fund and the Money Market Fund is to
seek to obtain maximum current income consistent with preservation
of capital and daily liquidity. The 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.
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 Advisor
utilizes economic forecasting, interest rate anticipation, credit
and call risk analysis, foreign currency exchange rate forecast-
ing, and other security selection techniques. The proportion of
each Fund's assets committed to investment in securities with par-
ticular characteristics (such as maturity, type and coupon rate)
will vary based on the Advisor'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 specif-
ically provided otherwise in the descriptions of the Funds that
follow, may be issued by domestic or foreign entities and denomi-
nated in U.S. dollars or foreign currencies: securities issued or
guaranteed by the U.S. Government, its agencies or instrumentali-
ties ("U.S. Government securities"); corporate debt securities,
including convertible securities and corporate commercial paper;
mortgage-backed and other asset-backed securities; inflation-in-
dexed bonds issued by both governments and corporations; struc-
tured notes, including hybrid or "indexed" securities, and loan
participations; delayed funding loans and revolving credit
facilities; bank certificates of deposit, fixed time deposits and
bankers' acceptances; repurchase agreements and reverse repur-chase
agreements; debt securities issued by states or local gov-ernments
and their agencies, authorities and other instrumentali-ties;
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
6 PIMCO Funds: Pacific Investment Management Series
<PAGE>
rates of interest, including rates of interest that vary inversely
at a multiple of a designated or floating rate, or that vary ac-
cording 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 Money
Market Fund, may invest all of its assets in derivative instru-
ments or in mortgage- or asset-backed securities. Each of the
Fixed Income Funds, except the Money Market Fund, may adhere to
its investment policy by entering into a series of purchase and
sale contracts or utilizing other investment techniques by which
it may obtain market exposure to the securities in which it pri-
marily invests.
In addition, each of the Fixed Income Funds may lend its port-
folio securities to brokers, dealers and other financial institu-
tions in order to earn income. Each of the Fixed Income Funds may
purchase and sell options and futures subject to the limits dis-
cussed below, engage in credit spread trades and enter into for-
ward foreign currency contracts.
Each of the Foreign Bond, Global Bond, Global Bond II,
International Bond, Emerging Markets Bond, Emerging Markets Bond II
and Real Return Bond Funds will normally invest at least 80% 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 Pro-
spectus, to be "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 Advisor 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 Global Bond, Emerging Markets Bond and Emerging
Markets Bond II Funds) denominated in currencies other than the U.S.
dollar. There can be no assurance that the Advisor will be
successful in doing so. The active use of currency derivatives
involves transaction costs which may adversely effect yield and
return.
The compositions of the Fixed Income Funds differ as follows:
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 such securities, when the Advisor
deems it appropriate to do so. The Fund will have a minimum aver-
age 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 associ-
ated with longer duration investments. The Long-Term U.S. Govern-
ment Fund's investments in fixed income securities are limited to
those of U.S. dollar-denominated securities of domestic and for-
eign issuers that are rated at least A by Moody's Investors Serv-
ice, Inc. ("Moody's") or Standard & Poor's Corporation ("S&P")
(or, if unrated, determined by the Advisor 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 in-
vested 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.
MUNICIPAL BOND FUND seeks high current income exempt from federal
income tax, consistent with preservation of capital. Capital
appreciation is a secondary objective. The Fund seeks its objectives
by investing in debt securities whose interest is, in the opinion of
bond counsel for the issuer at the time of issuance, exempt from
federal income tax ("Municipal Bonds"). Municipal Bonds generally
are issued by states and local governments and their agencies,
authorities and other instrumentalities. It is a policy of the Fund
that, under normal market conditions, at least 80% of its net assets
will be invested in Municipal Bonds. The Fund may invest up to 20%
of its net assets in U.S. Government securities, money market in-
struments and/or "private activity" bonds. Under normal circum-
stances, the average portfolio duration of the Municipal Bond Fund
will vary within a three-to ten-year time frame, based on the Ad-
visor's forecast for interest rates.
April 1, 1998 Prospectus 7
<PAGE>
The Fund may invest up to 10% of its net assets in Municipal
Bonds or "private activity" bonds which are rated below Baa by
Moody's or BBB by S&P but which are rated at least Ba by Moody's
or BB by S&P (or, if unrated, determined by the Advisor to be of
comparable quality). For information on the risks associated with
investments in securities rated below investment grade, see "Ap-
pendix B--Description of Securities Ratings."
EMERGING MARKETS BOND FUND invests in a portfolio of fixed income
securities denominated in foreign currencies and the U.S. dollar.
Under normal market conditions, the Fund will invest at least 80%
of its assets in fixed income securities of issuers that economi-
cally are tied to countries with emerging securities markets. The
Fund may invest up to 20% of its assets in other types of fixed
income instruments, including securities of issuers located in, or
securities denominated in currencies of, countries with developed
foreign securities markets. The Fund also may invest up to 10% of
its assets in shares of investment companies that invest primarily
in emerging market debt securities. The average portfolio duration
of the Fund will vary based on the Advisor's view of the potential
for total return offered by a particular duration strategy and,
under normal market conditions, is not expected to exceed eight
years.
The Advisor has broad discretion to identify and invest in
countries that it considers to qualify as emerging securities mar-
kets. However, the Advisor generally considers an emerging securi-
ties market to be one located in any country that is defined as an
emerging or developing economy by any of the following: the Inter-
national Bank for Reconstruction and Development (i.e., the World
Bank), including its various offshoots, such as the International
Finance Corporation, or the United Nations or its authorities. The
Fund's investments in emerging market fixed income securities may
be represented by futures contracts (including related options)
with respect to such securities, options on such securities, eq-
uity securities (including common stocks) upon the conversion of
convertible securities, or securities the return on which is de-
rived primarily from emerging securities markets, when the Advisor
deems it appropriate to do so.
The Fund emphasizes countries with relatively low gross na-
tional product per capita and with the potential for rapid eco-
nomic growth. The Advisor will select the Fund's country and cur-
rency composition based on its evaluation of relative interest
rates, inflation rates, exchange rates, monetary and fiscal poli-
cies, trade and current account balances, and any other specific
factors the Advisor believes to be relevant. The Fund likely will
concentrate its investments in Asia, Africa, the Middle East,
Latin America and the developing countries of Europe. Accordingly,
the Fund will be particularly susceptible to the effects of polit-
ical and economic developments in these regions. This effect may
be exacerbated by a relative scarcity of issuers in certain of
these markets, which may result in the Fund being highly concen-
trated in a small number of issuers. For a further discussion of
the special risks of investing in foreign and emerging market
countries, see "Characteristics and Risks of Securities and In-
vestment Techniques--Foreign Securities."
The Fund may invest substantially all of its assets in securi-
ties rated below investment grade but rated B or higher by Moody's
or S&P (or, if unrated, determined by the Advisor to be of compa-
rable quality). Such securities are colloquially referred to as
"junk bonds." While these securities generally provide greater po-
tential opportunity for capital appreciation and higher yields
than investments in higher rated securities, they also entail
greater risk, including the possibility of default or bankruptcy
of the issuer of the securities. Risk of default or bankruptcy may
be greater in periods of economic uncertainty or recession, as the
issuers may be less able to withstand general economic downturns
affecting the regions in which the Fund invests. The Advisor seeks
to reduce risk through diversification, credit analysis and atten-
tion to current developments and trends in emerging market econo-
mies and markets. The value of all fixed income securities, in-
cluding those held by the Fund, can be expected to change in-
versely with interest rates. For a further discussion of the spe-
cial risks of investing in lower rated securities, see "Character-
istics and Risks of Securities and Investment Techniques--High
Yield Securities ("Junk Bonds")."
EMERGING MARKETS BOND FUND II has the same policies as the
Emerging Markets Bond Fund, except that it is only available to
private account clients of PIMCO.
FOREIGN BOND FUND invests in a portfolio of fixed income securi-
ties primarily denominated in major foreign currencies and baskets
of foreign currencies (such as the European Currency Unit, or
"ECU"). The Advisor will invest the assets of
8 PIMCO Funds: Pacific Investment Management Series
<PAGE>
the Fund in a number of international bond markets so that, under
normal circumstances, the Fund will invest at least 85% of its as-
sets in securities of issuers located outside the United States,
representing at least three foreign countries, which may be repre-
sented by futures contracts (including related options) with re-
spect to such securities, and options on such securities, when the
Advisor 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 Advisor to be of comparable quality).
Securities rated below investment grade may be referred to collo-
quially 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 average port-
folio duration of this Fund will normally vary within a three- to
six-year time frame.
GLOBAL BOND FUND invests in a portfolio of fixed income securities
denominated in major currencies, baskets of foreign currencies
(such as the ECU), and the U.S. dollar. Under normal circumstances,
at least 65% of the Fund's 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 Advisor deems
it appropriate to do so. Depending on the Advisor'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
Advisor 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.
GLOBAL BOND FUND II has the same policies as the Global Bond Fund,
except as set forth below. The 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 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 Global Bond Fund II may only engage in short
sales that are "against the box," and may not loan its portfolio
securities if the market value exceeds 25% of the total assets of
the Fund. In addition, the Global Bond Fund II is subject to
different fundamental and non-fundamental investment restrictions
than the Global Bond Fund. See "Investment Restrictions" in this
Prospectus and in the Statement of Additional Information.
The Foreign Bond Fund differs from the Global Bond Fund and Global
Bond Fund II primarily in the extent to which assets are invested in
the securities of issuers located outside the United States. The
Advisor 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 Advisor
believes to be relevant.
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 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
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.
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
Advisor to be of comparable quality). 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 Advisor 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 Advisor's
view of the potential for total return offered by a particular du-
ration strategy. The Fund may invest in securities of foreign is-
suers, 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 Advisor 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 Securi-
ties and Investment Techniques--High Yield Securities ("Junk
Bonds")."
TOTAL RETURN FUND invests under normal circumstances at least 65%
of its assets in a diversified portfolio of fixed income securi-
ties of varying maturities. The average portfolio duration of this
Fund will normally vary within a three- to six-
April 1, 1998 Prospectus 9
<PAGE>
year time frame based on the Advisor'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 Advi-
sor to be of comparable quality). For information on the risks as-
sociated 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 denomi-
nated 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 Advisor believes
to be relatively undervalued. The total rate of return for this
Fund is expected to exhibit less volatility than that of the Long-
Term U.S. Government Fund because its duration will normally be
shorter.
TOTAL RETURN FUND II has the same policies as the 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).
TOTAL RETURN FUND III has the same policies as the Total Return
Fund, except that it limits its investments with respect to certain
socially sensitive issues in the same manner as the Low Duration
Fund III.
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.
LOW DURATION MORTGAGE FUND invests under normal circumstances at
least 80% of its assets in a diversified portfolio of mortgage-
related securities. 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 Aaa by Moody's or AAA by S&P, subject to a
minimum rating of Baa by Moody's or BBB by S&P (or, if unrated,
determined by the Adviser to be of comparable quality). The average
portfolio duration of this Fund will normally vary within a one- to
three-year time frame based on the Adviser's view of the potential
for total return offered by a particular duration strategy. The Fund
may invest without limit in U.S. dollar-denominated securities of
foreign issuers. The total rate of return and share price for this
Fund are expected to exhibit less volatility than that of the Total
Return Mortgage Fund because its duration will be shorter.
TOTAL RETURN MORTGAGE FUND has the same policies as the Low Duration
Mortgage Fund, except that its average portfolio duration will
normally vary approximately within a range of plus or minus one and
one-half years of the average duration of the Lehman Brothers
Mortgage-Backed Securities Index, which, as of May 31, 1997, had an
average duration of approximately four years.
REAL RETURN BOND FUND invests under normal circumstances at least
65% of its total assets 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 Advisor 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 de-
nominated in foreign currencies, (and the Fund may also invest be-
yond this limit in U.S. dollar-denominated securities of foreign
issuers).
Inflation-indexed bonds are fixed income securities whose prin-
cipal value is periodically adjusted according to the rate of in-
flation. 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 "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 Advisor 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, fi-
nal maturity and call features. See "Appendix A--Description of
Duration." Because of the unique features of inflation-indexed
bonds, the Advisor utilizes a modified form of duration for the
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 Real Return Bond Fund, it is ex-
pected 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.
LOW DURATION FUND invests in a diversified portfolio of fixed in-
come securities of varying maturities. The average portfolio dura-
tion of this Fund will normally vary within a one- to three-year
time frame based on the Advisor'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 Advisor to be of
comparable quality). For information on the risks associated with
investments in securities rated below investment grade, see "Ap-
pendix B--Description of Securities Ratings." The Fund may invest
up to 20% of its assets in securities denominated in foreign cur-
rencies, and may invest beyond this limit in U.S. dollar-denomi-
nated securities of foreign issuers. The total rate of return for
this Fund is expected to exhibit less volatility than that of the
Total Return Fund because its duration will be shorter.
LOW DURATION FUND II has the same policies as the 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).
LOW DURATION FUND III has the same policies as the 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.
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 with 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 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 Low Duration Fund because
its duration will normally be longer.
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 in-
vest 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
10 PIMCO Funds: Pacific Investment Management Series
<PAGE>
by Moody's or S&P (or, if unrated, determined by the Advisor 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 in-
vest up to 5% of its assets in securities denominated in foreign
currencies, and may invest beyond this limit in U.S. dollar-denom-
inated securities of foreign issuers.
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 as-
sets, measured at the time of investment, in a diversified portfo-
lio 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 in-
vestments in securities will be limited to U.S. dollar-denominated
securities that mature in 397 days or less from the date of pur-
chase. 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 cor-
porations; 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 Money Market Fund may invest only in U.S. dollar-denomi-
nated 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 Advi-
sor 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 organiza-
tions ("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 Trust-
ees; (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 Trust-
ees; or (3) an unrated security that is of comparable quality to a
security rated in the highest rating category as determined by the
Advisor 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 consid-
ered 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 rat-
ings applicable to fixed income securities.
The 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 accor-
dance with this exception, and (2) this limitation shall not apply
to U.S. Government securities and repurchase agreements with re-
spect 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 invest-
ment, in securities of any one issuer that are in the second-high-
est rating category, except that this limitation shall not apply
to U.S. Government securities. In the event that an instrument ac-
quired by the Fund is downgraded or otherwise ceases to be of the
quality that is required for securities purchased by the Fund, the
Advisor, under procedures approved by the Board of Trustees (or
the Board of Trustees itself if the Advisor becomes aware an
unrated security is downgraded below high quality and the Advisor
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 re-
tain the instrument.
April 1, 1998 Prospectus 11
<PAGE>
EQUITY FUND The Equity Funds are the PIMCO StocksPLUS Fund and the PIMCO
DESCRIP- StocksPLUS Short Strategy Fund. The investment objective of PIMCO
TIONS StocksPLUS Fund is to seek to achieve a total return which exceeds
the total return performance of the 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.
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 Advisor 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 also invest all of its assets in
derivative instruments, as described 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 foreign currency con-
tracts.
The Equity Funds differ in composition or strategy as follows:
STOCKSPLUS FUND. 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 Advisor expects that under normal market
conditions, the Fund will invest substantially all of its assets in
S&P 500 derivatives, backed by a portfolio of fixed income
securities. The Advisor 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. S&P chooses the
stocks to be included in the S&P 500 solely on a statistical ba-
sis. 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. The Fund will seek to remain
invested in S&P 500 derivatives or S&P 500 stocks even when the
S&P 500 is declining.
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 Advisor
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 par-
ticular weighting in the S&P 500.
Positions in S&P 500 futures and options on futures will be en-
tered into only to the extent they constitute permissible posi-
tions for the Fund according to applicable rules of the Commodity
Futures Trading Commission ("CFTC"). From time to time, the Advi-
sor may be constrained in its ability to use S&P 500 derivatives
either by requirements of the Internal Revenue Code or by an unan-
ticipated inability to close out positions when it would be most
advantageous to do so. A large number of investors use S&P 500 de-
rivatives for both hedging and speculative purposes, and although
generally this helps guarantee a liquid market in those instru-
ments, 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."
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 is declining. When the S&P 500 is rising, the Fund
will incur a loss.
The Fund will maintain short positions through the use of a
combination of S&P 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.
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 STRATEGIC BALANCED FUND has as its investment objective the
FUND 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 StocksPLUS Fund and the 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 The "total return" sought by certain of the Funds will consist of
RETURN AND interest and dividends from underlying securities, capital appre-
REAL RETURN ciation 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 port-
folio 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 in-
come securities (and therefore their capital appreciation or de-
preciation) is largely a function of changes in the current level
of interest rates. Generally, when interest rates
12 PIMCO Funds: Pacific Investment Management Series
<PAGE>
are falling, a portfolio with a shorter duration will not generate
as high a level of total return as a portfolio with a longer dura-
tion. Conversely, when interest rates are rising, a portfolio with
a shorter duration will generally outperform longer duration port-
folios. 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 mar-
ket 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 num-
ber of factors, including: conditions in the securities markets,
the business success of the security's issuer, changing interest
rates, real or perceived economic and competitive industry condi-
tions, and foreign currency exchange rates. Historically, the to-
tal return performance of equity-oriented portfolios has generally
been greater over the long term than fixed income portfolios. How-
ever, 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 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 generat-
ing 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 approxi-
mately 3%. On the other hand, an inflation-indexed instrument gen-
erating a 5% real return would generate a 5% increase in purchas-
ing 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) at-
tained by this Fund may be less than the total return attained by
other of the Funds that do not invest primarily in inflation-in-
dexed 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 de-
crease in value of inflation-indexed bonds.
Investment Risks and Considerations
The following are some of the principal risks of investing in the
Funds. Investors should read this Prospectus carefully for a more
complete discussion of the risks relating to an investment in the
Funds. 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. Gen-
erally, 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 se-
curities rated lower than Baa by Moody's or 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 posi-
tions 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.
April 1, 1998 Prospectus 13
<PAGE>
All Funds (except the Money Market Fund) may use derivative in-
struments, consisting of futures, options, options on futures, and
swap agreements, for hedging purposes or as part of their invest-
ment 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 securi-
ties being hedged and the value of the particular derivative in-
strument, and the risk that unexpected changes in interest rates
may adversely affect the value of a Fund's investments in particu-
lar derivative instruments. Unless otherwise indicated, all limi-
tations applicable to Fund investments (as stated in this Prospec-
tus 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 invest-
ment portfolio, resulting from market fluctuations or other
changes in a Fund's total assets, will not require a Fund to dis-
pose of an investment until the Advisor determines that is practi-
cable 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 Advisor will
determine which rating it believes best reflects the security's
quality and risk at that time, which may be the higher of the sev-
eral assigned ratings.
Investors should carefully consider the possible tax conse-
quences from investing in the Real Return Bond Fund. The Fund in-
vests primarily in securities that for tax purposes may be consid-
ered to have been issued originally at a discount. Accordingly,
the Fund may be required to make annual distributions to share-
holders in excess of the cash received by the Fund in a given pe-
riod from those investments. See "Characteristics and Risks of Se-
curities and Investment Techniques--Inflation-Indexed Bonds" and
"Taxes" for additional information.
The Emerging Markets Bond, Emerging Markets Bond II, Foreign
Bond, Global Bond, Global Bond II, International Bond, Commerical
Mortgage Securities and Real Return 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. The Funds are
still, however, subject to diversification requirements imposed by
the Internal Revenue Code of 1986, as amended, which means that as
of the end of each calendar quarter, a Fund may have no more than
25% of its assets invested in the securities of a single issuer, and
may, with respect to 50% of its assets, have no more than 5% of its
assets invested in the securities of a single issuer. As "non-diver-
sified" portfolios, these Funds may be more susceptible to risks
associated with a single economic, political or regulatory occur-
rence than a diversified portfolio might be.
The Funds offer their shares to both retail and institutional
investors. Institutional shareholders, some of whom also may be
investment advisory clients of Pacific Investment Management, 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 Advisor 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.
Characteristics and Risks of
Securities and Investment Techniques
The following describes in greater detail different types of secu-
rities 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.
U.S. U.S. Government securities are obligations of, or guaranteed by,
GOVERNMENT the U.S. Government, its agencies or instrumentalities. The U.S.
SECURITIES 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 Na-
tional Mortgage Association
14 PIMCO Funds: Pacific Investment Management Series
<PAGE>
("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. Trea-
sury; others, such as those of the Federal National Mortgage Asso-
ciation ("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 Associa-
tion, are supported only by the credit of the instrumentality.
U.S. Government securities include securities that have no cou-
pons, or have been stripped of their unmatured interest coupons,
individual interest coupons from such securities that trade sepa-
rately, and evidences of receipt of such securities. Such securi-
ties may pay no cash income, and are purchased at a deep discount
from their value at maturity. Because interest on zero coupon se-
curities 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 securi-
ties, 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.
CORPORATE Corporate debt securities include corporate bonds, debentures,
DEBT notes and other similar corporate debt instruments, including con-
SECURITIES vertible 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 de-
scribed 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 securi-
ties rated Baa as having speculative characteristics. The Advisor
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 Secu-
rities Ratings." Investments in high yield securities are dis-
cussed separately below under "High Yield Securities ("Junk
Bonds")."
CONVERTIBLE Each Fund (except the Municipal Bond Fund) may invest in convert-
SECURITIES ible securities, which may offer higher income than the common
stocks into which they are convertible. Typically, convertible se-
curities are callable by the company, which may, in effect, force
conversion before the holder would otherwise choose.
The convertible securities in which the Funds may invest con-
sist of bonds, notes, debentures and preferred stocks which may be
converted or exchanged at a stated or determinable exchange ratio
into underlying shares of common stock. A Fund may be required to
permit the issuer of a convertible security to redeem the securi-
ty, convert it into the underlying common stock, or sell it to a
third party. Thus, a Fund may not be able to control whether the
issuer of a convertible security chooses to convert that security.
If the issuer chooses to do so, this action could have an adverse
effect on a Fund's ability to achieve its investment objectives.
While the Fixed Income Funds intend to invest primarily in
fixed income securities, each may invest in convertible securities
or equity securities. While some countries or companies may be re-
garded as favorable investments, pure fixed income opportunities
may be unattractive or limited due to insufficient supply, legal
or technical restrictions. In such cases, a Fund may consider eq-
uity securities or convertible bonds to gain exposure to such in-
vestments.
LOAN Certain Funds may invest in fixed- and floating-rate loans ar-
PARTICI- ranged through private negotiations between an issuer of debt in-
PATIONS struments and one or more financial institutions ("lenders"). Gen-
AND erally, the Funds' investments in loans are expected to take the
ASSIGNMENTS form of loan participations and assignments of portions of loans
from third parties.
April 1, 1998 Prospectus 15
<PAGE>
Large loans to corporations or governments may be shared or
syndicated among several lenders, usually banks. The Funds may
participate in such syndicates, or can buy part of a loan, becom-
ing a direct lender. Participations and assignments involve spe-
cial types of risk, including limited marketability and the risks
of being a lender. See "Illiquid Securities" for a discussion of
the limits on a Fund's investments in loan participations and as-
signments with limited marketability. If a Fund purchases a par-
ticipation, it may only be able to enforce its rights through the
lender, and may assume the credit risk of the lender in addition
to the borrower. In assignments, the Funds' rights against the
borrower may be more limited than those held by the original
lender.
DELAYED The Funds (except the PIMCO Municipal Bond Fund) may also enter
FUNDING into, or acquire participations in, delayed funding loans and re-
LOANS AND volving credit facilities. Delayed funding loans and revolving
REVOLVING credit facilities are borrowing arrangements in which the lender
CREDIT agrees to make loans up to a maximum amount upon demand by the
FACILITIES borrower during a specified term. A revolving credit facility dif-
fers from a delayed funding loan in that as the borrower repays
the loan, an amount equal to the repayment may be borrowed again
during the term of the revolving credit facility. These commit-
ments may have the effect of requiring a Fund to increase its in-
vestment in a company at a time when it might not otherwise decide
to do so (including at a time when the company's financial condi-
tion makes it unlikely that such amounts will be repaid).
The Funds may acquire a participation interest in delayed fund-
ing loans or revolving credit facilities from a bank or other fi-
nancial institution. See "Loan Participations and Assignments."
The terms of the participation require the Fund to make a pro rata
share of all loans extended to the borrower and entitles the Fund
to a pro rata share of all payments made by the borrower. Delayed
funding loans and revolving credit facilities usually provide for
floating or variable rates of interest. To the extent that a Fund
is committed to advance additional funds, it will at all times
segregate assets, determined to be liquid by the Advisor in accor-
dance with procedures established by the Board of Trustees, in an
amount sufficient to meet such commitments.
VARIABLE Variable and floating rate securities provide for a periodic ad-
AND justment in the interest rate paid on the obligations. The terms
FLOATING of such obligations must provide that interest rates are adjusted
RATE periodically based upon an interest rate adjustment index as pro-
SECURITIES vided 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 Money Mar-
ket 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 the period.
Each of the Fixed Income Funds may invest in floating rate debt
instruments ("floaters") and (except the Municipal Bond Fund) engage
in credit spread trades. 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 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. A
credit spread trade is an investment position relating to a
difference in the prices or interest rates of two securities or
currencies, where the value of the investment position is
determined by movements in the difference between the prices or
interest rates, as the case may be, of the respective securities or
currencies.
Each of the Fixed Income Funds (except the Money Market Fund
and the Municipal Bond 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 mar-
ket rate of interest to which the inverse floater is indexed. An
inverse floating rate security may exhibit greater price volatil-
ity than a fixed rate obligation of similar credit quality. The
Funds have adopted a policy under which no Fund will invest more
than 5% (10% in the case of the Low Duration Mortgage and Total
Return Mortgage Funds) 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- Inflation-indexed bonds are fixed income securities whose princi-
INDEXED pal value is periodically adjusted according to the rate of infla-
BONDS tion. The interest rate on these bonds is generally fixed at issu-
ance at a rate lower than typical bonds. Over the life of an in-
flation-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 five or ten years, although it is an-
ticipated that securities with other maturities will be issued in
the future. The securities will pay interest on a semi-annual ba-
sis, equal to a fixed percentage of the inflation-adjusted princi-
pal amount. For example, if an investor purchased an inflation-in-
dexed 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 down-
ward, 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 defla-
tion. However, the current market value of the bonds is not guar-
anteed, and will fluctuate. The Funds may also invest in other in-
flation
16 PIMCO Funds: Pacific Investment Management Series
<PAGE>
related bonds which may or may not provide a similar guarantee. If
such a guarantee of principal is not provided, the adjusted prin-
cipal 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-in-
dexed bonds. In contrast, if nominal interest rates increased at a
faster rate than inflation, real interest rates might rise, lead-
ing 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 ex-
change rates), investors in these securities may not be protected
to the extent that the increase is not reflected in the bond's in-
flation measure.
The U.S. Treasury has only recently begun issuing inflation-in-
dexed bonds. As such, there is no trading history of these securi-
ties, and there can be no assurance that a liquid market in these
instruments will develop, although one is expected. Lack of a liq-
uid 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 assur-
ance 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 is-
suing inflation-indexed bonds, and there may be a more liquid mar-
ket 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 gener-
ally 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 coun-
try 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 in-
vestors do not receive their principal until maturity. See "Taxes"
for information about the possible tax consequences of investing
in the Real Return Bond Fund and in inflation-indexed bonds.
MORTGAGE- Each of the Funds (except the Money Market Fund and the Municipal
RELATED AND Bond Fund) may invest all of its assets in mortgage- or other as-
OTHER set-backed securities. The value of some mortgage- or asset-backed
ASSET- securities in which the Funds invest may be particularly sensitive
BACKED to changes in prevailing interest rates, and, like the other in-
SECURITIES vestments of the Funds, the ability of a Fund to successfully uti-
lize these instruments may depend in part upon the ability of the
Advisor to forecast interest rates and other economic factors cor-
rectly.
MORTGAGE-PASS-THROUGH SECURITIES are securities representing in-
terests 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 borrow-
ers on the mortgage loans which underlie the securities (net of
fees paid to the issuer or guarantor of the securities). Early re-
payment of principal on some mortgage-related securities (arising
from prepayments of principal due to sale of the underlying prop-
erty, refinancing, or foreclosure, net of fees and costs which may
be incurred) may expose a Fund to a lower rate of return upon re-
investment 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 securi-
ties, 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 prepay-
ment features may not increase as much as other fixed income secu-
rities. The rate of prepayments on underlying mortgages will af-
fect the price and volatility of a mortgage-related security, and
may have the effect of shortening or extending the effective matu-
rity of the security beyond what was anticipated at the
April 1, 1998 Prospectus 17
<PAGE>
time of purchase. To the extent that unanticipated rates of pre-
payment 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. Govern-
ment (in the case of securities guaranteed by GNMA); or guaranteed
by agencies or instrumentalities of the U.S. Government (in the
case of securities 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 bank-
ers and other secondary market issuers) may be supported by vari-
ous 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 mort-
gage poolers.
COLLATERALIZED MORTGAGE OBLIGATIONS ("CMOs") are hybrid mortgage-
related instruments. Interest and pre-paid principal on a CMO are
paid, in most cases, on a monthly basis. CMOs may be collateral-
ized 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 pay-
ments 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 re-
flect an interest in, and are secured by, mortgage loans on com-
mercial real property. The market for commercial mortgage-backed
securities developed more recently and in terms of total outstand-
ing 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 secu-
rities 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 participa-
tion in, or are secured by and payable from, mortgage loans on
real property, such as mortgage dollar rolls (see "Reverse Repur-
chase Agreements, Dollar Rolls, and Borrowings"), CMO residuals or
stripped mortgage-backed securities ("SMBS"), and may be struc-
tured 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 remain-
der of the principal. In the most extreme case, one class will re-
ceive all of the interest (the interest-only, or "IO" class),
while the other class will receive all of the principal (the prin-
cipal-only, or "PO" class). The yield to maturity on an IO class
is extremely sensitive to the rate of principal payments (includ-
ing prepayments) on the related underlying mortgage assets, and a
rapid rate of principal payments may have a material adverse ef-
fect 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%
(10% in the case of the Low Duration Mortgage and Total Return
Mortgage Funds) 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.
18 PIMCO Funds: Pacific Investment Management Series
<PAGE>
MUNICIPAL The Municipal Bond Fund invests in Municipal Bonds which are gen-
BONDS erally issued by states and local governments and their agencies,
authorities and other instrumentalities. The Municipal Bonds which
the Municipal Bond Fund may purchase include general obligation
bonds and limited obligation bonds (or revenue bonds), including
industrial development bonds issued pursuant to former federal tax
law. General obligation bonds are obligations involving the credit
of an issuer possessing taxing power and are payable from such is-
suer's general revenues and not from any particular source. Lim-
ited obligation bonds are payable only from the revenues derived
from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise or other specific
revenue source. Tax-exempt "private activity" bonds and industrial
development bonds generally are also revenue bonds and thus are
not payable from the issuer's general revenues. The Municipal Bond
Fund may invest in Municipal Bonds with credit enhancements such
as letters of credit, municipal bond insurance and Standby Bond
Purchase Agreements. The Municipal Bond Fund may also invest in
municipal lease obligations, as well as securities derived from
Municipal Bonds, such as residual interest bonds, participation
interests and embedded interest rate swaps and caps.
Municipal Bonds are subject to credit and market risk. Credit
risk relates to the ability of the issuer to make payments of
principal and interest. The ability of an issuer to make such pay-
ments could be affected by litigation, legislation or other polit-
ical events or the bankruptcy of the issuer. Market risk relates
to changes in a security's value as a result of changes in inter-
est rates. Lower rated Municipal Bonds generally provide higher
yields but are subject to greater credit and market risk than
higher quality Municipal Bonds.
REPURCHASE For the purpose of achieving income, each of the Funds may enter
AGREEMENTS into repurchase agreements, which entail the purchase of a portfo-
lio-eligible security from a bank or broker-dealer that agrees to
repurchase the security at the Fund's cost plus interest within a
specified time (normally one day). If the party agreeing to repur-
chase 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 Money Market Fund) (taken at current market value)
in repurchase agreements maturing in more than seven days.
REVERSE A reverse repurchase agreement involves the sale of a security by
REPURCHASE a Fund and its agreement to repurchase the instrument at a speci-
AGREEMENTS, fied time and price. Under a reverse repurchase agreement, the
DOLLAR Fund continues to receive any principal and interest payments on
ROLLS, AND the underlying security during the term of the agreement. The Fund
BORROWINGS generally will maintain a segregated account consisting of assets
determined to be liquid by the Advisor in accordance with proce-
dures established by the Board of Trustees to cover its obliga-
tions under reverse repurchase agreements and, to this extent, a
reverse repurchase agreement (or economically similar transaction)
will not be considered a "senior security" subject to the 300% as-
set coverage requirements otherwise applicable to borrowings by a
Fund.
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 simi-
lar 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 pur-
chase as well as by any interest earned on the proceeds of the se-
curities sold. The Fund also could be compensated through the re-
ceipt 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 Advisor in accordance with procedures estab-
lished by the Board of Trustees to cover its obligations under
dollar rolls.
To the extent that positions in reverse repurchase agreements,
dollar rolls or similar transactions are not covered through the
maintenance of a segregated account consisting of liquid assets at
least equal to the amount of any forward purchase commitment, such
transactions would be subject to the Funds' limitations on
borrowings, which would restrict the aggregate of such transactions
(plus any other borrowings) to 33 1/3% (for each Fund except the
Global Bond
April 1, 1998 Prospectus 19
<PAGE>
Fund II) of such Fund's total assets. Apart from such transac-
tions, a Fund will not borrow money, except for temporary adminis-
trative purposes. The 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 re-
quests (not for leverage) or for extraordinary or emergency pur-
poses.
LOANS OF For the purpose of achieving income, each Fund may lend its port-
PORTFOLIO folio securities to brokers, dealers, and other financial institu-
SECURITIES tions, provided: (i) the loan is secured continuously by collat-
eral consisting of U.S. Government securities, cash or cash equiv-
alents (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 se-
curities 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 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 secu-
rities. 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 security loaned or become insolvent.
The Funds may pay lending fees to the party arranging the loan.
WHEN- Each of the Funds may purchase or sell securities on a when-is-
ISSUED, sued, delayed delivery, or forward commitment basis. These trans-
DELAYED actions involve a commitment by the Fund to purchase or sell secu-
DELIVERY rities for a predetermined price or yield, with payment and deliv-
AND FORWARD ery taking place more than seven days in the future, or after a
COMMITMENT period longer than the customary settlement period for that type
TRANS- of security. When such purchases are outstanding, the Fund will
ACTIONS set aside and maintain until the settlement date in a segregated
account, assets determined to be liquid by the Advisor in accor-
dance 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 ac-
count. When purchasing a security on a when-issued, delayed deliv-
ery, 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 re-
quired 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 in-
vested 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 de-
livered, which may result in a capital gain or loss. There is no
percentage limitation on the extent to which the Funds may pur-
chase or sell securities on a when-issued, delayed delivery, or
forward commitment basis.
SHORT SALES Each of the Funds (except the High Yield, Total Return III and
StocksPLUS Funds), and particularly the 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 as-
set coverage in the form of assets determined to be liquid by the
Advisor 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
20 PIMCO Funds: Pacific Investment Management Series
<PAGE>
the right to obtain at no added cost, securities identical to
those sold short. The Global Bond Fund II may only engage in short
sales that are "against the box."
FOREIGN Each of the Funds (except the Municipal Bond, Low Duration II,
SECURITIES Total Return II and Long-Term U.S. Government Funds) may invest
directly in fixed income securities of non-U.S. issuers. The High
Yield, Commercial Mortgage Securities, Low Duration Mortgage, Total
Return Mortgage and Money Market 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.
Except for the Emerging Markets Bond and Emerging Markets Bond
II Funds, each of the Funds will concentrate its foreign investments
in securities of issuers based in developed countries. However, the
Short-Term, Low Duration and Low Duration III Funds may
each invest up to 5% of its assets in securities of issuers based in
the emerging market countries in which the Emerging Markets Bond
and Emerging Markets Bond II Funds may invest, and each of the
remaining Fixed Income Funds that may invest in foreign securities
may in-vest up to 10% of its assets in such securities.
Individual foreign economies may differ favorably or unfavor-
ably from the U.S. economy in such respects as growth of gross do-
mestic product, rate of inflation, capital reinvestment, re-
sources, self-sufficiency and balance of payments position. The
securities markets, values of securities, yields, and risks asso-
ciated with securities markets in different countries may change
independently of each other. Investing in the securities of is-
suers in any foreign country involves special risks and considera-
tions not typically associated with investing in U.S. companies.
Shareholders should consider carefully the substantial risks in-
volved in investing in securities issued by companies and govern-
ments of foreign nations. These risks include: differences in ac-
counting, auditing and financial reporting standards; generally
higher commission rates on foreign portfolio transactions; the
possibility of nationalization, expropriation or confiscatory tax-
ation; adverse changes in investment or exchange control regula-
tions (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, for-
eign securities and dividends and interest payable on those secu-
rities 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 there-
fore may exhibit greater price volatility. Additional costs asso-
ciated 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 for-
eign exchange rates also will affect the value of securities de-
nominated or quoted in currencies other than the U.S. dollar.
Certain of the Funds, and particularly the Emerging Markets Bond
and Emerging Markets Bond II Funds, will invest in the securities of
issuers based in coun-tries with developing economies. Investing in
developing (or "emerging market") countries involves certain risks
not typically associated with investing in U.S. securities, and
imposes risks greater than, or in addition to, risks of investing in
foreign, developed countries. A number of emerging market countries
restrict, to varying degrees, foreign investment in securities. Re-
patriation of investment income, capital, and the proceeds of sales
by foreign investors may require governmental registration and/or
approval in some emerging market countries. A number of the
currencies of emerging market countries have experienced signifi-
cant declines against the U.S. dollar in recent years, and devalu-
ation may occur subsequent to investments in these currencies by a
Fund. Inflation and rapid fluctuations in inflation rates have had,
and may continue to have, negative effects on the economies and
securities markets of certain emerging market countries. Many of the
emerging securities markets are relatively small, have low trading
volumes, suffer periods of relative illiquidity, and are
characterized by significant price volatility. There is a risk in
emerging market countries that a future economic or political cri-
sis could lead to price controls, forced mergers of companies, ex-
propriation or confiscatory taxation, seizure, nationalization, or
creation of government monopolies, any of which may have a detri-
mental effect on a Fund's investment.
Additional risks of investing in emerging market countries may
include: currency exchange rate fluctuations; greater social, eco-
nomic and political uncertainty and instability (including the
risk of war); more substantial governmental involvement in the
economy; less governmental supervision and regulation of the secu-
rities markets and participants in those markets; unavailability
of currency hedging techniques in certain emerging market coun-
tries; the fact that
April 1, 1998 Prospectus 21
<PAGE>
companies in emerging market countries may be newly organized and
may be smaller and less seasoned companies; the difference in, or
lack of, auditing and financial reporting standards, which may re-
sult in unavailability of material information about issuers; the
risk that it may be more difficult to obtain and/or enforce a
judgment in a court outside the United States; and significantly
smaller market capitalization of securities markets. Also, any
change in the leadership or policies of Eastern European coun-
tries, or the countries that exercise a significant influence over
those countries, may halt the expansion of or reverse the liberal-
ization of foreign investment policies now occurring and adversely
affect existing investment opportunities.
In addition, emerging securities markets may have different
clearance and settlement procedures, which may be unable to keep
pace with the volume of securities transactions or otherwise make
it difficult to engage in such transactions. Settlement problems
may cause a Fund to miss attractive investment opportunities, hold
a portion of its assets in cash pending investment, or delay in
disposing of a portfolio security. Such a delay could result in
possible liability to a purchaser of the security.
Each of the Fixed Income Funds (except the Municipal Bond, Low
Duration, Total Return II and Long-Term U.S. Government 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 assur-
ance 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.
Certain of the Funds also may invest in sovereign debt (other
than Brady Bonds) issued by governments, their agencies or instru-
mentalities, or other government-related entities located in
emerging market countries. Holders of sovereign debt may be re-
quested to participate in the rescheduling of such debt and to ex-
tend further loans to governmental entities. In addition, there is
no bankruptcy proceeding by which defaulted sovereign debt may be
collected.
A Fund's investments in foreign currency denominated debt obli-
gations and hedging activities will likely produce a difference
between its book income and its taxable income. This difference
may cause a portion of the Fund's income distributions to consti-
tute returns of capital for tax purposes or require the Fund to
make distributions exceeding book income to qualify as a regulated
investment company for federal tax purposes.
FOREIGN Foreign currency exchange rates may fluctuate significantly over
CURRENCY short periods of time. They generally are determined by the forces
TRANS- of supply and demand in the foreign exchange markets and the rela-
ACTIONS tive merits of investments in different countries, actual or per-
ceived 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.
For example, significant uncertainty surrounds the proposed
introduction of the euro (a common currency for the European Union)
in January 1999 and its effect on the value of securities
denominated in local European currencies. These and other currencies
in which the Funds' assets are denominated may be de-valued against
the U.S. dollar, resulting in a loss to the Funds.
All Funds that may invest in securities denominated in foreign
currencies may buy and sell foreign currencies on a spot and for-
ward basis to reduce the risks of adverse changes in foreign ex-
change rates. A forward foreign currency exchange contract in-
volves 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 ex-
posure to changes in the value of the currency it will deliver and
increases its exposure to changes in the value of the
22 PIMCO Funds: Pacific Investment Management Series
<PAGE>
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 re-
alized 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 pur-
poses of increasing exposure to a foreign currency or to shift ex-
posure to foreign currency fluctuations from one country to anoth-
er. 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 cur-
rencies are positively correlated. Each Fund will segregate assets
determined to be liquid by the Advisor in accordance with proce-
dures established by the Board of Trustees, in a segregated ac-
count to cover its obligations under forward foreign currency ex-
change 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 cur-
rency warrants and other instruments whose return is linked to
foreign currency exchange rates. Each Fund that may invest in se-
curities denominated in foreign currencies, except the Global Bond,
Emerging Markets Bond and Emerging Markets Bond II Funds, 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 The High Yield Fund invests at least 65% of its assets, and the
SECURITIES Emerging Markets Bond and Emerging Markets Bond II Funds may invest
("JUNK up to 100% of its assets and the Commercial Mortgage Securities Fund
BONDS") 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 Foreign Bond, Global Bond II,
Total Return, Low Duration, Low Duration III, Moderate Duration,
Total Return III, Global Bond, StocksPLUS Short strategy, Strategic
Balanced, Short-Term and StocksPLUS Funds may invest up to 10% of
its assets in such securities. The Municipal Bond Fund may invest
up to 10% of its assets in securities rated lower than Baa by
Moody's or BBB by S&P but rated at least Ba by Moody's or BB by S&P.
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 per-
ceived 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 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 ex-
ample, 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 periodi-
cally 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.
April 1, 1998 Prospectus 23
<PAGE>
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
Advisor does not rely solely on credit ratings when selecting se-
curities 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 Advisor deems it in the best inter-
est of shareholders.
During the year ended March 31, 1997, 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 Advisor to be
of comparable quality). See "Appendix B--Description of Securities
Ratings," for further information.
FIXED INCOME SECURITIES RATINGS
<TABLE>
<CAPTION>
BELOW
FUND PRIME 1 Aaa Aa A PRIME 1 Baa Ba B
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
FOREIGN BOND 21% 58% 14% 0% 0% 3% 4% 0%
---------------------------------------------------------------
GLOBAL BOND 33 45 14 2 0 4 2 0
---------------------------------------------------------------
GLOBAL BOND II 21 58 15 1 0 4 1 0
---------------------------------------------------------------
HIGH YIELD 6 1 0 0 0 3 48 42
---------------------------------------------------------------
TOTAL RETURN 13 66 2 4 0 9 5 1
---------------------------------------------------------------
TOTAL RETURN III 5 76 4 1 0 8 5 1
---------------------------------------------------------------
LOW DURATION 24 55 1 3 0 13 4 0
---------------------------------------------------------------
LOW DURATION III 40 60 0 0 0 0 0 0
---------------------------------------------------------------
MODERATE DURATION 2 59 0 7 0 24 5 3
---------------------------------------------------------------
SHORT-TERM 31 26 3 12 0 20 7 1
---------------------------------------------------------------
STOCKSPLUS 32 29 5 7 0 17 9 1
---------------------------------------------------------------
STRATEGIC BALANCED 7 36 0 8 0 38 9 2
</TABLE>
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 approxi-
mately 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 Advisor may not necessarily agree
with a rating assigned by any credit rating agency.
DERIVATIVE To the extent permitted by the investment objectives and policies
INSTRUMENTS of the Funds, the Funds may (except the Money Market Fund) pur-
chase and write call and put options on securities, securities in-
dexes and foreign currencies, and enter into futures contracts and
use options on futures contracts as further described below. The
Funds (except the Money Market Fund and the Municipal Bond Fund)
also may enter into swap agreements with respect to foreign cur-
rencies, interest rates, and securities indexes. The Funds may use
these techniques to hedge against changes in interest rates, for-
eign currency exchange rates or securities prices or as part of
their overall investment strategies. The Funds (except the Money
Market Fund and the Municipal Bond Fund) may also purchase and
sell options relating to foreign currencies for purposes of in-
creasing 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 de-
termined to be liquid by the Advisor in accordance with procedures
established by the Board of Trustees (or, as permitted by applica-
ble regulation, enter into certain offsetting positions) to cover
its obligations under options, futures, and swaps to limit
leveraging of the Fund.
Derivative instruments are considered for these purposes 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 depends upon cash flows from underlying assets,
such as mortgage-related or asset-backed securities. Each Fund
(except the Money Market Fund and the Municipal Bond Fund) may in-
vest all of its
24 PIMCO Funds: Pacific Investment Management Series
<PAGE>
assets in derivative instruments, subject only to the Fund's in-
vestment objective and policies. The value of some derivative in-
struments in which the Funds invest may be particularly sensitive
to changes in prevailing interest rates, and, like the other in-
vestments of the Funds, the ability of a Fund to successfully uti-
lize these instruments may depend in part upon the ability of the
Advisor to forecast interest rates and other economic factors cor-
rectly. If the Advisor 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 be-
low, and no assurance can be given that any strategy used will
succeed. If the Advisor incorrectly forecasts interest rates, mar-
ket 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 pos-
sible imperfect correlation, or
even no correlation, between price movements of derivative instru-
ments 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 in-
vestments or otherwise, due to the possible inability of a Fund to
purchase or sell a portfolio security at a time that otherwise
would be favorable or the possible need to sell a portfolio secu-
rity 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 substan-
tial increases in prices of securities the Fund intends to pur-
chase pending its ability to invest in such securities in an or-
derly 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 op-
tion (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 op-
tion to deliver the underlying security upon payment of the exer-
cise price or to pay the exercise price upon delivery of the un-
derlying 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 mul-
tiplier 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 pur-
chased, 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 under-
lying 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 combina-
tion 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 ex-
ercise 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 exer-
cise 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
April 1, 1998 Prospectus 25
<PAGE>
its obligation as a writer of the option. Once an option writer
has received an exercise notice, it cannot effect a closing pur-
chase 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 under-
lying security remains equal to or greater than the exercise price
(in the case of a put), or remains less than or equal to the exer-
cise 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 re-
strictions 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. Cur-
rency 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 in which certain Funds may invest dif-
fer 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 cer-
tain written over-the-counter options.
SWAP AGREEMENTS The Funds (except the Money Market and Municipal
Bond 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, 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." Con-
sequently, 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 con-
sisting of assets determined to be liquid by the Advisor in accor-
dance with procedures established by the Board of Trustees, to
limit any potential leveraging of the Fund's portfolio. Obliga-
tions under swap agreements so covered will not be construed to be
"senior securities" for purposes of the Funds' investment restric-
tion 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 Advisor's
ability to predict correctly whether certain types of investments
are likely to produce greater returns than other investments. Be-
cause 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
26 PIMCO Funds: Pacific Investment Management Series
<PAGE>
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 re-
strictions 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 pos-
sible 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 re-
ceived under such agreements.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS Each of the
Fixed Income Funds (except the Money Market Fund and the Municipal
Bond Fund) may invest in interest rate futures contracts and op-
tions 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. The Munic-
ipal Bond Fund may purchase and sell futures contracts on U.S.
Government securities and Municipal Bonds, as well as purchase put
and call options on such futures contracts. Each of the Equity Funds
and the 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 portfo-
lio 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. Most futures exchanges and boards of
trade limit the amount of fluctuation permitted in futures con-
tract 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 in-
struments are relatively new and without a significant trading
history. As a result, there is no assurance that an active second-
ary market will develop or continue to exist. Lack of a liquid
market for any reason may prevent a Fund from liquidating an unfa-
vorable position, and the Fund would remain obligated to meet mar-
gin 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 as-
sets 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 op-
tions which are standardized and traded on a U.S. or foreign ex-
change or board of trade, or similar entity, or quoted on an auto-
mated quotation system. Each Fund will use financial futures con-
tracts 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 posi-
tions, less the amount by which any such positions are "in-the-
money," would not exceed 5% of the Fund's net assets.
HYBRID A hybrid instrument can combine the characteristics of securities,
INSTRUMENTS futures, and options. For example, the principal amount or inter-
est rate of a hybrid could be tied (positively or negatively) to
the price of some commodity, currency or securities index or an-
other interest rate (each a "benchmark"). The interest rate or
(unlike most fixed income securities) the principal amount payable
at maturity of a hybrid security may be increased or decreased,
depending on changes in the value of the benchmark.
Hybrids can be used as an efficient means of pursuing a variety
of investment goals, including currency hedging, duration manage-
ment, and increased total return. Hybrids may not bear interest or
pay dividends. The value of a hybrid or its interest rate may be a
multiple of a benchmark and, as a result, may be leveraged and
move (up or down) more
April 1, 1998 Prospectus 27
<PAGE>
steeply and rapidly than the benchmark. These benchmarks may be
sensitive to economic and political events, such as commodity
shortages and currency devaluations, which cannot be readily fore-
seen by the purchaser of a hybrid. Under certain conditions, the
redemption value of a hybrid could be zero. Thus, an investment in
a hybrid may entail significant market risks that are not associ-
ated with a similar investment in a traditional, U.S. dollar-de-
nominated bond that has a fixed principal amount and pays a fixed
rate or floating rate of interest. The purchase of hybrids also
exposes a Fund to the credit risk of the issuer of the hybrids.
These risks may cause significant fluctuations in the net asset
value of the Fund. Accordingly, no Fund will invest more than 5%
of its assets in hybrid instruments.
Certain issuers of structured products such as hybrid instru-
ments may be deemed to be investment companies as defined in the
1940 Act. As a result, the Funds' investments in these products
will be subject to limits applicable to investments in investment
companies and may be subject to restrictions contained in the 1940
Act.
INVESTMENT Each of the Funds may invest in securities of other investment
IN companies, such as closed-end management investment companies, or
INVESTMENT in pooled accounts or other investment vehicles. As a shareholder
COMPANIES of an investment company, a Fund may indirectly bear service and
other fees which are in addition to the fees the Fund pays its
service providers.
PORTFOLIO The length of time a Fund has held a particular security is not
TURNOVER generally a consideration in investment decisions. The investment
policies of a Fund may lead to frequent changes in the Fund's in-
vestments, particularly in periods of volatile market movements.
High portfolio turnover (e.g., over 100%) involves correspondingly
greater expenses to a Fund, including commissions or dealer mark-
ups and other transaction costs on the sale of securities and
reinvestments in other securities. See "Management of the Trust--
Portfolio Transactions." Such sales may result in realization of
taxable capital gains. See "Taxes." The portfolio turnover rate
for the following Funds for the last two fiscal years (1997 and
1996, respectively) was: Short-Term -- 77% and 215%; Low Duration
-- 240% and 209%; Low Duration II -- 237% and 225%; High Yield
-- 67% and 66%; Total Return -- 173% and 221%; Total Return II
-- 293% and 73%; Total Return III -- 90% and 177%; Long-Term U.S.
Government -- 402% and 238%; Foreign Bond -- 984% and 1,234%;
Global Bond -- 911% and 1,083%; International Bond -- 875% and
1,046%; StocksPLUS -- 47% and 102%.
ILLIQUID Each of the Funds may invest up to 15% of its net assets in illiq-
SECURITIES uid securities (10% in the case of the Money Market Fund). Certain
illiquid securities may require pricing at fair value as deter-
mined in good faith under the supervision of the Board of Trust-
ees. The Advisor 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 those for 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, re-
purchase agreements with maturities in excess of seven days, cer-
tain 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 and other
securities which legally or in the Advisor's opinion may be deemed
illiquid (not including securities issued pursuant to Rule 144A
under the Securities Act of 1933 and certain commercial paper that
Pacific Investment Management has determined to be liquid under
procedures approved by the Board of Trustees).
Illiquid securities may include privately placed securities,
which are sold directly to a small number of investors, usually
institutions. Unlike public offerings, such securities are not
registered under the federal securities laws. Although certain of
these securities may be readily sold, for example, under Rule
144A, others may be illiquid, and their sale may involve substan-
tial delays and additional costs.
SERVICE Many of the services provided to the Funds depend on the smooth
SYSTEMS -- functioning of computer systems. Many systems in use today cannot
YEAR 2000 distinguish between the year 1900 and the year 2000. Should any of
PROBLEM the service systems fail to process information properly, that could
have an adverse impact on the Funds' operations and services
provided to shareholders. The Advisor, Distributor, Shareholder
Servicing and Transfer Agent, Custodian, and certain other service
providers to the Funds have reported that each is working toward
mitigating the risks associated with the so-called "year 2000
problem." However, there can be no assurance that the problem will
be corrected in all respects and that the Funds' operations and
services provided to shareholders will not be adversely
affected.
Performance Information
From time to time the Trust may make available certain information
about the performance of the Class D shares of some or all of the
Funds. Information about a Fund's performance is based on that
Fund's (or its predecessor's) record to a recent date and is not
intended to indicate future performance.
28 PIMCO Funds: Pacific Investment Management Series
<PAGE>
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
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 sev-
en-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 cal-
culate current yield, but reflects the compounding effect on earn-
ings of reinvested dividends. For the remaining Funds, quotations
of yield for a Fund or class will be based on the investment in-
come per share (as defined by the Securities and Exchange Commis-
sion) 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. The tax equivalent yield of the Mu-
nicipal Bond Fund's Class D shares may also be advertised, calcu-
lated like yield except that, for any given tax bracket, net in-
vestment income will be calculated as the sum of (i) any taxable
income of the class plus (ii) the tax exempt income of the class
divided by the difference between 1 and the effective federal in-
come tax rates for taxpayers in that tax bracket.
The total return of Class D shares of all Funds may be included
in advertisements or other written material. When a Fund's total
return is advertised with respect to its Class D shares, it will
be calculated for the past year, the past five years, and the past
ten years (or if the Fund has been offered for a period shorter
than one, five or ten years, that period will be substituted)
since the establishment of the Fund (or its predecessor series of
PIMCO Advisors Funds for the Global Bond Fund II), as more fully
described in the Statement of Additional Information. Consistent
with Securities and Exchange Commission rules and informal guid-
ance, for periods prior to the initial offering date of Class D
shares (April 1, 1998), total return presentations for the Class D
shares will 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, as necessary, to
reflect that there are no sales charges associated with Class D
shares, but not reflecting any different operating expenses (such as
administrative fee and/or 12b-1/servicing fee charges) associated
with Class D shares. All other things being equal, any higher
expenses of Class D shares would have adversely affected (i.e.,
reduced) total return for Class D shares (i.e., if the Class D
shares had been issued since the inception of the Fund) by the
amount of such higher expenses, compounded over the relevant period.
Total return is measured by comparing the value of an investment in
Class D shares of 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 im-mediate reinvestment of any dividends or
capital gains distribu-tions 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.
The Funds may also provide current distribution information to
its shareholders in shareholder reports or other shareholder com-
munications, or in certain types of sales literature provided to
prospective investors. Current distribution information for a
Class D shares of a Fund will be based on distributions for a
specified period (i.e., total dividends from net investment in-
come), divided by the net asset value per Class D share on the
last day of the period and annualized. The rate of current distri-
butions 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
Class D shares of a Fund have 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 indexes, such as the Standard & Poor's 500 Com-
posite Stock Price Index, the Lehman Brothers Aggregate Bond In-
dex, the Lehman Brothers Mortgage-Backed Securities Index, the
Merrill Lynch 1 to 3 Year Treasury Index, the Lehman Intermediate
and 20+ Year Treasury Blend Index, the Lehman Inflation Linked
Treasury Index, the Lehman Municipal Bond Index, the Lehman BB
Intermediate Corporate Index, indexes prepared by Lipper Analytical
Services, the J.P. Morgan Global Index, the J.P. Morgan Emerging
Markets Bond Index Plus, the Salomon Brothers
April 1, 1998 Prospectus 29
<PAGE>
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 en-
tities 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 administra-
tive and management costs and expenses. The Advisor may also re-
port to shareholders or to the public in advertisements concerning
the performance of the Advisor as adviser to clients other than
the Trust, and on the comparative performance or standing of the
Advisor in relation to other money managers. Such comparative in-
formation may be compiled or provided by independent ratings serv-
ices or by news organizations. Any performance information,
whether related to the Funds or to the Advisor, should be consid-
ered in light of the Funds' investment objectives and policies,
characteristics and quality of the portfolio, and the market con-
ditions during the time period indicated, and should not be con-
sidered to be representative of what may be achieved in the fu-
ture. For a description of the methods used to determine yield and
total return for the Funds, see the Statement of Additional Infor-
mation.
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 in-
vestor's total return or yield may be in any future period.
How to Buy Shares
Class D shares of each Fund are continuously offered through fi-
nancial service firms, such as broker-dealers or registered in-
vestment advisers, with which the Trust's principal underwriter,
PIMCO Funds Distributors LLC (the "Distributor"), has an agreement
for the use of the Funds in particular investment products, pro-
grams or accounts for which a fee may be charged. See "Financial
Service Firms" below.
You may purchase Class D shares only through your financial
service firm. In connection with purchases, your financial service
firm is responsible for forwarding all necessary documentation to
the Distributor, and may charge you for such services. Investors
who wish to purchase shares of the Funds directly from the Trust
or the Distributor should inquire as to the other classes of
shares. See "Description of the Trust--Multiple Classes of
Shares."
Class D shares may be purchased at a price equal to their net
asset value per share next determined after receipt of an order.
Purchase payments for Class D shares are fully invested at the net
asset value next determined after acceptance of the trade. All
purchase orders received by the Distributor from your financial
service firm prior to the close of regular trading (normally 4:00
p.m., Eastern time) on the New York Stock Exchange (the "Ex-
change"), on a regular business day, are processed at that day's
offering price. In addition, orders received by the Distributor
from financial service firms after the offering price is deter-
mined that day will receive such offering price if the orders were
received by the firm from its customer prior to such determination
and were transmitted to and received by the Distributor prior to
its close of business that day (normally 5:00 p.m., Eastern time)
or, in the case of certain retirement plans, received by the Dis-
tributor prior to 9:30 a.m., Eastern time on the next business
day. Purchase orders received on other than a regular business day
will be executed on the next succeeding regular business day.
The Distributor, in its sole discretion, may accept or reject any
order for purchase of Fund shares. The sale of shares will be
suspended during any period in which the Exchange is closed for
other than weekends or holidays, or if permitted by the rules of the
Securities and Exchange Commission, when trading on the Exchange is
restricted or during an emergency which makes it impracticable for
the Funds to dispose of their securities or to determine fairly the
value of their net assets, or during any other period as permitted
by the Securities and Exchange Commission for the protection of
investors.
Class D shares of the Funds will be held in your account with
your financial service firm and, generally, your firm will hold
your Class D shares in nominee or street name as your agent. Ac-
cordingly, in most cases, the Trust's transfer agent will have no
information with respect to or control over accounts of specific
Class D shareholders and you may obtain information about your ac-
counts only through your financial service firm. If you wish to
invest in the Funds through your own account with the Trust or the
Distributor, please inquire as to the other classes of shares of
the Funds. See "Description of the Trust--Multiple Classes of
Shares." In the interest of economy and convenience, certificates
for Class D shares will not be issued.
FINANCIAL Broker-dealers, registered investment advisors and other financial
SERVICE service firms provide varying investment products, programs or ac-
FIRMS counts, pursuant to arrangements with the Distributor, through
which their clients may purchase and redeem Class D shares of the
Funds. Firms will generally provide or arrange for the provision
of some or all of the shareholder servicing and account mainte-
nance services required by your account, including, without limi-
tation, transfers of registration and dividend payee changes; and
may perform functions such as generation of confirmation state-
ments and disbursement of cash dividends. Firms may also arrange
with their clients for other investment or administrative servic-
es. Your firm may independently establish and charge you transac-
tion fees and/or other additional amounts for such services, which
charges could reduce your investment returns on Class D shares of
the Funds.
Your financial service firm may have omnibus accounts and simi-
lar arrangements with the Trust and may be paid for providing sub-
transfer agency and other services. A firm may be paid for its
services directly or indirectly by the Funds, the Advisor or an
affiliate (normally not to exceed an annual rate of 0.35% of a
Fund's average daily net assets attributable to its Class D shares
and purchased through such firm for its clients). Your firm may
establish various minimum investment requirements for Class D
shares of the Funds and may also establish certain privileges with
respect to purchases, redemptions and exchanges of Class D shares
or the reinvestment of dividends.
This Prospectus should be read in connection with your firm's
materials regarding its fees and services.
Exchange Privilege
A shareholder may exchange Class D shares of any Fund for Class D
shares of any other Fund on the basis of their respective net
asset values. Class D shares of each Fund may also be exchanged
for Class D shares of certain series of PIMCO Funds: Multi-Manager
Series, an affiliated mutual fund family composed primarily of
stock portfolios managed by subsidiaries of PIMCO Advisors L.P.,
an affiliate of the Advisor. There are currently no exchange fees
or charges imposed by the Trust, although your financial service
firm may impose various fees and charges, investment minimums and
other requirements with respect to exchanges. Please contact your
financial service firm for details. An exchange will constitute a
taxable sale for federal income tax purposes.
The Trust reserves the right to refuse exchange purchases if,
in the judgment of the Advisor, the purchase would adversely af-
fect a Fund and its shareholders. In particular, a pattern of ex-
changes characteristic of "market-timing" strategies may be deemed
by the Advisor to be detrimental to the Trust or a particular
Fund. Although the Trust has no current intention of terminating
or modifying the exchange privilege, it reserves the right to do
so at any time. Except as otherwise permitted by Securities and
Exchange Commission regulations, the Trust will give 60 days' ad-
vance notice to your financial service firm of any termination or
material modification of the exchange privilege. For further in-
formation about exchange privileges, please contact your financial
service firm.
How to Redeem
Class D shares may be redeemed through your financial service firm
on any day the Exchange is open. Shares are redeemed at their net
asset value next determined after a proper redemption request has
been received from your financial service firm. There is no charge
by the Trust or the Distributor with respect to a redemption, al-
though your financial service firm may charge you for its services
in processing your redemption request. Please contact your finan-
cial service firm for details.
Your financial service firm is obligated to transmit your re-
demption orders to the Distributor promptly and is responsible for
ensuring that your redemption request is in proper form. Requests
for redemption received by financial service firms prior to the
close of regular trading (normally 4:00 p.m., Eastern time) on the
Exchange on a regular business day and received by the Distributor
prior to the close of the Distributor's business day will be con-
firmed at the net asset value effective as of the closing of the
Exchange on that day. Your financial service firm will be respon-
sible for furnishing all necessary documentation to the Distribu-
tor or the Trust's transfer agent and may charge you for its serv-
ices. Redemption proceeds will be forwarded to your financial
service firm as promptly as possible and in any event within seven
days after the redemption request is received by the Distributor
in good order. Under unusual circumstances, the Trust may suspend
redemptions or postpone payment for more than seven days, as per-
mitted by federal securities law.
30 PIMCO Funds: Pacific Investment Management Series
<PAGE>
Distributor
The Distributor, a wholly owned subsidiary of PIMCO Advisors L.P.,
is the principal underwriter of the Trust's shares. Pursuant to a
Distribution Contract with the Trust, with respect to each Fund's
Class D shares, the Distributor bears various promotional and sales
related expenses, including the cost of printing and mailing
prospectuses to persons other than current shareholders. The
Distributor, located at 2187 Atlantic Street, Stamford, Connecticut,
is a broker-dealer registered with the SEC.
April 1, 1998 Prospectus 31
<PAGE>
How Net Asset Value Is Determined
The net asset value per share of Class D shares of each Fund will
be determined once on each day on which the Exchange is open as of
the close of regular trading (normally 4:00 p.m., Eastern time) on
the Exchange 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 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
32 PIMCO Funds: Pacific Investment Management Series
<PAGE>
conditions and procedures followed by the 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 es-
tablished market makers. Fixed income securities, including those
to be purchased under firm commitment agreements (other than obli-
gations 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.
Quotations of foreign securities in foreign currency are con-
verted to U.S. dollar equivalents using foreign exchange quota-
tions 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 quota-
tions are not readily available are valued at fair value as deter-
mined 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 spe-
cially 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 class's "net asset value" per
share. Generally, for Funds that pay income dividends, those divi-
dends are expected to differ over time by approximately the amount
of the expense accrual differential between a particular Fund's
classes.
Distributions
Each Fund pays out as dividends substantially all of its net in-
vestment income (which comes from dividends and interest it re-
ceives or is deemed to receive from its investments) and net real-
ized short-term capital gains. For these purposes and for federal
income tax purposes, a portion of the premiums from certain ex-
pired call or put options written by the Fund, net gains from
closing purchase and sale transactions with respect to such op-
tions, and net gains from futures transactions are treated as
short-term capital gains. Each Fund distributes substantially all
of its net realized capital gains, if any, after giving effect to
any available capital loss carry-over.
Shares begin earning dividends on the day after the date that
funds are received by the Trust for the purchase of shares. For
the Fixed Income Funds (other than the 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. International Bond,
Strategic Balanced and the 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. There are no sales
charges on reinvested dividends. If a shareholder has elected to
receive dividends and/or capital gain distributions in cash and the
postal or other delivery service is unable to deliver checks to the
shareholder's address of record, such shareholder's distributions
will automatically be invested in the Money Market Fund until such
shareholder is located.
Class D shareholders may elect to invest dividends and/or
distributions paid by any Fund in shares of the same class of any
other Fund of the Trust at net asset value. For further information
on this option, please contact your financial service firm.
April 1, 1998 Prospectus 33
<PAGE>
Taxes
Each Fund intends to qualify as a regulated investment company an-
nually and to elect to be treated as a regulated investment com-
pany under the Code. As such, a Fund generally will not pay fed-
eral 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.
Shareholders subject to U.S. federal income tax will be subject
to tax on dividends received from a Fund, regardless of whether
received in cash or reinvested in additional shares. Distributions
received by tax-exempt shareholders will not be subject to federal
income tax to the extent permitted under applicable tax law. All
shareholders must treat dividends, other than capital gain divi-
dends or dividends that represent a return of capital to share-
holders, as ordinary income.
Dividends designated by a Fund as capital gain dividends de-rived
from the Fund's net capital gain (that is, the excess of net long-
term gain over net short-term loss) are taxable to sharehold-ers as
long-term capital gain except as provided by an applicable tax
exemption. Under the Taxpayer Relief Act of 1997, long-term capital
gains will generally be taxed at a 28% or 20% rate, depending upon
the holding period of the portfo-lio securities Any distributions
that are not from a Fund's net investment income, short-term capital
gain, 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 Octo-ber, November or December of a calendar
year are taxable to share-holders (who otherwise are subject to tax
on dividends) as though received on December 31 of that year if paid
to shareholders dur-ing 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 divi-dends paid to them.
Dividends paid to shareholders by the Municipal Bond Fund which
are derived from interest on Municipal Bonds are expected to be
designated by the Fund as "exempt-interest dividends," and share-
holders may exclude such dividends from gross income for federal
income tax purposes. However, if a shareholder receives social se-
curity or railroad retirement benefits, the shareholder may be taxed
on a portion of those benefits as a result of receiving tax-exempt
income. In addition, certain exempt-interest dividends could, as
discussed below, cause certain shareholders to become subject to the
alternative minimum tax and may increase the alternative minimum
tax liability of shareholders already subject to this tax.
To the extent that dividends paid to shareholders by the
Municipal Bond Fund are derived from taxable interest or from
capital gains, such dividends will be subject to Federal income tax.
Any gain realized on a redemption of shares will be taxable gain,
subject to any applicable tax exemption for which an investor may
qualify.
Dividends derived from interest on certain U.S. Government se-
curities may be exempt from state and local taxes, although inter-
est on mortgage-backed U.S. Government securities may not be so
exempt. The distributions of "exempt-interest dividends" paid by
the Municipal Bond Fund may be exempt from state and local taxa-
tion when received by a shareholder to the extent that they are
derived from interest on Municipal Bonds issued by the state or
political subdivision in which such shareholder resides. The fed-
eral exemption for "exempt-interest dividends" attributable to Mu-
nicipal Bonds does not necessarily result in exemption of such
dividends from income for the purpose of state and local taxes.
The Trust will report annually on a state-by-state basis the
source of income the Municipal Bond Fund receives on Municipal
Bonds that was paid out as dividends during the preceding year.
The Code also provides that exempt-interest dividends allocable
to interest received from "private activity bonds" issued after
August 7, 1986 are an item of tax preference for individual and
corporate alternative minimum tax at the applicable rate for indi-
viduals and corporations. Therefore, if the Municipal Bond Fund
invests in such private activity bonds, certain of its sharehold-
ers may become subject to the alternative minimum tax on that part
of its distributions to them that are derived from interest income
on such bonds, and certain shareholders already subject to such
tax may have increased liability therefor. However, it is the
present policy of the Municipal Bond Fund to invest no more than
20% of its assets in such bonds. Other provisions of the Code af-
fect the tax treatment of distributions from the
34 PIMCO Funds: Pacific Investment Management Series
<PAGE>
Municipal Bond Fund for corporations, casualty insurance compa-
nies, and financial institutions. In particular, under the Code,
for corporations, alternative minimum taxable income will be in-
creased by a percentage of the amount by which the corporation's
"adjusted current earnings" (which includes various items of tax
exempt income) exceeds the amount otherwise determined to be al-
ternative minimum taxable income. Accordingly, an investment in
the Municipal Bond Fund may cause shareholders to be subject to
(or result in an increased liability under) the alternative mini-
mum tax.
Dividends to shareholders of the Municipal Bond Fund derived
from money market instruments and U.S. Government securities are
generally taxable as ordinary income. The Fund may seek to reduce
fluctuations in its net asset value by engaging in portfolio
strategies involving options on securities, futures contracts, and
options on futures contracts. Any gain derived by the Fund from
the use of such instruments, including by reason of "marking to
market," will be treated as a combination of short-term and long-
term capital gain and, if not offset by realized capital losses
incurred by the Fund, will be distributed to shareholders (possi-
bly requiring the liquidation of other portfolio securities) and
will be taxable to shareholders as a combination of ordinary in-
come and long-term capital gain.
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 prin-
cipal value of these securities also may give rise to original is-
sue discount, which, likewise, will be includable in the Fund's
gross income on a current basis, regardless of whether the Fund
receives any cash payments. See "Taxation--Original Issue Dis-
count" 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 in-
vestment 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.
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, R.
Wesley Burns, Vern O. Curtis, Brent R. Harris, Thomas P. Kemp, 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 Pacific Investment Management serves as investment adviser ("Advi-
ADVISOR sor") to the Funds pursuant to an investment advisory contract.
The Advisor is an investment counseling firm founded in 1971, and
had approximately $118 billion in assets under management as of
December 31, 1997. Pacific Investment Management is a subsidiary of
PIMCO Advisors L.P. ("PIMCO Advisors"). The general partners of
PIMCO Advisors are PIMCO Partners, G.P. and PIMCO Advisors Holdings
L.P. ("PAH"). PIMCO Partners, G.P. is a general partnership between
PIMCO Holding LLC, a Delaware limited liability company and indirect
wholly owned subsidiary of Pacific Life Insurance Company, and PIMCO
Partners LLC, a California limited liability company controlled by
the PIMCO Managing Directors. PIMCO Partners, G.P. is the sole
general partner of PAH. Pacific Investment Management's address is
840 Newport Center Drive, Suite 360, Newport Beach, California
92660. Pacific Investment Management is registered as an investment
adviser with the Securities and Exchange Commission and as a
commodity trading advisor with the CFTC.
April 1, 1998 Prospectus 35
<PAGE>
The Advisor manages the investment and reinvestment of the as-
sets of each Fund. The Advisor 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 "Portfo-
lio Transactions" in the Statement of Additional Information.
Information about the individual portfolio managers responsible
for management of the Trust's currently operational Funds offered
in this Prospectus, including their occupations for the past five
years, is provided below.
<TABLE>
<CAPTION>
PORTFOLIO MANAGER AND BUSINESS
FUND EXPERIENCE (PAST FIVE YEARS)
---------------------------------------------------------------------
<C> <S>
TOTAL RETURN FUND William H. Gross, Managing Director,
TOTAL RETURN FUND II Pacific Investment Management. A
TOTAL RETURN FUND III Fixed Income Portfolio Manager, Mr.
LOW DURATION FUND Gross is one of the founders of Pa-
LOW DURATION FUND II cific Investment Management and has
LOW DURATION FUND III managed the Total Return and Low Du-
SHORT-TERM FUND ration Funds since their inception,
STOCKSPLUS FUND May 11, 1987. Mr. Gross is the
STRATEGIC BALANCED FUND leader of the team which has
MODERATE DURATION FUND managed the Short-Term, StocksPLUS,
Strategic Balanced and Moderate
Duration Funds since January 6,
1998.
---------------------------------------------------------------------
LOW DURATION MORTGAGE FUND William C. Powers, Managing Director,
PIMCO. A Fixed Income Portfolio
Manager, Mr. Powers joined PIMCO in
1991.
---------------------------------------------------------------------
LONG-TERM U.S. GOVERNMENT FUND Pasi Hamalainen, Senior Vice Presi-
TOTAL RETURN MORTGAGE FUND dent, Pacific Investment Management.
A Fixed Income Portfolio Manager, Mr.
Hamalainen joined Pacific Investment
Management in 1994 and has managed
the Long-Term U.S. Government Fund
since July 1, 1997.
---------------------------------------------------------------------
MUNICIPAL BOND FUND Benjamin Ehlert, Executive Vice Pres-
ident, PIMCO. A Fixed Income Portfo-
lio Manager, Mr. Ehlert has been as-
sociated with PIMCO for over 23
years.
---------------------------------------------------------------------
EMERGING MARKETS BOND FUND Michael J. Rosborough, Senior Vice
EMERGING MARKETS BOND FUND II President, Pacific Investment Manage-
ment. A Fixed Income Portfolio Manag-
er, Mr. Rosborough was associated
with RBC Dominion in Tokyo as a Vice
President and Manager in foreign
fixed income prior to joining Pacific
Investment Management in 1994.
---------------------------------------------------------------------
FOREIGN BOND FUND Lee R. Thomas, III, Managing Director
GLOBAL BOND FUND and Senior International Portfolio
GLOBAL BOND FUND II Manager, Pacific Investment Manage-
INTERNATIONAL BOND FUND ment. A Fixed Income Portfolio
Manager, Mr. Thomas has managed the
Foreign Bond Fund since July 13,
1995, and the Global Bond Fund II
since October 1, 1995. Prior to join-
ing Pacific Investment Management in
1995, Mr. Thomas was associated with
Investcorp as a member of the manage-
ment committee responsible for global
securities and foreign exchange trad-
ing. Prior to Investcorp, he was as-
sociated with Goldman Sachs as an Ex-
ecutive Director in foreign fixed in-
come.
---------------------------------------------------------------------
HIGH YIELD FUND Benjamin Trosky, Managing Director,
Pacific Investment Management. A
Fixed Income Portfolio Manager, Mr.
Trosky joined Pacific Investment
Management in 1990 and has managed
the High Yield Fund since its incep-
tion, December 16, 1992.
--------------------------------------------------------------------
REAL RETURN BOND FUND John Brynjolfsson, Vice President,
Pacific Investment Management. A
Fixed Income Portfolio Manager, Mr.
Brynjolfsson joined Pacific Invest-
ment Management in 1989, and has man-
aged the Real Return Bond Fund since
its inception, January 29, 1997.
--------------------------------------------------------------------
MONEY MARKET FUND Leslie Barbi, Senior Vice President,
Pacific Investment Management. A
Fixed Income Portfolio Manager, Ms.
Barbi has managed the Money Market
Fund since November 1, 1995. Prior to
joining Pacific Investment Management
in 1993, Ms. Barbi was associated
with Salomon Brothers as a proprie-
tary Portfolio Manager.
</TABLE>
FUND Pacific Investment Management also serves as administrator to the
ADMINIS- Funds' Class D shares pursuant to an administration agreement
TRATOR with the Trust. Pacific Investment Management provides
administrative services for Class D shareholders of 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. Pacific Investment Management may also retain certain of
its affiliates to provide certain of these services. In addition,
Pacific Investment Management, at its own expense, arranges for the
provision of legal, audit, custody, transfer agency (including sub-
transfer agency and other administrative
36 PIMCO Funds: Pacific Investment Management Series
<PAGE>
services) 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.
Pacific Investment Management or an affiliate may pay financial
service firms a portion of the Class D administration fees in return
for the firms' services (normally not to exceed an annual rate of
.35% of a Fund's average daily net assets attributable to Class D
shares purchased through such firms). The administration agreement
for Class D shares has been adopted in conformity with the
requirements set forth under Rule 12b-1 of the 1940 Act to allow for
the payment of up to .25% per annum of the Class D administrative
fees for activities that may be deemed to be primarily intended to
result in the sale of Class D shares. The principal types of
activities for which such payments may be made are services in
connection with the distribution and marketing of Class D shares
and/or the provision of shareholders services.
The Funds (and not Pacific Investment Management) 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 Pacific Investment
Management 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 Pacific Investment Management 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 servicing
fees payable with respect to Class D 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, subject to review and
approval by the Trustees.
ADVISORY The Funds feature fixed advisory and administrative fee rates. For
AND providing investment advisory and administrative services to the
ADMINIS- Funds as described above, Pacific Investment Management receives
TRATIVE monthly fees from each Fund at an annual rate (i) based on the av-
FEES erage daily net assets of the Fund for advisory fees and, (ii) at-
tributable in the aggregate to the Fund's Class D shares for ad-
ministrative fees, as follows:
<TABLE>
<CAPTION>
ADVISORY
FUND FEE RATE
-----------------------------------------------------
<S> <C>
Money Market Fund .15%
-----------------------------------------------------
StocksPLUS, StocksPLUS Short Strategy,
Strategic Balanced, and Commercial
Mortgage Securities Funds .40%
-----------------------------------------------------
Emerging Markets Bond and Emerging
Markets Bond II Funds .45%
-----------------------------------------------------
All other Funds .25%
<CAPTION>
ADMINISTRATIVE
FUND FEE RATE*
-----------------------------------------------------
<S> <C>
Money Market Fund .45%
-----------------------------------------------------
Total Return, Low Duration and Short-
Term Funds .50%
-----------------------------------------------------
Municipal Bond Fund .60%
-----------------------------------------------------
Foreign Bond, Global Bond, Global
Bond II and International Bond
Funds .70%
-----------------------------------------------------
Emerging Markets Bond and Emerging
Markets Bond II Funds .80%
-----------------------------------------------------
All other Funds .65%
</TABLE>
* As described under the "Fund Administrator," the administration
agreement includes a plan adopted in conformity with Rule 12b-1
which provides for the payment of up to .25% of the Administrative
Fee Rate as reimbursement for expenses in respect of activities that
may be deemed to be primarily intended to result in the sale of
Class D shares. The "Annual Fund Operating Expenses" table on page 4
of this Prospectus shows the Administrative Fee Rate under two
separate columns entitled "Administrative Fee" and "12b-1 (Service)
Fee."
Both the investment advisory contract and administration agree-
ment with respect to Class D shares of the Funds may be terminated
by the Trustees at any time on 60 days' written notice. The in-
vestment advisory contract may be terminated by Pacific Investment
Management on 60 days' written notice. Following the expiration of
the one-year period commencing with the effectiveness of the ad-
ministration agreement, it may be terminated by Pacific Investment
Management on 60 days' written notice. Following its initial two-
year term, the investment advisory contract will continue from
year to year if approved by the Trustees. Following its initial
one-year term, the administration agreement with respect to Class
D shares of the Funds will continue from year-to-year if approved
by the Trustees.
PORTFOLIO Pursuant to the advisory contract, the Advisor places orders for
TRANS- the purchase and sale of portfolio investments for the Funds' ac-
ACTIONS counts 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 Advisor will seek the best price and ex-
ecution of the Funds' orders. In doing so, a Fund may pay higher
commission rates than the lowest available when the Advisor be-
lieves it is reasonable to do so in light of the value of the bro-
kerage and research services provided by the broker effecting the
transaction.
April 1, 1998 Prospectus 37
<PAGE>
The Advisor manages the Funds without regard generally to re-
strictions on portfolio turnover, except those imposed on its
ability to engage in short-term trading by provisions of the fed-
eral tax laws. The use of certain derivative instruments with rel-
atively short maturities may tend to exaggerate the portfolio
turnover rate for some of the Funds. Trading in fixed income secu-
rities does not generally involve the payment of brokerage commis-
sions, 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 Pro-
spectus is set forth under "Financial Highlights."
Some securities considered for investments by the Funds may
also be appropriate for other clients served by the Advisor. If a
purchase or sale of securities consistent with the investment pol-
icies of a Fund and one or more of these clients served by the Ad-
visor 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 Advisor. The Advisor may
aggregate orders for the Funds with simultaneous transactions en-
tered into on behalf of other clients of the Advisor so long as
price and transaction expenses are averaged either for that trans-
action or for the day.
Description of the Trust
CAPITALI- The Trust was organized as a Massachusetts business trust on Feb-
ZATION ruary 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 cir-
cumstances, 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 pro-
vides for indemnification out of Trust property for all loss and
expense of any shareholder held personally liable for the obliga-
tions of the Trust. The risk of a shareholder incurring financial
loss on account of shareholder liability is limited to circum-
stances in which such disclaimer is inoperative or the Trust it-
self is unable to meet its obligations, and thus should be consid-
ered remote.
MULTIPLE In addition to Class D shares, each Fund offers up to five
CLASSES OF additional classes, Class A, Class B, Class C, Institutional Class
SHARES and Administrative Class shares, through separate prospectuses. The
other classes are subject to different sales charges and expense
levels than Class D shares, which will affect performance
accordingly. This Prospectus relates only to the Class D shares of
the Funds. Unlike Class D shares, which may be purchased only
through financial service firms, the other classes may be purchased
directly from the Trust and/or the Distributor. Shareholders of a
particular class may also receive additional services or services
different from those received by the other classes. Investors may
contact the Distributor at 800-426-0107 for more information
concerning Class A, B, C or D shares of the Funds. To obtain more
information about the Institutional and Administrative Class shares,
please call the Distributor at 800-927-4648.
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 re-
quired 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.
38 PIMCO Funds: Pacific Investment Management Series
<PAGE>
Shares entitle their holders to one vote per share (with pro-
portionate voting for fractional shares). As of _______, 1998, the
following were shareholders of record of at least 25% of the out-
standing voting securities of the indicated Fund: [TO BE UPDATED
IN POST-EFFECTIVE AMENDMENT NO. 40] Tice & Co. (Buffalo, New York)
and Wendel & Co. (New York, New York) with respect to the Long-
Term U.S. Government Fund; Pacific Investment Management Company
(Newport Beach, California) with respect to the Real Return Bond
Fund; and Charles Schwab & Co., Inc. (San Francisco, California)
with respect to the Foreign Bond Fund. To the extent such share-
holders are also the beneficial owners of those shares, 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).
April 1, 1998 Prospectus 39
<PAGE>
Appendix A
Description of Duration
Duration is a measure of the expected life of a fixed income secu-
rity that was developed as a more precise alternative to the con-
cept 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 securi-
ty). However, "term to maturity" measures only the time until a
fixed income security provides its final payment, taking no ac-
count 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. Dura-
tion management is one of the fundamental tools used by the Advi-
sor.
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 occur-
ring 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 dura-
tion by approximately the same amount that selling an equivalent
amount of the underlying securities would.
There are some situations where even the standard duration cal-
culation 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 inter-
est rate exposure corresponds to the frequency of the coupon re-
set. 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
Advisor will use more sophisticated analytical techniques that in-
corporate the anticipated economic life of a security into the de-
termination of its interest rate exposure.
40 PIMCO Funds: Pacific Investment Management Series
<PAGE>
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 Advisor's view of their com-
parability to rated securities. A Fund's use of average quality
criteria is intended to be a guide for those institutional invest-
ors 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 in-
vestments 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 Advisor to be of comparable quality).
The percentage of a Fund's assets invested in securities in a par-
ticular rating category will vary. Following is a description of
Moody's and S&P's ratings applicable to fixed income securities.
MOODY'S CORPORATE AND MUNICIPAL BOND RATINGS
INVESTORS Aaa: Bonds which are rated Aaa are judged to be of the best
SERVICE, quality. They carry the smallest degree of investment risk and are
INC. generally referred to as "gilt edge." Interest payments are pro-
tected by a large or by an exceptionally stable margin and princi-
pal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to im-
pair 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 se-
curities.
A: Bonds which are rated A possess many favorable investment
attributes and are to be considered as upper-medium-grade obliga-
tions. Factors giving security to principal and interest are con-
sidered adequate but elements may be present that suggest a sus-
ceptibility 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 el-
ements; their future cannot be considered as well-assured. Often
the protection of interest and principal payments may be very mod-
erate 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 pe-
riod of time may be small.
Caa: Bonds which are rated Caa are of poor standing. Such is-
sues 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.
C: Bonds which are rated C are the lowest rated class of bonds
and issues so rated can be regarded as having extremely poor pros-
pects of ever attaining any real investment standing.
Moody's applies numerical modifiers, 1, 2, and 3 in each ge-
neric 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 in-
dicates a mid-range ranking; and the modifier 3 indicates that the
issue ranks in the lower end of its generic rating category.
April 1, 1998 Prospectus 41
<PAGE>
CORPORATE SHORT-TERM DEBT RATINGS
Moody's short-term debt ratings are opinions of the ability of is-
suers 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 indem-
nity 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 em-
ployed; conservative capitalization structure with moderate reli-
ance on debt and ample asset protection; broad margins in earnings
coverage of fixed financial charges and high internal cash genera-
tion; 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 ob-
ligations. This will normally be evidenced by many of the charac-
teristics 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 ob-
ligations. The effect of industry characteristics and market com-
positions may be more pronounced. Variability in earnings and
profitability may result in changes in the level of debt protec-
tion measurements and may require relatively high financial lever-
age. Adequate alternate liquidity is maintained.
NOT PRIME: Issuers rated Not Prime do not fall within any of
the Prime rating categories.
STANDARD & CORPORATE AND MUNICIPAL BOND RATINGS
POOR'S
RATINGS
SERVICES Investment Grade
AAA: Debt rated AAA has the highest rating assigned by S&P. Ca-
pacity 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.
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 ca-
pacity to pay interest and repay principal for debt in this cate-
gory than in higher-rated categories.
Speculative Grade
Debt rated BB, B, CCC, CC, and C is regarded as having predomi-
nantly 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 un-
certainties or exposure to adverse business, financial, or eco-
nomic 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.
42 PIMCO Funds: Pacific Investment Management Series
<PAGE>
B: Debt rated B has a greater vulnerability to default but cur-
rently 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 re-
pay principal. The B rating category is also used for debt subor-
dinated 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 re-
payment 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 ac-
tual 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 rat-
ing. The C rating may be used to cover a situation where a bank-
ruptcy petition has been filed, but debt service payments are con-
tinued.
CI: The rating CI is reserved for income bonds on which no in-
terest 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 modi-
fied by the addition of a plus or minus sign to show relative
standing within the major rating categories.
Provisional ratings: The letter "p" indicates that the rating
is provisional. A provisional rating assumes the successful com-
pletion 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 com-
pletion. The investor should exercise his own judgment with re-
spect 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 indica-
tion 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
An S&P 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 catego-
ries, 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 designa-
tion is satisfactory. However, the relative degree of safety is
not as high as for issues designated A-1.
April 1, 1998 Prospectus 43
<PAGE>
A-3: Issues carrying this designation have adequate capacity
for timely payment. They are, however, more vulnerable to the ad-
verse effects of changes in circumstances than obligations carry-
ing the higher designations.
B: Issues rated B are regarded as having only speculative ca-
pacity 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 mar-
ket price or suitability for a particular investor. The ratings
are based on current information furnished to S&P by the issuer or
obtained from other sources it considers reliable. S&P does not
perform an audit in connection with any rating and may, on occa-
sion, rely on unaudited financial information. The ratings may be
changed, suspended, or withdrawn as a result of changes in or un-
availability of such information.
44 PIMCO Funds: Pacific Investment Management Series
<PAGE>
PIMCO Funds:
Pacific Investment
Management Series
- --------------------------------------------------------------------------------
INVESTMENT ADVISOR AND ADMINISTRATOR
Pacific Investment Management Company, 840 Newport Center Drive, Suite 360,
Newport Beach, CA 92660
- --------------------------------------------------------------------------------
DISTRIBUTOR
PIMCO Funds Distributors LLC, 2187 Atlantic Street, Stamford,
Connecticut 06902
- --------------------------------------------------------------------------------
CUSTODIAN
Investors Fiduciary Trust Company, 801 Pennsylvania, Kansas City, MO 64105
- --------------------------------------------------------------------------------
SHAREHOLDER SERVICING AGENT AND TRANSFER AGENT
Shareholder Services, Inc., P.O. Box 5866, Denver, Colorado 80217
- --------------------------------------------------------------------------------
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP, 1055 Broadway, Kansas City, MO 64105
- --------------------------------------------------------------------------------
LEGAL COUNSEL
Dechert Price & Rhoads, 1775 Eye Street N.W., Washington, D.C. 20006
- --------------------------------------------------------------------------------
For further information about the PIMCO Funds, call 1-800-426-0107.
