PIMCO Corporate & Income Opportunity Fund

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM N-CSR

CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT

INVESTMENT COMPANIES

Investment Company Act file number: 811-21238

PIMCO Corporate & Income Opportunity Fund

(Exact name of registrant as specified in charter)

1633 Broadway, New York, NY 10019

(Address of principal executive offices)

William G. Galipeau

Treasurer (Principal Financial & Accounting Officer)

650 Newport Center Drive

Newport Beach, CA 92660

(Name and address of agent for service)

Copies to:

David C. Sullivan

Ropes & Gray LLP

Prudential Tower

800 Boylston Street

Boston, MA 02199

Registrant’s telephone number, including area code: (844) 337-4626

Date of fiscal year end: July 31

Date of reporting period: July 31, 2016

Form N-CSR is to be used by management investment companies to file reports with the Commission not later than 10 days after the transmission to stockholders of any report that is required to be transmitted to stockholders under Rule 30e-1 under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may use the information provided on Form N-CSR in its regulatory, disclosure review, inspection, and policymaking roles.

A registrant is required to disclose the information specified by Form N-CSR, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-CSR unless the Form displays a currently valid Office of Management and Budget (“OMB”) control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.


Item  1. Reports to Shareholders.

The following is a copy of the report transmitted to shareholders pursuant to Rule 30e-1 under the Investment Company Act of 1940, as amended (the “1940 Act”) (17 CFR 270.30e-1).


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PIMCO Closed-End Funds

 

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Annual Report

 

July 31, 2016

 

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PIMCO Corporate & Income Opportunity Fund

PIMCO Corporate & Income Strategy Fund

PIMCO High Income Fund

PIMCO Income Strategy Fund

PIMCO Income Strategy Fund II

 

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Table of Contents

 

            Page  
     

Letter from the Chairman of the Board & President

        2   

Important Information About the Funds

        4   

Financial Highlights

        14   

Statements of Assets and Liabilities

        16   

Statements of Operations

        17   

Statements of Changes in Net Assets

        18   

Notes to Financial Statements

        63   

Report of Independent Registered Public Accounting Firm

        85   

Glossary

        86   

Federal Income Tax Information

        87   

Shareholder Meeting Results

        88   

Investment Strategy Updates

        89   

Dividend Reinvestment Plan

        90   

Management of the Funds

        92   

Approval of Investment Management Agreement

        95   

Privacy Policy

        101   
     
Fund    Fund
Summary
     Schedule of
Investments
 
     

PIMCO Corporate & Income Opportunity Fund

     9         20   

PIMCO Corporate & Income Strategy Fund

     10         29   

PIMCO High Income Fund

     11         37   

PIMCO Income Strategy Fund

     12         46   

PIMCO Income Strategy Fund II

     13         54   


Letter from the Chairman of the Board & President

 

Dear Shareholder,

 

The global financial markets generated mixed results during the reporting period. Investor sentiment fluctuated as investors reacted to incoming economic data, shifting monetary policy, volatile commodity prices and numerous geopolitical issues.

 

On July 19, 2016, PIMCO announced that the firm’s Managing Directors have appointed Emmanuel (Manny) Roman as PIMCO’s next Chief Executive Officer. PIMCO’s current CEO, Douglas Hodge, will assume a new role as Managing Director and Senior Advisor when Mr. Roman joins PIMCO on November 1st. The announcement of Mr. Roman as PIMCO’s CEO is the culmination of a process undertaken by the firm to hire a senior executive who would add leadership and strategic insights combined with a deep appreciation of PIMCO’s diversified global businesses, investment process and focus on superior investment performance and client service. Mr. Roman’s appointment has the full support of the firm’s leadership including Mr. Hodge, PIMCO’s President Jay Jacobs, the firm’s Executive Committee and its Managing Directors. Mr. Roman has nearly 30 years of experience in the investment industry, with expertise in fixed income and proven executive leadership, most recently as CEO of Man Group PLC, one of the world’s largest publicly traded alternative asset managers and a leader in liquid, high-alpha investment strategies.

 

For the 12-month reporting period ended July 31, 2016

 

Despite a number of headwinds, the U.S. economy was resilient and continued to expand during the reporting period. That being said, the pace was far from robust. Looking back, U.S. gross domestic product (“GDP”), which represents the value of goods and services produced in the country, the broadest measure of economic activity and the principal indicator of economic performance, expanded at a 2.0% annual pace during the third quarter of 2015. Economic activity then decelerated, as GDP grew at a 1.4% and 1.1% annual pace during the fourth quarter of 2015 and first quarter of 2016, respectively. Finally, the Commerce Department’s second reading — released after the reporting period had ended — showed that second quarter 2016 GDP grew at an annual pace of 1.1%.

 

At its meeting in December 2015, the Federal Reserve (“Fed”) took its initial step toward normalizing monetary policy. In particular, the Fed raised interest rates from a range between 0% and 0.25% to a range between 0.25% and 0.50%. However, since that time the Fed has remained on hold. In its official statement following the Fed’s July 2016 meeting it said, “The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”

 

Economic activity outside the U.S. was mixed during the reporting period. In the eurozone, underlying economies gradually improved from low levels due to better domestic demand, while low inflation remained a concern. Against this backdrop, the European Central Bank (“ECB”) introduced additional easing measures, including the purchase of corporate bonds in an attempt to stimulate growth and spur inflation. The Bank of Japan also continued to pursue highly accommodative monetary policy. While the Bank of England (“BoE”) kept rates on hold, British voters’ decision in June 2016 to leave the European Union (“Brexit”) led to speculation that the country’s central bank would lower rates in the near future. This occurred on August 4, 2016 — after the reporting period ended — as the BoE lowered interest rates from 0.50% to 0.25%, an all-time low, and announced that it would purchase government and corporate bonds in an attempt to stimulate the U.K. economy. Elsewhere, economic activity in China moderated, which impacted growth in many emerging market economies.

 

Commodity prices were highly volatile during the reporting period. Crude oil began the reporting period at roughly $49 a barrel and ended the period at approximately $42 a barrel. Its low of $26 occurred on February 11, 2016 and its peak of $52 took place on June 9, 2016. Finally, foreign exchange markets fluctuated given economic data, central bank policy and, most recently, Brexit, which sent the pound sharply lower.

 

 

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Outlook

 

Nine years since the financial crisis started, monetary easing is continuing with few signs of an end in sight. This appears to be especially true in a post-Brexit world rife with economic uncertainty and generally weak growth around the world. Against this backdrop, investor sentiment is likely to be challenged at times. Other questions facing investors are the upcoming November elections in the U.S. and a host of geopolitical issues, such as further moderating growth in China, instability in the Middle East, and further terrorist attacks, to name a few.

 

In such an environment, investors will be in for a choppy ride. However, in our view it won’t be without opportunity, especially for those with long-term outlooks, a healthy risk appetite and the latitude to invest actively. As always, we will continue to conduct extensive research and focus on quality and sustainability to help our shareholders navigate the many uncertainties around the globe.

 

In the following pages of this PIMCO Closed-End Funds Annual Report, please find specific details regarding investment performance and a discussion of factors that most affected the Funds’ performance over the 12 months ended July 31, 2016.

 

Thank you for investing with us. We value your trust and will continue to work diligently to meet your investment needs. If you have questions regarding any of your PIMCO Closed-End Funds investments, please contact your financial advisor or call the Funds’ shareholder servicing agent at (844) 33-PIMCO, or (844) 337-4626. We also invite you to visit our website at www.pimco.com to learn more about our views.

 

Sincerely,

 

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Hans W. Kertess   Peter G. Strelow
Chairman of the Board of Trustees   President

 

  ANNUAL REPORT   JULY 31, 2016   3


Important Information About the Funds

 

We believe that bond funds have an important role to play in a well- diversified investment portfolio. It is important to note, however, that in an environment where interest rates trend upward, rising rates would negatively impact the performance of most bond funds, and fixed- income securities held by a Fund are likely to decrease in value. A number of factors can cause interest rates to rise (e.g., central bank monetary policies, inflation rates, general economic conditions, etc.). Accordingly, changes in interest rates can be sudden, and there is no guarantee that Fund Management will anticipate such movement.

 

As of the date of this report, interest rates in the U.S. are at or near historically low levels. As such, bond funds may currently face an increased exposure to the risks associated with rising interest rates. This is especially true since the Federal Reserve Board has concluded its quantitative easing program and, at its meeting on December 16, 2015, raised interest rates for the first time since 2006 from a target range of 0% to 0.25% to a target range of 0.25% to 0.50%. Further, while the U.S. bond market has steadily grown over the past three decades, dealer inventories of corporate bonds have remained relatively stagnant. As a result, there has been a significant reduction in the ability of dealers to “make markets” in corporate bonds. All of the factors mentioned above, individually or collectively, could lead to increased volatility and/or lower liquidity in the fixed income markets, which could result in increased losses to a Fund. Bond funds and individual bonds with a longer duration (a measure of the sensitivity of a security’s price to changes in interest rates) tend to be more sensitive to changes in interest rates, usually making them more volatile than securities or funds with shorter durations. In addition, in the current low interest rate environment, the market price of the Funds’ common shares may be particularly sensitive to changes in interest rates or the perception that there will be a change in interest rates.

 

The use of derivatives may subject the Funds to greater volatility than investments in traditional securities. The Funds may use derivative instruments for hedging purposes or as part of an investment strategy. Use of these instruments may involve certain costs and risks such as liquidity risk, interest rate risk, market risk, call risk, credit risk, management risk and the risk that a Fund could not close out a position when it would be most advantageous to do so. Certain derivative transactions may have a leveraging effect on a Fund. For example, a small investment in a derivative instrument may have a significant impact on a Fund’s exposure to interest rates, currency exchange rates or other investments. As a result, a relatively small price movement in a derivative instrument may cause an immediate and substantial loss or gain, which translates into heightened volatility in a Fund’s net asset value “NAV”. A Fund may engage in such transactions regardless of whether the Fund owns the asset, instrument or components of the index underlying a derivative instrument. A Fund

may invest a significant portion of its assets in these types of instruments. If it does, a Fund’s investment exposure could far exceed the value of its portfolio securities and its investment performance could be primarily dependent upon securities it does not directly own. Changes in regulation relating to a mutual fund’s use of derivatives and related instruments could potentially limit or impact a Fund’s ability to invest in derivatives, limit a Fund’s ability to employ certain strategies that use derivatives and adversely affect the value or performance of derivatives and a Fund. For instance, in December 2015, the SEC proposed new regulations applicable to a mutual fund’s use of derivatives and related instruments. If adopted as proposed, these regulations could significantly limit or impact a Fund’s ability to invest in derivatives and other instruments, limit a Fund’s ability to employ certain strategies that use derivatives and adversely affect a Fund’s performance, efficiency in implementing its strategy, liquidity and ability to pursue its investment objectives and generate income.

 

Certain Funds’ monthly distributions may include, among other sources, payments and premiums (characterized as capital for financial accounting purposes and as ordinary income for tax purposes) generated by certain types of interest rate derivatives.

 

Strategies involving interest rate derivatives may attempt to capitalize on differences between short-term and long-term interest rates as part of a Fund’s duration and yield curve active management strategies. For instance, in the event that long-term interest rates are higher than short-term interest rates, a Fund may elect to pay a floating short-term interest rate and to receive a long-term fixed interest rate for a stipulated period of time, thereby generating payments as a function of the difference between current short-term interest rates and long-term interest rates, so long as the floating short-term interest rate (which may rise) is lower than the fixed long-term interest rate.

 

A Fund may also enter into opposite sides of multiple interest rate swaps or other derivatives with respect to the same underlying reference instrument (e.g., a 10-year U.S. treasury) that have different effective dates with respect to interest accrual time periods for the principal purpose of generating distributable gains (characterized as ordinary income for tax purposes) and that are not part of the Fund’s duration or yield curve management strategies (“paired swap transactions”). In a paired swap transaction, a Fund would generally enter into one or more interest rate swap agreements whereby the Fund agrees to make regular payments starting at the time the Fund enters into the agreements equal to a floating interest rate in return for payments equal to a fixed interest rate (the “initial leg”). The Fund would also enter into one or more interest rate swap agreements on the same underlying instrument, but take the opposite position (i.e., in this example, the Fund would make regular payments equal to a fixed interest rate in return for receiving payments equal to a floating interest

 

 

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rate) with respect to a contract whereby the payment obligations do not commence until a date following the commencement of the initial leg (the “forward leg”).

 

A Fund’s income- and gain-generating strategies may generate current income and gains taxable as ordinary income sufficient to support monthly distributions even in situations when the Fund has experienced a decline in net assets due to, for example, adverse changes in the broad U.S. or non-U.S. equity markets or the Fund’s debt investments, or arising from its use of derivatives. For instance, a significant portion of a Fund’s monthly distributions may be sourced from paired swap transactions utilized to produce current distributable ordinary income for tax purposes on the initial leg, with the expectation that the Fund will later realize a corresponding capital loss and potential decline in its net asset value with respect to the forward leg (to the extent there are not corresponding offsetting capital gains being generated from other sources). Because some or all of these transactions may generate capital losses without corresponding offsetting capital gains, portions of a Fund’s distributions recognized as ordinary income for tax purposes (such as from paired swap transactions) may be economically similar to a taxable return of capital when considered together with such capital losses.

 

The notional exposure of a Fund’s interest rate derivatives may represent a multiple of the Fund’s total net assets. There can be no assurance a Fund’s strategies involving interest rate derivatives will work as intended and such strategies are subject to the risks related to the use of derivatives generally, as discussed above (see also Notes 6 and 7 in the Notes to Financial Statements for further discussion on the use of derivative instruments and certain of the risks associated therewith).

 

A Fund’s use of leverage creates the opportunity for increased income for the Fund’s common shareholders, but also creates special risks. Leverage is a speculative technique that may expose a Fund to greater risk and increased costs. If shorter-term interest rates rise relative to the rate of return on a Fund’s portfolio, the interest and other costs of leverage to the Fund could exceed the rate of return on the debt obligations and other investments held by the Fund, thereby reducing return to the Fund’s common shareholders. In addition, fees and expenses of any form of leverage used by a Fund will be borne entirely by its common shareholders (and not by preferred shareholders, if any) and will reduce the investment return of the Fund’s common shares. There can be no assurance that a Fund’s use of leverage will result in a higher yield on its common shares, and it may result in losses. Leverage creates several major types of risks for a Fund’s common shareholders, including: (1) the likelihood of greater volatility of net asset value and market price of the Fund’s common shares, and of the investment return to the Fund’s common shareholders, than a comparable portfolio without leverage; (2) the possibility either that the Fund’s common

share dividends will fall if the interest and other costs of leverage rise, or that dividends paid on the Fund’s common shares will fluctuate because such costs vary over time; and (3) the effects of leverage in a declining market or a rising interest rate environment, as leverage is likely to cause a greater decline in the net asset value of the Fund’s common shares than if the Fund were not leveraged and may result in a greater decline in the market value of the Fund’s common shares.

 

A Fund’s investments in and exposure to foreign securities involve special risks. For example, the value of these investments may decline in response to unfavorable political and legal developments, unreliable or untimely information or economic and financial instability. Foreign securities may experience more rapid and extreme changes in value than investments in securities of U.S. issuers. The securities markets of certain foreign countries are relatively small, with a limited number of companies representing a small number of industries. Issuers of foreign securities are usually not subject to the same degree of regulation as U.S. issuers. Reporting, accounting, auditing and custody standards of foreign countries differ, in some cases significantly, from U.S. standards. Also, nationalization, expropriation or other confiscation, currency blockage, political changes or diplomatic developments could adversely affect a Fund’s investments in foreign securities. In the event of nationalization, expropriation or other confiscation, a Fund could lose its entire investment in foreign securities. Risks associated with investing in foreign securities may be increased when a Fund invests in emerging markets. For example, if a Fund invests in emerging market debt, it may face increased exposure to interest rate, liquidity, volatility, and redemption risk due to the specific economic, political, geographical, or legal background of the emerging market.

 

Investments in loans are generally subject to risks similar to those of investments in other types of debt obligations, including, among others, credit risk, interest rate risk, variable and floating rate securities risk, and, as applicable, risks associated with mortgage-related securities. In addition, in many cases loans are subject to the risks associated with below-investment grade securities. In the case of a loan participation or assignment, a Fund generally has no right to enforce compliance with the terms of the loan agreement with the borrower. As a result, a Fund may be subject to the credit risk of both the borrower and the lender that is selling the loan agreement. In the event of the insolvency of the lender selling a loan participation, a Fund may be treated as a general creditor of the lender and may not benefit from any set-off between the lender and the borrower. The Funds may be subject to heightened or additional risks and potential liabilities and costs by investing in mezzanine and other subordinated loans or acting as an originator of loans, including those arising under bankruptcy, fraudulent conveyance, equitable subordination, lender liability, environmental and other laws and regulations, and risks and costs associated with debt servicing and taking foreclosure actions

 

 

  ANNUAL REPORT   JULY 31, 2016   5


Important Information About the Funds (Cont.)

 

associated with the loans. To the extent that a Fund originates a loan, it may be responsible for all or a substantial portion of the expenses associated with initiating the loan, irrespective of whether the loan transaction is ultimately consummated or closed. This may include significant legal and due diligence expenses, which will be indirectly borne by a Fund and its shareholders.

 

Mortgage-related and other asset-backed securities often involve risks that are different from or more acute than risks associated with other types of debt instruments. Generally, rising interest rates tend to extend the duration of fixed rate mortgage-related securities, making them more sensitive to changes in interest rates. As a result, in a period of rising interest rates, if a Fund holds mortgage-related securities, it may experience additional volatility since individual mortgage holders are less likely to exercise prepayment options, thereby putting additional downward pressure on the value of these securities and potentially causing the Fund to lose money. This is known as extension risk. Mortgage-backed securities can be highly sensitive to rising interest rates, such that even small movements can cause an investing Fund to lose value. Mortgage-backed securities, and in particular those not backed by a government guarantee, are subject to credit risk. In addition, adjustable and fixed rate mortgage-related securities are subject to prepayment risk. When interest rates decline, borrowers may pay off their mortgages sooner than expected. This can reduce the returns of the Funds because the Funds may have to reinvest that money at the lower prevailing interest rates. The Funds’ investments in other asset-backed securities are subject to risks similar to those associated with mortgage-related securities, as well as additional risks associated with the nature of the assets and the servicing of those assets. Payment of principal and interest on asset-backed securities may be largely dependent upon the cash flows generated by the assets backing the securities, and asset-backed securities may not have the benefit of any security interest in the related assets.

 

High-yield bonds (commonly referred to as “junk bonds”) typically have a lower credit rating than other bonds. Lower-rated bonds generally involve a greater risk to principal than higher-rated bonds. Further, markets for lower-rated bonds are typically less liquid than for higher- rated bonds, and public information is usually less abundant in such markets. Thus, high yield investments increase the chance that a Fund will lose money on its investment. The Funds may also invest in bonds and other instruments that are not rated, but which PIMCO considers to be equivalent to high-yield investments. The Funds may hold defaulted securities that may involve special considerations including bankruptcy proceedings, other regulatory and legal restrictions affecting the Funds’ ability to trade, and the availability of prices from independent pricing services or dealer quotations. Defaulted securities are often illiquid and may not be actively traded. Sale of securities in

bankrupt companies at an acceptable price may be difficult and differences compared to the value of the securities used by the Funds could be material.

 

Variable and floating rate securities generally are less sensitive to interest rate changes but may decline in value if their interest rates do not rise as much, or as quickly, as interest rates in general. Conversely, floating rate securities will not generally increase in value if interest rates decline. Inverse floating rate securities may decrease in value if interest rates increase. Inverse floating rate securities may also exhibit greater price volatility than a fixed rate obligation with similar credit quality. When a Fund holds variable or floating rate securities, a decrease (or, in the case of inverse floating rate securities, an increase) in market interest rates will adversely affect the income received from such securities and the NAV of the Funds’ shares.

 

The global economic crisis brought several small economies in Europe to the brink of bankruptcy and many other economies into recession and weakened the banking and financial sectors of many European countries. For example, the governments of Greece, Spain, Portugal, and the Republic of Ireland have all experienced large public budget deficits, the effects of which are still yet unknown and may slow the overall recovery of the European economies from the global economic crisis. In addition, due to large public deficits, some European countries may be dependent on assistance from other European governments and institutions or other central banks or supranational agencies such as the International Monetary Fund. Assistance may be dependent on a country’s implementation of reforms or reaching a certain level of performance. Failure to reach those objectives or an insufficient level of assistance could result in a deep economic downturn which could significantly affect the value of a Fund’s European investments. It is possible that one or more Economic and Monetary Union of the European Union (“EMU”) member countries could abandon the euro and return to a national currency and/or that the euro will cease to exist as a single currency in its current form. The exit of any country out of the euro may have an extremely destabilizing effect on other eurozone countries and their economies and a negative effect on the global economy as a whole. Such an exit by one country may also increase the possibility that additional countries may exit the euro should they face similar financial difficulties. In June 2016, the United Kingdom approved a referendum to leave the European Union. Significant uncertainty remains in the market regarding the ramifications of that development, and the range and potential implications of possible political, regulatory, economic and market outcomes are difficult to predict.

 

As the use of technology has become more prevalent in the course of business, the Funds have become potentially more susceptible to operational risks through breaches in cyber security. A breach in cyber

 

 

6   PIMCO CLOSED-END FUNDS     


 

security refers to both intentional and unintentional cyber events that may cause a Fund to lose proprietary information, suffer data corruption, or lose operational capacity. Cyber security breaches may involve unauthorized access to a Fund’s digital information systems (e.g., through “hacking” or malicious software coding), but may also result from outside attacks such as denial-of-service attacks (i.e., efforts to make network services unavailable to intended users). In addition, cyber security breaches of a Fund’s third party service providers (including but not limited to advisers, sub-advisers, administrators, transfer agents, custodians, distributors and other third parties) or issuers that a Fund invests in can also subject a Fund to many of the same risks associated with direct cyber security breaches. Cyber security failures or breaches may result in financial losses to a Fund and its shareholders. These failures or breaches may also result in disruptions to business operations, potentially resulting in financial losses; interference with a Fund’s ability to calculate its net asset value, process shareholder transactions or otherwise transact business with shareholders; impediments to trading; violations of applicable privacy and other laws; regulatory fines; penalties; reputational damage; reimbursement or other compensation costs; or additional compliance costs. In addition, substantial costs may be incurred in order to prevent any cyber incidents in the future. Like with operational risk in general, the Funds have established risk management systems designed to reduce the risks associated with cyber security. However, there is no guarantee that such efforts will succeed, especially since the Funds do not directly control the cyber security systems of issuers or third party service providers. The Funds and their shareholders could be negatively impacted as a result.

 

The Funds may invest in securities and instruments that are economically tied to Russia. Investments in Russia are subject to various risks such as political, economic, legal, market and currency risks. The risks include uncertain political and economic policies, short- term market volatility, poor accounting standards, corruption and crime, an inadequate regulatory system, and unpredictable taxation. Investments in Russia are particularly subject to the risk that economic sanctions may be imposed by the United States and/or other countries. Such sanctions — which may impact companies in many sectors, including energy, financial services and defense, among others — may negatively impact the Funds’ performance and/or ability to achieve their investment objectives. The Russian securities market is characterized by limited volume of trading, resulting in difficulty in obtaining accurate prices. The Russian securities market, as compared to U.S. markets, has significant price volatility, less liquidity, a smaller market capitalization and a smaller number of traded securities. There may be little publicly available information about issuers. Settlement, clearing and registration of securities transactions are subject to risks because of registration systems that may not be subject to effective government

supervision. This may result in significant delays or problems in registering the transfer of securities. Russian securities laws may not recognize foreign nominee accounts held with a custodian bank, and therefore the custodian may be considered the ultimate owner of securities they hold for their clients. Ownership of securities issued by Russian companies is recorded by companies themselves and by registrars instead of through a central registration system. It is possible that the ownership rights of the Funds could be lost through fraud or negligence. While applicable Russian regulations impose liability on registrars for losses resulting from their errors, it may be difficult for the Funds to enforce any rights it may have against the registrar or issuer of the securities in the event of loss of share registration. Adverse currency exchange rates are a risk and there may be a lack of available currency hedging instruments. Investments in Russia may be subject to the risk of nationalization or expropriation of assets. Oil, natural gas, metals, and timber account for a significant portion of Russia’s exports, leaving the country vulnerable to swings in world prices.

 

The common shares of the Funds trade on the New York Stock Exchange. As with any stock, the price of a Fund’s common shares will fluctuate with market conditions and other factors. If you sell your common shares of a Fund, the price received may be more or less than your original investment. Shares of closed-end management investment companies frequently trade at a discount from their net asset value. The common shares of a Fund may trade at a price that is less than the initial offering price and/or the net asset value of such shares. Further, if a Fund’s shares trade at a price that is more than the initial offering price and/or the net asset value of such shares, including at a substantial premium and/or for an extended period of time, there is no assurance that any such premium will be sustained for any period of time and will not decrease, or that the shares will not trade at a discount to net asset value thereafter.

 

The Funds may be subject to various risks in addition to those described above. Some of these risks may include, but are not limited to, the following: asset allocation risk, credit risk, stressed securities risk, distressed and defaulted securities risk, corporate bond risk, market risk, issuer risk, liquidity risk, equity securities and related market risk, mortgage-related and other asset-backed securities risk, extension risk, prepayment risk, privately issued mortgage-related securities risk, mortgage market/ subprime risk, foreign (non-U.S.) investment risk, emerging markets risk, currency risk, redenomination risk, non- diversification risk, management risk, municipal bond risk, inflation- indexed security risk, senior debt risk, loans, participations and assignments risk, reinvestment risk, real estate risk, U.S. Government securities risk, foreign (non-U.S.) government securities risk, valuation risk, segregation and cover risk, focused investment risk, credit default swaps risk, event-linked securities risk, counterparty risk, preferred securities risk, confidential information access risk, other investment

 

 

  ANNUAL REPORT   JULY 31, 2016   7


Important Information About the Funds (Cont.)

 

companies risk, private placements risk, inflation/deflation risk, regulatory risk, tax risk, recent economic conditions risk, market disruptions and geopolitical risk, potential conflicts of interest involving allocation of investment opportunities, repurchase agreements risk, securities lending risk, zero-coupon bond and payment-in-kind securities risk, portfolio turnover risk, smaller company risk, short sale risk and convertible securities risk. A description of certain of these risks is available in the Notes to Financial Statements of this Report.

 

On each Fund Summary page in this Shareholder Report, the Average Annual Total Return table measures performance assuming that all dividend and capital gain distributions were reinvested. Total return is calculated by determining the percentage change in NAV or market price (as applicable) in the specified period. Returns do not reflect the deduction of taxes that a shareholder would pay on Fund distributions. Total return for a period of more than one year represents the average annual total return. Performance at market price will differ from results at NAV. Although market price returns tend to reflect investment results over time, during shorter periods returns at market price can also be influenced by factors such as changing views about a Fund, market conditions, supply and demand for the Fund’s shares, or changes in the Fund’s dividends. Performance shown is net of fees and expenses.

 

The following table discloses the commencement of operations and diversification status of each Fund:

 

Fund Name         Commencement
of Operations
    Diversification
Status
 

PIMCO Corporate & Income Opportunity Fund

      12/27/02        Diversified   

PIMCO Corporate & Income Strategy Fund

      12/21/01        Diversified   

PIMCO High Income Fund

      04/30/03        Diversified   

PIMCO Income Strategy Fund

      08/29/03        Diversified   

PIMCO Income Strategy Fund II

      10/29/04        Diversified   

 

An investment in a Fund is not a deposit of a bank and is not guaranteed or insured by the Federal Deposit Insurance Corporation or any other government agency. It is possible to lose money on investments in the Funds.

 

The Trustees are responsible generally for overseeing the management of the Funds. The Trustees authorize the Funds to enter into service agreements with the Investment Manager and other service providers in order to provide, and in some cases authorize service providers to procure through other parties, necessary or desirable services on behalf of the Funds. Shareholders are not parties to or third-party beneficiaries of such service agreements. Neither a Fund’s original or any subsequent prospectus or Statement of Additional Information (SAI), any press release or shareholder report, any contracts filed as exhibits to a Fund’s registration statement, nor any other communications,

disclosure documents or regulatory filings from or on behalf of a Fund creates a contract between or among any shareholder of a Fund, on the one hand, and the Fund, a service provider to the Fund, and/or the Trustees or officers of the Fund, on the other hand. The Trustees (or the Funds and their officers, service providers or other delegates acting under authority of the Trustees) may amend its most recent or use a new prospectus or SAI with respect to a Fund, adopt and disclose new or amended policies and other changes in press releases and shareholder reports and/or amend, file and/or issue any other communications, disclosure documents or regulatory filings, and may amend or enter into any contracts to which a Fund is a party, and interpret the investment objective(s), policies, restrictions and contractual provisions applicable to any Fund, without shareholder input or approval, except in circumstances in which shareholder approval is specifically required by law (such as changes to fundamental investment policies) or where a shareholder approval requirement was specifically disclosed in a Fund’s prospectus, SAI or shareholder report and is otherwise still in effect.

 

PIMCO has adopted written proxy voting policies and procedures (“Proxy Policy”) as required by Rule 206(4)-6 under the Investment Advisers Act of 1940. The Proxy Policy has been adopted by the Funds as the policies and procedures that PIMCO will use when voting proxies on behalf of the Funds. A description of the policies and procedures that PIMCO uses to vote proxies relating to portfolio securities of each Fund, and information about how each Fund voted proxies relating to portfolio securities held during the most recent twelve-month period ended June 30, are available without charge, upon request, by calling the Funds at (844) 33-PIMCO (844-337-4626), on the Funds’ website at www.pimco.com, and on the Securities and Exchange Commission’s (“SEC”) website at http://www.sec.gov.

 

Each Fund files a complete schedule of its portfolio holdings with the SEC for the first and third quarters of its fiscal year on Form N-Q. A copy of each Fund’s Form N-Q is available on the SEC’s website at http://www.sec.gov and may be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C., and is available without charge, upon request by calling the Funds at (844) 33-PIMCO (844-337-4626) and on the Funds’ website at www.pimco.com.

 

Updated portfolio holdings information about a Fund will be available at www.pimco.com approximately 15 calendar days after such Fund’s most recent fiscal quarter end, and will remain accessible until such Fund files a Form N-Q or a shareholder report for the period which includes the date of the information. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330.

 

 

8   PIMCO CLOSED-END FUNDS     


PIMCO Corporate & Income Opportunity Fund

 

  Symbol on NYSE - PTY

 

Allocation Breakdown

 

Corporate Bonds & Notes

    39.6%   

Non-Agency Mortgage-Backed Securities

    21.9%   

Asset-Backed Securities

    15.3%   

Short-Term Instruments

    10.0%   

Municipal Bonds & Notes

    6.4%   

Other

    6.8%   
   

% of Investments, at value as of 07/31/2016. Financial derivative instruments, if any, are excluded.

 

Fund Information (as of July 31, 2016)(1)

 

Market Price

    $14.75   

NAV

    $13.27   

Premium/(Discount) to NAV

    11.15%   

Market Price Distribution Yield(2)

    10.58%   

NAV Distribution Yield(2)

    11.76%   

Total Effective Leverage(3)

    42%   
 

 

Average Annual Total Return(1) for the period ended July 31, 2016  
    1 Year     5 Year     10 Year     Commencement
of Operations
(12/27/02)
 
Market Price     16.09%        9.04%        12.18%        13.35%   
NAV     5.26%        11.81%        13.75%        13.78%   

 

All Fund returns are net of fees and expenses.

 

(1) 

Performance quoted represents past performance. Past performance is not a guarantee or a reliable indicator of future results. Current performance may be lower or higher than performance shown. Investment return and the principal value of an investment will fluctuate. Total return, market price, NAV, market price distribution yield, and NAV distribution yield will fluctuate with changes in market conditions. For performance current to the most recent month-end, visit www.pimco.com or call (844) 33-PIMCO.

 

(2) 

Distribution yields are not performance and are calculated by annualizing the most recent distribution per share and dividing by the NAV or Market Price, as applicable, as of the reported date. Distributions may be comprised of ordinary income, net capital gains, and/or a return of capital (ROC) of your investment in the Fund. Because the distribution rate may include a ROC, it should not be confused with yield or income. If the Fund estimates that a portion of its distribution may be comprised of amounts from sources other than net investment income, the Fund will notify shareholders of the estimated composition of such distribution through a Section 19 Notice. Please refer to the most recent Section 19 Notice, if applicable, for additional information regarding the composition of distributions. Please visit www.pimco.com for most recent Section 19 Notice, if applicable. Final determination of a distribution’s tax character will be made on Form 1099 DIV sent to shareholders each January.

 

(3) 

Represents total effective leverage outstanding, as a percentage of total managed assets. Total effective leverage consists of preferred shares, reverse repurchase agreements and other borrowings, credit default swap notional and floating rate notes issued in tender option bond transactions, as applicable (collectively “Total Effective Leverage”). The Fund may engage in other transactions not included in Total Effective Leverage disclosed above that may give rise to a form of leverage, including certain derivative transactions. For the purpose of calculating Total Effective Leverage outstanding as a percentage of total managed assets, total managed assets refer to total assets (including assets attributable to Total Effective Leverage that may be outstanding) minus accrued liabilities (other than liabilities representing Total Effective Leverage).

 

Investment Objective and Strategy Overview

 

PIMCO Corporate & Income Opportunity Fund’s primary investment objective is to seek high current income, with capital preservation and capital appreciation as secondary objectives.

 

 

Fund Insights at NAV

 

Following are key factors impacting the Fund’s performance during the reporting period:

 

»  

The Fund’s exposure to U.S. interest rates was the primary contributor to performance, as interest rates rallied significantly.

 

»  

The Fund’s allocation to non-agency mortgage-backed securities contributed to returns. The sector continued to benefit from an improving U.S. housing market and limited outstanding supply.

 

»  

The Fund’s exposure to U.S. dollar-denominated Russian sovereign and quasi-sovereign bonds benefited returns. Spreads on these issues continued to retrace much of the widening that occurred in recent years, as geopolitical tensions in the region eased and investor sentiment improved.

 

»  

The Fund’s allocation to high yield corporate bonds was the primary detractor from performance. The asset class faced headwinds from lower energy prices, financial market volatility and mutual fund withdrawals.

 

»  

Exposure to local and hard currency-denominated Brazilian debt detracted from returns. Brazil was negatively impacted by its slowing economy, high inflation and an ongoing political crisis.

 

  ANNUAL REPORT   JULY 31, 2016   9


PIMCO Corporate & Income Strategy Fund

 

  Symbol on NYSE - PCN

 

Allocation Breakdown

 

Corporate Bonds & Notes

    46.8%   

Non-Agency Mortgage-Backed Securities

    24.0%   

Asset-Backed Securities

    15.9%   

Municipal Bonds & Notes

    3.7%   

Short-Term Instruments

    2.4%   

Other

    7.2%   
   

% of Investments, at value as of 07/31/2016. Financial derivative instruments, if any, are excluded.

Fund Information (as of July 31, 2016)(1)

 

Market Price

    $15.43   

NAV

    $14.28   

Premium/(Discount) to NAV

    8.05%   

Market Price Distribution Yield(2)

    8.75%   

NAV Distribution Yield(2)

    9.45%   

Total Effective Leverage(3)

    25%   
 

 

Average Annual Total Return(1) for the period ended July 31, 2016  
    1 Year     5 Year     10 Year     Commencement
of Operations
(12/21/01)
 
Market Price     24.21%        10.09%        11.75%        11.64%   
NAV     6.78%        11.08%        12.56%        11.90%   

 

All Fund returns are net of fees and expenses.

 

(1) 

Performance quoted represents past performance. Past performance is not a guarantee or a reliable indicator of future results. Current performance may be lower or higher than performance shown. Investment return and the principal value of an investment will fluctuate. Total return, market price, NAV, market price distribution yield, and NAV distribution yield will fluctuate with changes in market conditions. For performance current to the most recent month-end, visit www.pimco.com or call (844) 33-PIMCO.

 

(2) 

Distribution yields are not performance and are calculated by annualizing the most recent distribution per share and dividing by the NAV or Market Price, as applicable, as of the reported date. Distributions may be comprised of ordinary income, net capital gains, and/or a return of capital (ROC) of your investment in the Fund. Because the distribution rate may include a ROC, it should not be confused with yield or income. If the Fund estimates that a portion of its distribution may be comprised of amounts from sources other than net investment income, the Fund will notify shareholders of the estimated composition of such distribution through a Section 19 Notice. Please refer to the most recent Section 19 Notice, if applicable, for additional information regarding the composition of distributions. Please visit www.pimco.com for most recent Section 19 Notice, if applicable. Final determination of a distribution’s tax character will be made on Form 1099 DIV sent to shareholders each January.

 

(3) 

Represents total effective leverage outstanding, as a percentage of total managed assets. Total effective leverage consists of preferred shares, reverse repurchase agreements and other borrowings, credit default swap notional and floating rate notes issued in tender option bond transactions, as applicable (collectively “Total Effective Leverage”). The Fund may engage in other transactions not included in Total Effective Leverage disclosed above that may give rise to a form of leverage, including certain derivative transactions. For the purpose of calculating Total Effective Leverage outstanding as a percentage of total managed assets, total managed assets refer to total assets (including assets attributable to Total Effective Leverage that may be outstanding) minus accrued liabilities (other than liabilities representing Total Effective Leverage).

 

Investment Objective and Strategy Overview

 

PIMCO Corporate & Income Strategy Fund’s primary investment objective is to seek high current income, with a secondary objective of capital preservation and appreciation.

 

 

Fund Insights at NAV

 

Following are key factors impacting the Fund’s performance during the reporting period:

 

»  

The Fund’s exposure to U.S. interest rates was the primary contributor to performance, as interest rates rallied significantly.

 

»  

The Fund’s allocation to non-agency mortgage-backed securities contributed to returns. The sector continued to benefit from an improving U.S. housing market and limited outstanding supply.

 

»  

The Fund’s exposure to U.S. dollar-denominated Russian quasi-sovereign bonds benefited returns. Spreads on these issues continued to retrace much of the widening that occurred in recent years, as geopolitical tensions in the region eased and investor sentiment improved.

 

»  

The Fund’s allocation to high yield corporate bonds was the primary detractor from performance. The asset class faced headwinds from lower energy prices, financial market volatility and mutual fund withdrawals.

 

»  

Exposure to local and hard currency-denominated Brazilian debt detracted from returns. Brazil was negatively impacted by its slowing economy, high inflation and an ongoing political crisis.

 

10   PIMCO CLOSED-END FUNDS     


PIMCO High Income Fund

 

  Symbol on NYSE - PHK

 

Allocation Breakdown

 

Corporate Bonds & Notes

    56.6%   

Non-Agency Mortgage-Backed Securities

    14.7%   

Asset-Backed Securities

    14.6%   

Municipal Bonds & Notes

    6.9%   

Short-Term Instruments

    2.4%   

Other

    4.8%   
   

% of Investments, at value as of 07/31/2016. Financial derivative instruments, if any, are excluded.

 

Fund Information (as of July 31, 2016)(1)

 

Market Price

    $10.03   

NAV

    $6.63   

Premium/(Discount) to NAV

    51.28%   

Market Price Distribution Yield(2)

    12.38%   

NAV Distribution Yield(2)

    18.73%   

Total Effective Leverage(3)

    26%   
 

 

Average Annual Total Return(1) for the period ended July 31, 2016  
    1 Year     5 Year     10 Year     Commencement
of Operations
(04/30/03)
 
Market Price     19.92%        8.63%        10.80%        11.01%   
NAV     8.68%        13.11%        11.29%        11.34%   

 

All Fund returns are net of fees and expenses.

 

(1)

Performance quoted represents past performance. Past performance is not a guarantee or a reliable indicator of future results. Current performance may be lower or higher than performance shown. Investment return and the principal value of an investment will fluctuate. Total return, market price, NAV, market price distribution yield, and NAV distribution yield will fluctuate with changes in market conditions. For performance current to the most recent month-end, visit www.pimco.com or call (844) 33-PIMCO.

 

(2)

Distribution yields are not performance and are calculated by annualizing the most recent distribution per share and dividing by the NAV or Market Price, as applicable, as of the reported date. Distributions may be comprised of ordinary income, net capital gains, and/or a return of capital (ROC) of your investment in the Fund. Because the distribution rate may include a ROC, it should not be confused with yield or income. If the Fund estimates that a portion of its distribution may be comprised of amounts from sources other than net investment income, the Fund will notify shareholders of the estimated composition of such distribution through a Section 19 Notice. Please refer to the most recent Section 19 Notice, if applicable, for additional information regarding the composition of distributions. Please visit www.pimco.com for most recent Section 19 Notice, if applicable. Final determination of a distribution’s tax character will be made on Form 1099 DIV sent to shareholders each January.

 

(3)

Represents total effective leverage outstanding, as a percentage of total managed assets. Total effective leverage consists of preferred shares, reverse repurchase agreements and other borrowings, credit default swap notional and floating rate notes issued in tender option bond transactions, as applicable (collectively “Total Effective Leverage”). The Fund may engage in other transactions not included in Total Effective Leverage disclosed above that may give rise to a form of leverage, including certain derivative transactions. For the purpose of calculating Total Effective Leverage outstanding as a percentage of total managed assets, total managed assets refer to total assets (including assets attributable to Total Effective Leverage that may be outstanding) minus accrued liabilities (other than liabilities representing Total Effective Leverage).

 

Investment Objective and Strategy Overview

 

PIMCO High Income Fund’s primary investment objective is to seek high current income, with capital appreciation as a secondary objective.

 

 

Fund Insights at NAV

 

Following are key factors impacting the Fund’s performance during the reporting period:

 

»  

The Fund’s exposure to U.S. interest rates was the primary contributor to performance, as interest rates rallied significantly.

 

»  

The Fund’s allocation to non-agency mortgage-backed securities contributed to returns. The sector continued to benefit from an improving U.S. housing market and limited outstanding supply.

 

»  

The Fund’s exposure to U.S. dollar-denominated Russian quasi-sovereign bonds benefited returns. Spreads on these issues continued to retrace much of the widening that occurred in recent years, as geopolitical tensions in the region eased and investor sentiment improved.

 

»  

The Fund’s allocation to high yield corporate bonds was the primary detractor from performance. The asset class faced headwinds from lower energy prices, financial market volatility and mutual fund withdrawals.

 

»  

Exposure to local and hard currency-denominated Brazilian debt detracted from returns. Brazil was negatively impacted by its slowing economy, high inflation and an ongoing political crisis.

 

»  

The Fund’s use of paired swap transactions during the reporting period supported the Fund’s monthly distributions, but generally resulted in a decline in the Fund’s net asset value.

 

  ANNUAL REPORT   JULY 31, 2016   11


PIMCO Income Strategy Fund

 

  Symbol on NYSE - PFL

 

Allocation Breakdown

 

Corporate Bonds & Notes

    49.3%   

Asset-Backed Securities

    23.9%   

Non-Agency Mortgage-Backed Securities

    14.3%   

Municipal Bonds & Notes

    4.5%   

Short-Term Instruments

    1.8%   

Other

    6.2%   
   

% of Investments, at value as of 07/31/2016. Financial derivative instruments, if any, are excluded.

 

Fund Information (as of July 31, 2016)(1)

 

Market Price

    $10.48   

NAV

    $10.53   

Premium/(Discount) to NAV

    (0.47)%   

Market Price Distribution Yield(2)

    10.31%   

NAV Distribution Yield(2)

    10.26%   

Total Effective Leverage(3)

    23%   
 

 

Average Annual Total Return(1) for the period ended July 31, 2016  
    1 Year     5 Year     10 Year     Commencement
of Operations
(08/29/03)
 
Market Price     12.41%        7.32%        5.31%        5.67%   
NAV     1.91%        9.24%        6.08%        6.17%   

 

All Fund returns are net of fees and expenses.

 

(1) 

Performance quoted represents past performance. Past performance is not a guarantee or a reliable indicator of future results. Current performance may be lower or higher than performance shown. Investment return and the principal value of an investment will fluctuate. Total return, market price, NAV, market price distribution yield, and NAV distribution yield will fluctuate with changes in market conditions. For performance current to the most recent month-end, visit www.pimco.com or call (844) 33-PIMCO.

 

(2) 

Distribution yields are not performance and are calculated by annualizing the most recent distribution per share and dividing by the NAV or Market Price, as applicable, as of the reported date. Distributions may be comprised of ordinary income, net capital gains, and/or a return of capital (ROC) of your investment in the Fund. Because the distribution rate may include a ROC, it should not be confused with yield or income. If the Fund estimates that a portion of its distribution may be comprised of amounts from sources other than net investment income, the Fund will notify shareholders of the estimated composition of such distribution through a Section 19 Notice. Please refer to the most recent Section 19 Notice, if applicable, for additional information regarding the composition of distributions. Please visit www.pimco.com for most recent Section 19 Notice, if applicable. Final determination of a distribution’s tax character will be made on Form 1099 DIV sent to shareholders each January.

 

(3) 

Represents total effective leverage outstanding, as a percentage of total managed assets. Total effective leverage consists of preferred shares, reverse repurchase agreements and other borrowings, credit default swap notional and floating rate notes issued in tender option bond transactions, as applicable (collectively “Total Effective Leverage”). The Fund may engage in other transactions not included in Total Effective Leverage disclosed above that may give rise to a form of leverage, including certain derivative transactions. For the purpose of calculating Total Effective Leverage outstanding as a percentage of total managed assets, total managed assets refer to total assets (including assets attributable to Total Effective Leverage that may be outstanding) minus accrued liabilities (other than liabilities representing Total Effective Leverage).

 

Investment Objective and Strategy Overview

 

PIMCO Income Strategy Fund’s primary investment objective is to seek high current income, consistent with the preservation of capital.

 

 

Fund Insights at NAV

 

Following are key factors impacting the Fund’s performance during the reporting period:

 

»  

The Fund’s exposure to U.S. interest rates was the primary contributor to performance, as interest rates rallied significantly.

 

»  

The Fund’s allocation to non-agency mortgage-backed securities contributed to returns. The sector continued to benefit from an improving U.S. housing market and limited outstanding supply.

 

»  

The Fund’s exposure to U.S. dollar-denominated Russian quasi-sovereign bonds benefited returns. Spreads on these issues continued to retrace much of the widening that occurred in recent years, as geopolitical tensions in the region eased and investor sentiment improved.

 

»  

The Fund’s allocation to high yield corporate bonds was the primary detractor from performance. The asset class faced headwinds from lower energy prices, financial market volatility and mutual fund withdrawals.

 

»  

Exposure to local and hard currency-denominated Brazilian debt detracted from returns. Brazil was negatively impacted by its slowing economy, high inflation and an ongoing political crisis.

 

12   PIMCO CLOSED-END FUNDS     


PIMCO Income Strategy Fund II

 

  Symbol on NYSE - PFN

 

Allocation Breakdown

 

Corporate Bonds & Notes

    45.4%   

Non-Agency Mortgage-Backed Securities

    21.8%   

Asset-Backed Securities

    16.3%   

Municipal Bonds & Notes

    7.0%   

Short-Term Instruments

    2.6%   

Other

    6.9%   
   

% of Investments, at value as of 07/31/2016. Financial derivative instruments, if any, are excluded.

 

Fund Information (as of July 31, 2016)(1)

 

Market Price

    $9.39   

NAV

    $9.42   

Premium/(Discount) to NAV

    (0.32)%   

Market Price Distribution Yield(2)

    10.22%   

NAV Distribution Yield(2)

    10.19%   

Total Effective Leverage(3)

    25%   
 

 

Average Annual Total Return(1) for the period ended July 31, 2016  
    1 Year     5 Year     10 Year     Commencement
of Operations
(10/29/04)
 
Market Price     11.92%        9.32%        4.72%        4.59%   
NAV     2.34%        9.78%        4.81%        5.01%   

 

All Fund returns are net of fees and expenses.

 

(1) 

Performance quoted represents past performance. Past performance is not a guarantee or a reliable indicator of future results. Current performance may be lower or higher than performance shown. Investment return and the principal value of an investment will fluctuate. Total return, market price, NAV, market price distribution yield, and NAV distribution yield will fluctuate with changes in market conditions. For performance current to the most recent month-end, visit www.pimco.com or call (844) 33-PIMCO.

 

(2) 

Distribution yields are not performance and are calculated by annualizing the most recent distribution per share and dividing by the NAV or Market Price, as applicable, as of the reported date. Distributions may be comprised of ordinary income, net capital gains, and/or a return of capital (ROC) of your investment in the Fund. Because the distribution rate may include a ROC, it should not be confused with yield or income. If the Fund estimates that a portion of its distribution may be comprised of amounts from sources other than net investment income, the Fund will notify shareholders of the estimated composition of such distribution through a Section 19 Notice. Please refer to the most recent Section 19 Notice, if applicable, for additional information regarding the composition of distributions. Please visit www.pimco.com for most recent Section 19 Notice, if applicable. Final determination of a distribution’s tax character will be made on Form 1099 DIV sent to shareholders each January.

 

(3) 

Represents total effective leverage outstanding, as a percentage of total managed assets. Total effective leverage consists of preferred shares, reverse repurchase agreements and other borrowings, credit default swap notional and floating rate notes issued in tender option bond transactions, as applicable (collectively “Total Effective Leverage”). The Fund may engage in other transactions not included in Total Effective Leverage disclosed above that may give rise to a form of leverage, including certain derivative transactions. For the purpose of calculating Total Effective Leverage outstanding as a percentage of total managed assets, total managed assets refer to total assets (including assets attributable to Total Effective Leverage that may be outstanding) minus accrued liabilities (other than liabilities representing Total Effective Leverage).

 

Investment Objective and Strategy Overview

 

PIMCO Income Strategy Fund II’s primary investment objective is to seek high current income, consistent with the preservation of capital.

 

 

Fund Insights at NAV

 

Following are key factors impacting the Fund’s performance during the reporting period:

 

»  

The Fund’s exposure to U.S. interest rates was the primary contributor to performance, as interest rates rallied significantly.

 

»  

The Fund’s allocation to non-agency mortgage-backed securities contributed to returns. The sector continued to benefit from an improving U.S. housing market and limited outstanding supply.

 

»  

The Fund’s exposure to U.S. dollar-denominated Russian quasi-sovereign bonds benefited returns. Spreads on these issues continued to retrace much of the widening that occurred in recent years, as geopolitical tensions in the region eased and investor sentiment improved.

 

»  

The Fund’s allocation to high yield corporate bonds was the primary detractor from performance. The asset class faced headwinds from lower energy prices, financial market volatility and mutual fund withdrawals.

 

»  

Exposure to local and hard currency-denominated Brazilian debt detracted from returns. Brazil was negatively impacted by its slowing economy, high inflation and an ongoing political crisis.

 

  ANNUAL REPORT   JULY 31, 2016   13


Financial Highlights

 

              
Investment Operations
          Less Distributions to Common Shareholders(b)  
                                                       
    Net Asset Value
Beginning of
Year or
Period
    Net  Investment
Income(a)
    Net Realized/
Unrealized
Gain (Loss)
    Distributions on
Preferred Shares
from Net
Investment
Income(b)
    Distributions on
Preferred Shares
from Realized
Gains(b)
    Total            From Net
Investment
Income
    From Net
Realized
Capital Gains
    Tax Basis
Return of
Capital
    Total  

PIMCO Corporate & Income Opportunity Fund

                     

07/31/2016

  $ 14.23      $ 1.30      $ (0.65   $ (0.02   $ 0.00      $ 0.63              $ (1.59   $ 0.00      $ 0.00      $ (1.59

12/01/2014 - 07/31/2015(f)

    15.41        0.68        (0.33     (0.00 )^      0.00        0.35                (1.69     0.00        0.00        (1.69 )(i) 

11/30/2014

    16.62        1.14        1.06        (0.00 )^      (0.01     2.19                (1.56     (1.84     0.00        (3.40

11/30/2013

    17.58        1.43        0.19        (0.00 )^      (0.00 )^      1.62                (1.82     (0.76     0.00        (2.58

11/30/2012

    14.22        1.68        3.87        (0.01     0.00        5.54                (2.18     0.00        0.00        (2.18

11/30/2011

    16.29        1.88        (1.87     (0.01     0.00        0.00                (2.07     0.00        0.00        (2.07

PIMCO Corporate & Income Strategy Fund

                     

07/31/2016

  $   14.75      $   1.24      $   (0.33   $   (0.01   $ 0.00      $ 0.90              $ (1.37   $ 0.00      $ 0.00      $ (1.37

11/01/2014 - 07/31/2015(g)

    15.60        0.73        (0.21     (0.00 )^      0.00        0.52                (1.37     0.00        0.00        (1.37 )(i) 

10/31/2014

    16.04        0.99        0.87        (0.00 )^        (0.00 )^      1.86                (1.35       (0.95     0.00        (2.30

10/31/2013

    15.90        1.28        0.44        (0.01     0.00        1.71                (1.57     0.00        0.00        (1.57

10/31/2012

    13.67        1.57        2.47        (0.01     0.00        4.03                (1.80     0.00        0.00        (1.80

10/31/2011

    15.51        1.72        (1.87     (0.01     0.00          (0.16               (1.68     0.00        0.00        (1.68

PIMCO High Income Fund

                     

07/31/2016

  $ 7.37      $ 0.74      $ (0.22   $ (0.00 )^    $ 0.00      $ 0.52              $ (1.18   $ 0.00      $ (0.08   $   (1.26

04/01/2015 - 07/31/2015(h)

    7.59        0.21        0.06        (0.00 )^      0.00        0.27                (0.33     0.00        (0.16     (0.49 )(i) 

03/31/2015

    8.23        0.94        (0.12     (0.00 )^      0.00        0.82                (1.46     0.00        0.00        (1.46

03/31/2014

    8.65        0.84        0.20        (0.00 )^      0.00        1.04                (1.35     0.00          (0.11     (1.46

03/31/2013

    7.87        0.81        1.43        (0.00 )^      0.00        2.24                (1.42     0.00        (0.04     (1.46

03/31/2012

    9.42        0.96        (1.05     (0.00 )^      0.00        (0.09             (1.39     0.00        (0.07     (1.46

PIMCO Income Strategy Fund

                     

07/31/2016

  $ 11.46      $ 0.88      $ (0.70   $ (0.03   $ 0.00      $ 0.15              $ (1.08   $ 0.00      $ 0.00      $ (1.08

07/31/2015

    12.15        0.79        (0.34     (0.03     0.00        0.42                (1.22     0.00        0.00        (1.22

07/31/2014

    11.70        0.79        0.78        (0.04     0.00        1.53                (1.08     0.00        0.00        (1.08

07/31/2013

    11.35        0.92        0.87        (0.04     0.00        1.75                (1.40     0.00        0.00        (1.40

07/31/2012

    11.39        1.16        (0.04     (0.05     0.00        1.07                (1.11     0.00        0.00        (1.11

PIMCO Income Strategy Fund II

                     

07/31/2016

  $ 10.27      $ 0.87      $ (0.67   $ (0.02   $ 0.00      $ 0.18              $ (1.03   $ 0.00      $ 0.00      $ (1.03

07/31/2015

    10.88        0.70        (0.29     (0.03     0.00        0.38                (1.11     0.00        0.00        (1.11

07/31/2014

    10.29        0.72        0.87        (0.04     0.00        1.55                (0.96     0.00        0.00        (0.96

07/31/2013

    10.23        0.88        0.68        (0.04     0.00        1.52                (1.46     0.00        0.00        (1.46

07/31/2012

    10.04        1.03        0.03        (0.04     0.00        1.02                (0.83     0.00        0.00        (0.83

 

* Annualized
^ Reflects an amount rounding to less than one cent.
(a) Per share amounts based on average number of common shares outstanding during the year or period.
(b) The tax characterization of distributions is determined in accordance with federal income tax regulations. See Note 2(c) in the Notes to Financial Statements for more information.
(c) Total investment return is calculated assuming a purchase of a common share at the market price on the first day and a sale of a common share at the market price on the last day of each year or period reported. Dividends and distributions, if any, are assumed, for purposes of this calculation, to be reinvested at prices obtained under the Funds’ dividend reinvestment plan. Total investment return does not reflect brokerage commissions in connection with the purchase or sale of Fund shares.
(d) Calculated on the basis of income and expenses applicable to both common and preferred shares relative to the average net assets of common shareholders. The expense ratio and net investment income do not reflect the effects of dividend payments to preferred shareholders.
(e) Interest expense primarily relates to participation in borrowing and financing transactions. See Note 5 in the Notes to Financial Statements for more information.
(f)

Fiscal year end changed from November 30th to July 31st.

(g)

Fiscal year end changed from October 31st to July 31st.

(h)

Fiscal year end changed from March 31st to July 31st.

(i) Total distributions for the period ended July 31, 2015 may be lower than prior fiscal years due to fiscal year end changes resulting in a reduction of the amount of days in the period ended July 31, 2015.
(j) See Note 12 in the Notes to Financial Statements.

 

14   PIMCO CLOSED-END FUNDS        See Accompanying Notes   


Preferred Share
Transactions
          Common Share           Ratios/Supplemental Data  
                                          Ratios to Average Net Assets              
Increase Resulting
from Tender  and
Repurchase
of Auction-Rate
Preferred Shares(j)
           Net Assets
Value End of
Year or
Period
    Market Price
End of Year
or Period
    Total
Investment
Return(c)
           Net Assets
Applicable
to Common
Shareholders
(000s)
    Expenses(d)(e)     Expenses
Excluding
Interest
Expense(d)
    Net  Investment
Income(d)
    Preferred
Shares Asset
Coverage
Per Share
    Portfolio
Turnover
Rate
 
                     
                     
$ 0.00              $ 13.27      $ 14.75        16.09           $ 946,843        0.89     0.85     9.93   $ 124,468        45
  0.16                14.23        14.31        (13.61             1,006,484        0.91     0.90     7.01     130,743        34   
  0.00                15.41        18.50        26.04                1,082,000        0.91        0.91        7.36        108,229        44   
  0.00                16.62        17.75        (0.15             1,149,779        0.91        0.91        8.49        113,443        118   
  0.00                17.58        20.37        36.86                  1,205,090        1.05        0.93        10.63        117,697        29   
  0.00                14.22        16.78        9.24                967,195        1.09        0.94        11.76        99,399        53   
                     
                     
$   0.51              $   14.28      $   15.43        24.21           $ 553,569        1.10     1.02     8.91   $   274,223        43
  0.00                14.75        13.71        (7.12             570,122        1.07     1.07     6.51     109,336        40   
  0.00                15.60        16.18        8.84                599,980        1.09        1.09        6.32        113,753        48   
  0.00                16.04        17.15        3.48                612,225        1.10        1.09        7.91        115,565        108   
  0.00                15.90        18.17        33.21                603,483        1.32        1.14        11.03        114,270        28   
  0.00                13.67        15.27        4.78                515,041        1.30        1.16        11.56        101,188        32   
                     
$ 0.26              $ 6.63      $ 10.03        19.92           $ 841,102        1.08     0.95     11.20   $ 231,185        42
  0.00                7.37        9.71        (18.40             925,598        1.05     1.03     8.14     104,245        8   
  0.00                7.59        12.48        12.30                949,880        1.18        1.02        11.53        106,324        58   
  0.00                8.23        12.56        15.51                1,021,120        1.14        1.03        10.14        112,424        159   
  0.00                8.65        12.35        8.53                1,063,863        1.06        1.05        10.00        116,082        70   
  0.00                7.87        12.84        3.28                960,496        1.16        1.07        11.76        107,233        24   
                     
$ 0.00              $ 10.53      $ 10.48        12.41           $ 266,347        1.17     1.13     8.49   $ 154,837        38
  0.11                11.46        10.39        (2.62             289,909        1.30        1.25        6.67        166,328        67   
  0.00                12.15        11.87        9.95                306,475        1.19        1.18        6.71        122,004        113   
  0.00                11.70        11.83        5.69                294,017        1.24        1.21        7.59        118,058        63   
  0.00                11.35        11.52        12.02                283,285        1.85        1.65        10.93        114,654        23   
                     
                     
$ 0.00              $ 9.42      $ 9.39        11.92           $ 556,840        1.14     1.07     9.25   $ 175,544        38
  0.12                10.27        9.41        (0.12             606,974        1.16        1.13        6.58        189,105        63   
  0.00                10.88        10.50        12.39                642,119        1.14        1.14        6.79        124,695        119   
  0.00                10.29        10.24        6.80                605,843        1.16        1.14        8.20        119,060        71   
  0.00                10.23        10.96        16.33                597,683        1.48        1.37        10.87        117,792        17   

 

  ANNUAL REPORT   JULY 31, 2016   15


Statements of Assets and Liabilities

 

July 31, 2016

 

(Amounts in thousands, except per share amounts)   PIMCO
Corporate &
Income
Opportunity
Fund
    PIMCO
Corporate &
Income
Strategy
Fund
    PIMCO High
Income Fund
    PIMCO Income
Strategy
Fund
    PIMCO Income
Strategy
Fund II
 

Assets:

         

Investments, at value

                                       

Investments in securities*

  $ 1,271,246      $ 687,766      $ 1,084,625      $ 329,757      $ 694,980   

Financial Derivative Instruments

                                       

Exchange-traded or centrally cleared

    5,793        3,306        10,715        1,734        4,043   

Over the counter

    2,555        1,482        3,241        713        1,444   

Cash

    5        1        0        1        0   

Deposits with counterparty

    11,274        8,639        21,470        5,299        10,474   

Foreign currency, at value

    608        67        256        330        552   

Receivable for investments sold

    254        18,116        121        5,637        13,516   

Interest and/or dividends receivable

    11,635        6,132        12,872        2,815        6,179   

Other assets

    6        3        40        2        5   

Total Assets

    1,303,376        725,512        1,133,340        346,288        731,193   

Liabilities:

         

Borrowings & Other Financing Transactions

                                       

Payable for reverse repurchase agreements

  $ 24,805      $ 91,401      $ 145,880      $ 16,112      $ 54,148   

Financial Derivative Instruments

                                       

Exchange-traded or centrally cleared

    6,819        3,315        11,990        1,903        4,549   

Over the counter

    57,062        2,910        7,383        1,854        4,084   

Payable for investments purchased

    19,315        12,022        7,628        5,668        12,292   

Deposits from counterparty

    460        1,820        3,425        430        1,221   

Distributions payable to common shareholders

    9,274        4,362        13,122        2,277        4,728   

Distributions payable to preferred shareholders

    26        5        9        10        21   

Overdraft due to custodian

    0        0        23        0        0   

Accrued management fees

    647        413        600        239        484   

Other liabilities

    175        170        203        173        376   

Total Liabilities

    118,583        116,418        190,263        28,666        81,903   

Preferred Shares ($0.00001 par value and $25,000 liquidation preference per share)

    237,950        55,525        101,975        51,275        92,450   

Net Assets Applicable to Common Shareholders

  $ 946,843      $ 553,569      $ 841,102      $ 266,347      $ 556,840   

Net Assets Applicable to Common Shareholders Consist of:

         

Common Shares:

                                       

Par value ($0.00001 per share)

  $ 1      $ 0      $ 1      $ 0      $ 1   

Paid in capital in excess of par

    1,034,727        571,150        1,494,231        419,478        950,673   

Undistributed (overdistributed) net investment income

    11,608        8,897        (16,843     1,149        6,597   

Accumulated undistributed net realized (loss)

    (222,772     (80,679     (661,802       (182,275       (468,738

Net unrealized appreciation

    123,279        54,201        25,515        27,995        68,307   

Net Assets Applicable to Common Shareholders

  $ 946,843      $ 553,569      $ 841,102      $ 266,347      $ 556,840   

Net Asset Value Per Common Share

  $ 13.27      $ 14.28      $ 6.63      $ 10.53      $ 9.42   

Common shares issued and outstanding

    71,339        38,775        126,835        25,300        59,103   

Preferred shares issued and outstanding

    10        2        4        2        4   

Cost of investments in securities

  $   1,283,360      $   709,296      $   1,114,964      $ 340,091      $ 717,786   

Cost of foreign currency held

  $ 645      $ 67      $ 259      $ 348      $ 551   

Cost or premiums of financial derivative instruments, net

  $ (55,576   $ (1,166   $ (3,020   $ (801   $ (1,663

* Includes repurchase agreements of:

  $ 63,979      $ 13,671      $ 16,067      $ 3,824      $ 10,863   

 

 

A zero balance may reflect actual amounts rounding to less than one thousand.

 

16   PIMCO CLOSED-END FUNDS        See Accompanying Notes   


Statements of Operations

 

Year Ended July 31, 2016                              
(Amounts in thousands)   PIMCO
Corporate &
Income
Opportunity
Fund
    PIMCO
Corporate &
Income
Strategy
Fund
    PIMCO High
Income Fund
    PIMCO Income
Strategy
Fund
    PIMCO Income
Strategy
Fund II
 

Investment Income:

         

Interest, net of foreign taxes*

  $ 98,049      $ 52,042      $ 101,646      $ 24,487      $ 55,445   

Dividends

    2,550        1,789        1,164        930        2,013   

Total Income

    100,599        53,831        102,810        25,417        57,458   

Expenses:

         

Management fees

    7,573        5,092        7,573        2,818        5,712   

Auction agent fees and commissions

    44        36        52        57        36   

Trustee fees and related expenses

    218        126        202        61        119   

Interest expense

    343        405        1,052        111        373   

Auction rate preferred shares related expenses

    136        196        201        55        52   

Miscellaneous expense

    31        10        15        3        3   

Total Expenses

    8,345        5,865        9,095        3,105        6,295   

Net Investment Income

    92,254        47,966        93,715        22,312        51,163   

Net Realized Gain (Loss):

         

Investments in securities

    10,111        4,508        5,172        61        1,695   

Exchange-traded or centrally cleared financial derivative instruments

      (117,740       (55,433     (2,606     (30,634     (74,148

Over the counter financial derivative instruments

    18,322        6,639        39,795        3,182        5,268   

Foreign currency

    (61     (234     (317     (83     222   

Net Realized Gain (Loss)

    (89,368     (44,520     42,044          (27,474       (66,963

Net Change in Unrealized Appreciation (Depreciation):

         

Investments in securities

    (54,576     (42,359     (68,804     (18,124     (36,894

Exchange-traded or centrally cleared financial derivative instruments

    99,803        54,264        (14,085     27,892        66,201   

Over the counter financial derivative instruments

    (1,450     35        (20,978     (42     (1,357

Foreign currency assets and liabilities

    137        (46     (95     (6     27   

Net Change in Unrealized Appreciation (Depreciation)

    43,914        11,894          (103,962     9,720        27,977   

Net Increase in Net Assets Resulting from Operations

  $ 46,800      $ 15,340      $ 31,797      $ 4,558      $ 12,177   

Distributions on Preferred Shares from Net Investment Income

  $ (1,253   $ (275   $ (528   $ (797   $ (1,437

Net Increase in Net Assets Applicable to Common Shareholders Resulting from Operations

  $ 45,547      $ 15,065      $ 31,269      $ 3,761      $ 10,740   

* Foreign tax withholdings

  $ 0      $ 2      $ 6      $ 0      $ 0   

 

 

A zero balance may reflect actual amounts rounding to less than one thousand.

 

  ANNUAL REPORT   JULY 31, 2016   17


Statements of Changes in Net Assets

 

    PIMCO
Corporate & Income Opportunity Fund
    PIMCO
Corporate & Income Strategy Fund
 
(Amounts in thousands)   Year Ended
July 31, 2016
    Period from
December 1, 2014 to
July 31, 2015(a)
    Year Ended
November 30, 2014
    Year Ended
July 31, 2016
    Period from
November 1, 2014 to
July 31,  2015(b)
    Year Ended
October 31, 2014
 

(Decrease) in Net Assets from:

           

Operations:

           

Net investment income

  $ 92,254      $ 47,744      $ 79,920      $ 47,966      $ 28,166      $ 37,968   

Net realized gain (loss)

    (89,368     (4,996     28,093        (44,520     3,953        17,611   

Net change in unrealized appreciation (depreciation)

    43,914        (18,369     42,688        11,894        (12,132     15,590   

Net increase in net assets resulting from operations

    46,800        24,379        150,701        15,340        19,987        71,169   

Distributions on preferred shares from net investment income(d)

    (1,253     (313     (125     (275     (160     (41

Distributions on preferred shares from net realized gains(d)

    0        0        (296     0        0        (122

Net Increase in Net Assets Applicable to Common Shareholders Resulting from Operations

    45,547        24,066        150,280        15,065        19,827        71,006   

Distributions to Common Shareholders:

           

From net investment income

    (112,955     (119,032     (109,083     (53,009     (52,644     (51,774

From net realized capital gains

    0        0        (127,359     0        0        (36,294

Tax basis return of capital

    0        0        0        0        0        0   

Total Distributions to Common Shareholders(d)

    (112,955     (119,032 )(e)      (236,442     (53,009     (52,644 )(e)      (88,068

Preferred Share Transactions:

           

Net Increase resulting from tender and repurchase of Auction-Rate Preferred Shares***

    0        11,317        0        19,858        0        0   

Common Share Transactions**:

           

Issued as reinvestment of distributions

    7,767        8,133        18,383        1,533        2,959        4,817   

Total (Decrease) in Net Assets

    (59,641     (75,516     (67,779     (16,553     (29,858     (12,245

Net Assets Applicable to Common Shareholders:

           

Beginning of year or period

      1,006,484        1,082,000        1,149,779        570,122        599,980        612,225   

End of year or period*

  $ 946,843      $   1,006,484      $   1,082,000      $   553,569      $   570,122      $   599,980   

* Including undistributed (overdistributed) net investment income of:

  $ 11,608      $ (8,639   $ 36,794      $ 8,897      $ (4,556   $ 11,115   

** Common Share Transactions:

           

Shares issued as reinvestment of distributions

    583        530        1,058        110        197        303   

 

 

A zero balance may reflect actual amounts rounding to less than one thousand.

(a) 

Fiscal Year end changed from November 30th to July 31st.

(b) 

Fiscal Year end changed from October 31st to July 31st.

(c) 

Fiscal Year end changed from March 31st to July 31st.

(d) 

The tax characterization of distributions is determined in accordance with federal income tax regulations. See Note 2(c) in the Notes to Financial Statements for more information.

(e)

Total distributions for the period ended July 31, 2015 may be lower than prior fiscal years due to fiscal year end changes resulting in a reduction of the amount of days in the period ended July 31, 2015.

*** See Note 12 in the Notes to Financial Statements.

 

18   PIMCO CLOSED-END FUNDS        See Accompanying Notes   


 

PIMCO
High Income Fund
    PIMCO
Income Strategy Fund
    PIMCO
Income Strategy Fund II
 
Year Ended
July 31, 2016
    Period from
April 1, 2015 to
July 31,  2015(c)
    Year Ended
March 31, 2015
    Year Ended
July 31, 2016
    Year Ended
July 31, 2015
    Year Ended
July 31, 2016
    Year Ended
July 31, 2015
 
           
           
$ 93,715      $ 26,276      $ 117,468      $ 22,312      $ 19,896      $ 51,163      $ 41,101   
  42,044        (29,322     (29,862     (27,474     (3,515     (66,963     (3,754
  (103,962     35,957        10,866        9,720        (5,066     27,977        (12,764
  31,797        32,911        98,472        4,558        11,315        12,177        24,583   
  (528     (130     (356     (797     (815     (1,437     (1,538
  0        0        0        0        0        0        0   

 

31,269

  

    32,781        98,116        3,761        10,500        10,740        23,045   
           
    (149,487     (41,672     (182,280     (27,324     (30,835     (60,876     (65,838
  0        0        0        0        0        0        0   
  (9,562     (19,452     0        0        0        0        0   
  (159,049     (61,124 )(e)      (182,280     (27,324     (30,835     (60,876     (65,838
           
 
 
    
32,304
 
  
    0        0        0        2,770        0        6,855   
           
  10,980        4,061        12,924        1        999        2        793   
  (84,496     (24,282     (71,240     (23,562     (16,566     (50,134     (35,145
           
  925,598        949,880          1,021,120        289,909        306,475          606,974        642,119   
$ 841,102      $   925,598      $ 949,880      $   266,347      $   289,909      $ 556,840      $   606,974   

$

(16,843

  $ (39,740   $ (32,887   $ 1,149      $ (1,974   $ 6,597      $ (2,589
           
  1,307        374        1,088        0        86        0        79   

 

  ANNUAL REPORT   JULY 31, 2016   19


Schedule of Investments PIMCO Corporate & Income Opportunity Fund

 

        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 
INVESTMENTS IN SECURITIES 134.3%   
BANK LOAN OBLIGATIONS 2.3%   

Fortescue Metals Group Ltd.

  

4.250% due 06/30/2019

  $     2,863      $     2,810   

iHeartCommunications, Inc.

  

7.246% due 01/30/2019

      8,198          6,389   

Sequa Corp.

  

5.250% due 06/19/2017

      8,748          7,015   

Westmoreland Coal Co.

  

7.500% due 12/16/2020

      7,364          5,670   
       

 

 

 

Total Bank Loan Obligations (Cost $25,559)

      21,884   
       

 

 

 
       
CORPORATE BONDS & NOTES 53.1%   
BANKING & FINANCE 25.5%   

AGFC Capital Trust

  

6.000% due 01/15/2067

      1,800          990   

Ally Financial, Inc.

  

8.000% due 11/01/2031

      4,067          4,973   

Banco Bilbao Vizcaya Argentaria S.A.

  

6.750% due 02/18/2020 (f)

  EUR     1,800          1,836   

Banco do Brasil S.A.

  

6.250% due 04/15/2024 (f)

  $     4,200          2,581   

9.000% due 06/18/2024 (f)

      9,298          7,536   

Banco Espirito Santo S.A.

  

2.625% due 05/08/2017 ^

  EUR     500          159   

4.000% due 01/21/2019 ^

      5,000          1,593   

4.750% due 01/15/2018 ^

      1,000          319   

Banco Santander S.A.

  

6.250% due 09/11/2021 (f)

      400          400   

Barclays Bank PLC

  

14.000% due 06/15/2019 (f)

  GBP     12,050          20,114   

Blackstone CQP Holdco LP

  

9.296% due 03/19/2019

  $     15,657          15,794   

BNP Paribas S.A.

  

7.375% due 08/19/2025 (f)

      11,000          11,234   

Cantor Fitzgerald LP

  

6.500% due 06/17/2022

      10,000          10,546   

Co-operative Group Holdings Ltd.

  

7.500% due 07/08/2026

  GBP     6,200          9,015   

Communications Sales & Leasing, Inc.

  

8.250% due 10/15/2023

  $     5,300          5,439   

Credit Agricole S.A.

  

7.500% due 06/23/2026 (f)

  GBP     300          382   

7.875% due 01/23/2024 (f)

  $     13,900          13,831   

Credit Suisse Group AG

  

7.500% due 12/11/2023 (f)

      2,936          3,050   

Flagstar Bancorp, Inc.

  

6.125% due 07/15/2021

      6,000          6,160   

GSPA Monetization Trust

  

6.422% due 10/09/2029 (i)

      9,108          10,421   

HSBC Holdings PLC

  

5.250% due 09/16/2022 (f)

  EUR     585          627   

6.000% due 09/29/2023 (f)

      5,477          6,254   

Jefferies Finance LLC

  

7.375% due 04/01/2020

  $     300          282   

7.500% due 04/15/2021

      591          546   

Jefferies LoanCore LLC

  

6.875% due 06/01/2020

      10,500          9,424   

Lloyds Bank PLC

  

12.000% due 12/16/2024 (f)

      5,150          7,058   

Lloyds Banking Group PLC

  

7.625% due 06/27/2023 (f)

  GBP     6,298          8,370   

7.875% due 06/27/2029 (f)

      400          529   

MPT Operating Partnership LP

  

5.250% due 08/01/2026

  $     2,203          2,321   

National Bank of Greece S.A.

  

3.875% due 10/07/2016

  EUR     2,550          2,851   

Nationwide Building Society

  

10.250% (f)

  GBP     21          3,570   
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Navient Corp.

  

5.500% due 01/15/2019

  $     4,950      $     5,105   

5.625% due 08/01/2033

      230          180   

Novo Banco S.A.

  

5.000% due 04/04/2019

  EUR     371          315   

5.000% due 04/23/2019

      152          129   

5.000% due 05/14/2019

      315          268   

5.000% due 05/21/2019

      73          62   

5.000% due 05/23/2019

      213          181   

Omega Healthcare Investors, Inc.

  

4.375% due 08/01/2023

  $     2,600          2,634   

OneMain Financial Holdings LLC

  

6.750% due 12/15/2019

      2,116          2,150   

PHH Corp.

  

6.375% due 08/15/2021

      280          260   

7.375% due 09/01/2019

      1,050          1,071   

Rio Oil Finance Trust

  

9.250% due 07/06/2024

      1,834          1,586   

Royal Bank of Scotland Group PLC

  

7.500% due 08/10/2020 (f)

      6,840          6,669   

8.000% due 08/10/2025 (f)

      9,835          9,798   

Santander UK Group Holdings PLC

  

7.375% due 06/24/2022 (f)

  GBP     7,650          10,031   

Sberbank of Russia Via SB Capital S.A.

  

6.125% due 02/07/2022

  $     500          546   

Springleaf Finance Corp.

  

5.250% due 12/15/2019

      1,680          1,636   

8.250% due 12/15/2020

      6,680          6,931   

Tesco Property Finance PLC

  

5.411% due 07/13/2044

  GBP     8,560          10,839   

6.052% due 10/13/2039

      2,691          3,764   

TIG FinCo PLC

  

8.500% due 03/02/2020

      1,154          1,558   

8.750% due 04/02/2020 (i)

      7,339          7,454   
       

 

 

 
            241,372   
       

 

 

 
       
INDUSTRIALS 21.8%   

Altice Financing S.A.

  

7.500% due 05/15/2026

  $     6,700          6,784   

BMC Software Finance, Inc.

  

8.125% due 07/15/2021

      3,031          2,485   

Boxer Parent Co., Inc. (9.000% Cash or 9.750% PIK)

  

9.000% due 10/15/2019 (c)(i)

      8,226          6,992   

Caesars Entertainment Operating Co., Inc.

  

9.000% due 02/15/2020 ^

      27,145          26,222   

Chesapeake Energy Corp.

  

3.930% due 04/15/2019

      157          132   

8.000% due 12/15/2022

      300          272   

Diamond 1 Finance Corp.

  

5.450% due 06/15/2023

      219          232   

6.020% due 06/15/2026

      202          217   

DISH DBS Corp.

  

7.750% due 07/01/2026

      2,400          2,495   

Eagle Materials, Inc.

  

4.500% due 08/01/2026 (b)

      2,640          2,685   

FAGE International S.A.

  

5.625% due 08/15/2026 (b)

      1,500          1,536   

Forbes Energy Services Ltd.

  

9.000% due 06/15/2019 ^

      2,858          1,143   

Ford Motor Co.

  

7.700% due 05/15/2097 (i)

      31,901          41,324   

Fresh Market, Inc.

  

9.750% due 05/01/2023

      1,600          1,488   

Hampton Roads PPV LLC

  

6.171% due 06/15/2053

      1,800          1,805   

Harvest Operations Corp.

  

2.330% due 04/14/2021

      6,678          6,657   

HCA, Inc.

  

7.500% due 11/15/2095

      1,900          1,947   

iHeartCommunications, Inc.

  

9.000% due 09/15/2022

      5,810          4,292   

Intelsat Luxembourg S.A.

  

7.750% due 06/01/2021

      11,443          2,689   

8.125% due 06/01/2023

      1,939          461   
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Intrepid Aviation Group Holdings LLC

  

6.875% due 02/15/2019

  $     12,290      $     11,153   

Kinder Morgan Energy Partners LP

  

6.375% due 03/01/2041

      800          845   

Kinder Morgan, Inc.

  

7.750% due 01/15/2032

      3,100          3,633   

7.800% due 08/01/2031

      6,000          7,164   

Numericable SFR S.A.

  

6.250% due 05/15/2024

      14,000          13,527   

NXP BV

  

4.125% due 06/01/2021

      4,860          5,042   

Post Holdings, Inc.

  

5.000% due 08/15/2026 (b)

      4,400          4,397   

Prime Security Services Borrower LLC

  

9.250% due 05/15/2023

      6,650          7,115   

Revlon Escrow Corp.

  

6.250% due 08/01/2024 (b)

      2,100          2,132   

Sabine Pass Liquefaction LLC

       

5.875% due 06/30/2026

      5,400          5,549   

Safeway, Inc.

       

7.250% due 02/01/2031

      470          463   

Scientific Games International, Inc.

  

10.000% due 12/01/2022

      5,600          5,005   

Sequa Corp.

       

7.000% due 12/15/2017

      13,090          2,225   

SFR Group S.A.

       

7.375% due 05/01/2026

      2,200          2,200   

Tembec Industries, Inc.

       

9.000% due 12/15/2019

      2,100          1,654   

Transocean, Inc.

       

9.000% due 07/15/2023

      1,813          1,704   

UAL Pass-Through Trust

  

7.336% due 01/02/2021

      1,889          1,983   

UCP, Inc.

       

8.500% due 10/21/2017

      10,900          10,850   

Unique Pub Finance Co. PLC

  

5.659% due 06/30/2027

  GBP     5,416          7,251   

Valvoline, Inc.

       

5.500% due 07/15/2024

  $     750          785   
       

 

 

 
          206,535   
       

 

 

 
UTILITIES 5.8%       

CenturyLink, Inc.

       

7.500% due 04/01/2024

      1,500          1,605   

Frontier Communications Corp.

  

10.500% due 09/15/2022

      1,190          1,287   

11.000% due 09/15/2025

      1,190          1,276   

Gazprom OAO Via Gaz Capital S.A.

  

9.250% due 04/23/2019

      11,200          12,885   

Illinois Power Generating Co.

  

6.300% due 04/01/2020

      4,570          1,828   

7.000% due 04/15/2018

      8,855          3,542   

7.950% due 06/01/2032

      1,175          470   

Mountain States Telephone & Telegraph Co.

  

7.375% due 05/01/2030 (i)

      15,730          16,792   

Odebrecht Drilling Norbe Ltd.

  

6.350% due 06/30/2022

      525          144   

Odebrecht Offshore Drilling Finance Ltd.

  

6.625% due 10/01/2023

      4,964          844   

6.750% due 10/01/2023

      4,684          796   

Petrobras Global Finance BV

  

3.536% due 03/17/2020

      420          388   

4.250% due 10/02/2023

  EUR     1,200          1,183   

5.750% due 01/20/2020

  $     360          360   

6.250% due 12/14/2026

  GBP     6,100          7,155   

6.625% due 01/16/2034

      800          895   

6.750% due 01/27/2041

  $     4,100          3,382   

7.875% due 03/15/2019

      487          518   
       

 

 

 
          55,350   
       

 

 

 

Total Corporate Bonds & Notes
(Cost $526,225)

          503,257   
       

 

 

 
 

 

20   PIMCO CLOSED-END FUNDS        See Accompanying Notes   


 

July 31, 2016

 

        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 
MUNICIPAL BONDS & NOTES 8.6%   
CALIFORNIA 4.7%   

Los Angeles Community Redevelopment Agency, California Tax Allocation Bonds, (NPFGC Insured), Series 2006

    

6.020% due 09/01/2021

  $     6,480      $     6,497   

Riverside County, California Redevelopment Successor Agency Tax Allocation Bonds, Series 2010

   

7.500% due 10/01/2030

      3,425          3,855   

San Diego Redevelopment Agency, California Tax Allocation Bonds, Series 2010

   

7.750% due 09/01/2040

      21,545          24,661   

Stockton Public Financing Authority, California Revenue Bonds, (BABs), Series 2009

   

7.942% due 10/01/2038

      8,500          9,716   
       

 

 

 
          44,729   
       

 

 

 
ILLINOIS 2.7%   

Chicago, Illinois General Obligation Bonds, (BABs), Series 2010

   

7.517% due 01/01/2040

      23,700          25,076   
       

 

 

 
VIRGINIA 0.1%   

Tobacco Settlement Financing Corp., Virginia Revenue Bonds, Series 2007

   

6.706% due 06/01/2046

      1,400          1,195   
       

 

 

 
WEST VIRGINIA 1.1%   

Tobacco Settlement Finance Authority, West Virginia Revenue Bonds, Series 2007

   

7.467% due 06/01/2047

      10,740          10,311   
       

 

 

 

Total Municipal Bonds & Notes
(Cost $73,943)

   

      81,311   
       

 

 

 
U.S. GOVERNMENT AGENCIES 3.8%   

Fannie Mae

       

3.000% due 01/25/2042 (a)

      1,578          143   

3.500% due 02/25/2033 (a)

      3,670          484   

4.743% due 01/25/2029

      800          806   

5.612% due 07/25/2040 (a)

      1,966          282   

5.788% due 10/25/2028

      1,000          1,069   

8.867% due 01/25/2042

      732          733   

Freddie Mac

       

6.175% due 11/25/2055

      14,780          7,929   

6.619% due 02/15/2034 (a)

      3,197          708   

8.038% due 12/25/2027

      4,449          4,343   

8.245% due 07/15/2039

      4,311          4,685   

9.459% due 03/15/2044

      1,518          2,121   

10.716% due 04/15/2044

      968          1,036   

10.756% due 02/15/2036

      6,525          8,594   

11.238% due 03/25/2025

      2,383          2,406   

Ginnie Mae

       

3.000% due 12/20/2042 (a)

      256          5   

3.500% due 09/16/2041 - 06/20/2042 (a)

      2,452          221   

6.263% due 01/20/2042 (a)

      3,304          495   
       

 

 

 

Total U.S. Government Agencies
(Cost $34,770)

            36,060   
       

 

 

 
NON-AGENCY MORTGAGE-BACKED SECURITIES 29.5%   

Banc of America Alternative Loan Trust

 

6.000% due 01/25/2036 ^

      288          247   

6.000% due 04/25/2036 ^

      5,307          4,732   

Banc of America Funding Trust

       

5.500% due 01/25/2036

      527          536   

6.000% due 07/25/2037 ^

      840          668   

BCAP LLC Trust

       

2.973% due 03/27/2036

      3,868          2,009   

3.333% due 07/26/2037

      798          35   

5.196% due 03/26/2037

      2,511          734   
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

7.035% due 12/26/2036

  $     8,549      $     7,712   

8.970% due 10/26/2036

      5,716          5,334   

Bear Stearns ALT-A Trust

       

2.840% due 11/25/2036 ^

      1,030          759   

2.873% due 08/25/2046

      6,761          5,178   

3.076% due 08/25/2036 ^

      4,415          3,278   

3.241% due 11/25/2034

      508          471   

3.379% due 09/25/2035 ^

      1,764          1,456   

Bear Stearns Mortgage Funding Trust

  

   

7.000% due 08/25/2036

      2,978          2,845   

Chase Mortgage Finance Trust

  

2.695% due 12/25/2035 ^

      32          30   

6.000% due 02/25/2037 ^

      2,670          2,225   

6.000% due 03/25/2037 ^

      569          495   

6.000% due 07/25/2037 ^

      2,118          1,792   

Chase Mortgage Trust

       

3.750% due 02/25/2044

      1,000          951   

Citigroup Mortgage Loan Trust, Inc.

  

3.797% due 11/25/2035

      18,312          10,317   

5.242% due 04/25/2037 ^

      5,025          4,315   

5.294% due 03/25/2037 ^

      1,518          1,366   

6.000% due 11/25/2036

      15,613          11,355   

CitiMortgage Alternative Loan Trust

  

5.750% due 04/25/2037 ^

      4,106          3,549   

Countrywide Alternative Loan Resecuritization Trust

  

6.000% due 08/25/2037 ^

      3,042          2,410   

Countrywide Alternative Loan Trust

  

0.697% due 03/20/2046

      6,769          5,069   

0.758% due 08/25/2035

      95          57   

4.335% due 06/25/2047

      5,363          4,379   

4.762% due
04/25/2037 ^(a)

      32,015          6,513   

5.250% due 05/25/2021 ^

      26          26   

5.500% due 03/25/2035

      832          688   

5.500% due 09/25/2035 ^

      7,138          6,422   

5.500% due 03/25/2036 ^

      267          202   

5.750% due 01/25/2035

      990          1,001   

5.750% due 02/25/2035

      1,097          1,082   

6.000% due 02/25/2035

      961          986   

6.000% due 04/25/2036

      2,605          2,061   

6.000% due 05/25/2036 ^

      2,730          2,176   

6.000% due 02/25/2037 ^

      915          648   

6.000% due 02/25/2037

      3,448          2,780   

6.000% due 04/25/2037 ^

      9,625          6,952   

6.000% due 08/25/2037 ^

      25,322            20,351   

6.250% due 10/25/2036 ^

      3,708          3,183   

6.250% due 12/25/2036 ^

      4,509          3,384   

6.500% due 08/25/2036 ^

      1,209          845   

6.500% due 09/25/2036 ^

      639          513   

19.844% due 02/25/2036

      2,818          4,135   

Countrywide Home Loan Mortgage Pass-Through Trust

  

5.500% due 07/25/2037 ^

      1,076          868   

6.000% due 04/25/2036 ^

      828          748   

6.000% due 03/25/2037 ^

      3,072          2,655   

Credit Suisse Mortgage Capital Mortgage-Backed Trust

  

5.750% due 04/25/2036 ^

      2,146          1,681   

6.000% due 02/25/2037 ^

      2,589          2,249   

Deco Pan Europe Ltd.

       

0.503% due 04/27/2018

  EUR     1,760          1,935   

Epic Drummond Ltd.

       

0.044% due 01/25/2022

      2,566          2,768   

First Horizon Alternative Mortgage Securities Trust

  

6.000% due 08/25/2036 ^

  $     3,325          2,807   

GSR Mortgage Loan Trust

       

2.884% due 11/25/2035 ^

      2,715          2,472   

2.919% due 03/25/2037 ^

      4,558          3,776   

5.500% due 05/25/2036 ^

      400          381   

IndyMac Mortgage Loan Trust

       

6.500% due 07/25/2037 ^

      7,489          4,644   

JPMorgan Alternative Loan Trust

  

2.681% due 03/25/2037

      15,871          13,012   

JPMorgan Mortgage Trust

       

2.789% due 10/25/2035

      82          80   

2.839% due 01/25/2037 ^

      2,137          1,916   

2.861% due 02/25/2036 ^

      3,521          3,108   

3.009% due 06/25/2036 ^

      1,526          1,330   

Lehman Mortgage Trust

       

6.000% due 07/25/2036 ^

      2,358          1,770   
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

6.000% due 07/25/2037 ^

  $     434      $     391   

26.742% due 11/25/2035 ^

      410          706   

Lehman XS Trust

       

0.708% due 06/25/2047

      5,485          3,895   

MASTR Alternative Loan Trust

  

6.750% due 07/25/2036

      4,662          3,434   

Merrill Lynch Mortgage Investors Trust

  

   

2.820% due 03/25/2036 ^

      4,648          3,094   

Mesdag Delta BV

       

0.094% due 01/25/2020

  EUR     2,143          2,057   

RBSSP Resecuritization Trust

  

0.673% due 10/27/2036

  $     3,609          315   

0.693% due 08/27/2037

      8,000          2,172   

Residential Accredit Loans, Inc. Trust

 

0.678% due 08/25/2036

      1,578          1,234   

0.718% due 05/25/2037 ^

      555          130   

6.000% due 08/25/2036 ^

      1,058          884   

6.000% due 05/25/2037 ^

      3,393          2,868   

Residential Asset Securitization Trust

 

5.750% due 02/25/2036 ^

      578          454   

6.000% due 02/25/2037 ^

      2,725          2,187   

6.250% due 09/25/2037 ^

      5,848          4,122   

Residential Funding Mortgage Securities, Inc. Trust

  

3.530% due 02/25/2037

      4,667          3,776   

Structured Adjustable Rate Mortgage Loan Trust

  

2.795% due 11/25/2036 ^

      7,455          5,704   

2.857% due 01/25/2036 ^

      9,936          7,526   

2.924% due 07/25/2036 ^

      1,824          1,472   

3.130% due 07/25/2035 ^

      3,607          3,105   

4.559% due 03/25/2037 ^

      1,442          998   

Structured Asset Mortgage Investments Trust

  

0.608% due 08/25/2036

      267          203   

Suntrust Adjustable Rate Mortgage Loan Trust

  

2.867% due 02/25/2037 ^

      1,072          945   

3.034% due 04/25/2037 ^

      1,351          1,153   

6.042% due 02/25/2037 ^

      11,593          9,849   

WaMu Mortgage Pass-Through Certificates Trust

  

2.542% due 07/25/2037 ^

      1,246          1,017   

4.179% due 02/25/2037 ^

      1,697          1,542   

4.412% due 07/25/2037 ^

      2,963          2,694   

6.002% due 10/25/2036 ^

      2,456          1,933   

Washington Mutual Mortgage Pass-Through Certificates Trust

   

1.295% due 05/25/2047 ^

      670          44   

6.000% due 10/25/2035 ^

      2,305          1,696   

6.000% due 03/25/2036 ^

      3,409          3,179   

6.000% due 02/25/2037

      8,707          7,723   
       

 

 

 

Total Non-Agency Mortgage-Backed Securities (Cost $270,860)

      278,954   
       

 

 

 
ASSET-BACKED SECURITIES 20.5%   

AMAC CDO Funding

  

1.788% due 11/23/2050

      2,789          2,661   

6.516% due 11/23/2050

      876          879   

Ameriquest Mortgage Securities, Inc. Asset-Backed Pass-Through Certificates

   

1.838% due 03/25/2033

      99          95   

Bear Stearns Asset-Backed Securities Trust

  

0.888% due 04/25/2037

      23,128          16,824   

CIFC Funding Ltd.

  

0.000% due 05/24/2026 (e)

      4,100          2,898   

0.000% due 07/22/2026

      3,000          1,834   

Citigroup Mortgage Loan Trust, Inc.

  

0.648% due 12/25/2036

      8,968          5,921   

0.853% due 11/25/2046

      11,202          9,699   

Countrywide Asset-Backed Certificates

  

0.658% due 03/25/2037

      5,314          4,835   

0.688% due 06/25/2047

      20,858          14,195   

0.798% due 09/25/2037 ^

      19,068          9,419   

4.992% due 10/25/2046 ^

      15,727          14,062   

Credit-Based Asset Servicing and Securitization LLC

  

0.598% due 11/25/2036

      1,572          983   

4.023% due 12/25/2035 ^

      153          152   
 

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2016   21


Schedule of Investments PIMCO Corporate & Income Opportunity Fund (Cont.)

 

        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

First Franklin Mortgage Loan Trust

  

0.648% due 10/25/2036

  $     6,098      $     4,186   

Fremont Home Loan Trust

  

0.638% due 01/25/2037

      7,835          4,095   

IndyMac Home Equity Mortgage Loan Asset-Backed Trust

   

0.648% due 07/25/2037

      3,886          2,395   

JPMorgan Mortgage Acquisition Trust

  

5.830% due 07/25/2036 ^

      157          89   

Lehman XS Trust

  

6.290% due 06/24/2046

      4,846          4,532   

Long Beach Mortgage Loan Trust

  

0.788% due 01/25/2036

      8,000          4,440   

Merrill Lynch Mortgage Investors Trust

  

4.244% due 03/25/2037

      7,874          2,726   

Morgan Stanley ABS Capital, Inc. Trust

  

0.638% due 10/25/2036

      8,728          5,227   

Morgan Stanley Mortgage Loan Trust

  

6.250% due 07/25/2047 ^

      1,648          1,153   

Park Place Securities, Inc. Asset-Backed Pass-Through Certificates

   

1.138% due 07/25/2035

      6,000          3,460   

Renaissance Home Equity Loan Trust

  

5.612% due 04/25/2037

      11,879            5,995   

7.238% due 09/25/2037 ^

      10,024          6,033   

Residential Asset Securities Corp. Trust

  

1.068% due 08/25/2034

      12,009          9,527   

SLM Student Loan Trust

  

0.000% due 10/28/2029 (e)

      8          9,603   

0.000% due 01/25/2042 (e)

      7          7,447   

South Coast Funding Ltd.

  

1.230% due 08/10/2038

      21,412          4,514   
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Taberna Preferred Funding Ltd.

  

0.993% due 12/05/2036

  $     600      $     420   

1.013% due 08/05/2036

      868          608   

1.013% due 08/05/2036 ^

      16,817          11,772   

1.033% due 02/05/2036

      11,162          8,316   

Tropic CDO Ltd.

  

1.580% due 04/15/2034

      25,000          13,250   
       

 

 

 

Total Asset-Backed Securities
(Cost $197,463)

          194,245   
       

 

 

 
SOVEREIGN ISSUES 1.7%   

Autonomous Community of Catalonia

  

4.300% due 11/15/2016

  EUR     5,100          5,739   

4.900% due 09/15/2021

      2,650          3,049   

Republic of Greece Government International Bond

  

3.800% due 08/08/2017

  JPY     695,000          6,497   

4.750% due 04/17/2019

  EUR     600          605   
       

 

 

 

Total Sovereign Issues (Cost $14,697)

  

      15,890   
       

 

 

 
        SHARES            
COMMON STOCKS 0.1%   
FINANCIALS 0.1%   

TIG FinCo PLC (g)

      794,831          505   
       

 

 

 

Total Common Stocks (Cost $1,179)

  

      505   
       

 

 

 
PREFERRED SECURITIES 1.2%   
BANKING & FINANCE 1.2%   

Farm Credit Bank of Texas

  

10.000% due 12/15/2020 (f)

      7,870          9,463   
        SHARES         MARKET
VALUE
(000S)
 

GMAC Capital Trust

  

6.411% due 02/15/2040

      94,725      $     2,408   
       

 

 

 

Total Preferred Securities (Cost $11,403)

    11,871   
       

 

 

 
SHORT-TERM INSTRUMENTS 13.5%   
REPURCHASE AGREEMENTS (h) 6.8%   
          63,979   
       

 

 

 
        PRINCIPAL
AMOUNT
(000S)
           
U.S. TREASURY BILLS 6.7%   

0.301% due 10/06/2016 - 10/13/2016 (d)(e)(k)(m)

  $     63,320          63,290   
       

 

 

 
Total Short-Term Instruments
(Cost $127,261)
        127,269   
       

 

 

 
       
Total Investments in Securities
(Cost $1,283,360)
        1,271,246   
       
Total Investments 134.3%
(Cost $1,283,360)
    $       1,271,246   

Financial Derivative
Instruments (j)(l) (5.9)%

(Cost or Premiums, net $(55,576))

    (55,533

Preferred Shares (25.1)%

        (237,950
Other Assets and Liabilities, net (3.3)%          (30,920
       

 

 

 
Net Assets Applicable to Common Shareholders 100.0%       $     946,843   
       

 

 

 
 

NOTES TO SCHEDULE OF INVESTMENTS (AMOUNTS IN THOUSANDS*):

 

* A zero balance may reflect actual amounts rounding to less than one thousand.
^ Security is in default.
(a) Interest only security.
(b) When-issued security.
(c) Payment in-kind security.
(d) Coupon represents a weighted average yield to maturity.
(e) Zero coupon security.
(f) Perpetual maturity; date shown, if applicable, represents next contractual call date.

 

(g)  RESTRICTED SECURITIES:

 

Issuer Description                Acquisition
Date
    Cost     Market
Value
    Market Value
as Percentage
of Net Assets
 

TIG FinCo PLC

         04/02/2015        $    1,179      $     505        0.05%   
        

 

 

   

 

 

   

 

 

 

 

BORROWINGS AND OTHER FINANCING TRANSACTIONS

 

(h)  REPURCHASE AGREEMENTS:

 

Counterparty   Lending
Rate
    Settlement
Date
    Maturity
Date
    Principal
Amount
    Collateralized By   Collateral
(Received)
    Repurchase
Agreements,
at Value
    Repurchase
Agreement
Proceeds
to be
Received (1)
 
BOS     0.480     07/29/2016        08/01/2016      $ 5,000      U.S. Treasury Notes 1.750% due 03/31/2022   $ (5,141   $ 5,000      $ 5,000   
MBC     0.550        07/29/2016        08/01/2016            54,900      U.S. Treasury Notes 1.375% due 03/31/2020         (56,840         54,900            54,903   
SSB     0.010        07/29/2016        08/01/2016        4,079      U.S. Treasury Notes 1.000% due 05/15/2018     (4,162     4,079        4,079   
           

 

 

   

 

 

   

 

 

 

Total Repurchase Agreements

  

    $     (66,143   $     63,979      $     63,982   
           

 

 

   

 

 

   

 

 

 

 

(1)

Includes accrued interest.

 

22   PIMCO CLOSED-END FUNDS        See Accompanying Notes   


 

July 31, 2016

 

 

REVERSE REPURCHASE AGREEMENTS:

 

Counterparty   Borrowing
Rate  (3)
    Borrowing
Date
    Maturity
Date
         Amount
Borrowed  (3)
    Payable for
Reverse
Repurchase
Agreements
 

BCY

    (0.250 )%      02/18/2016        TBD  (2)    $     (818   $ (817
    (0.250     03/04/2016        TBD  (2)        (194     (194

MSC

    1.050        07/19/2016        10/19/2016          (9,325     (9,328

RDR

    (1.000     01/22/2016        TBD  (2)        (462     (460
    (0.750     06/15/2016        06/15/2017          (3,650     (3,646

UBS

    0.900        07/11/2016        10/06/2016          (4,206     (4,208
    1.150        05/18/2016        08/18/2016      GBP     (1,673     (2,220
    1.200        07/11/2016        10/06/2016      $         (3,929     (3,932
           

 

 

 

Total Reverse Repurchase Agreements

  

        $     (24,805
           

 

 

 

 

(2) 

Open maturity reverse repurchase agreement.

(3) 

The average amount of borrowings outstanding during the period ended July 31, 2016 was $(44,433) at a weighted average interest rate of 0.629%.

 

BORROWINGS AND OTHER FINANCING TRANSACTIONS SUMMARY

 

The following is a summary by counterparty of the market value of Borrowings and Other Financing Transactions and collateral (received)/pledged as of July 31, 2016:

 

(i) Securities with an aggregate market value of $28,880 have been pledged as collateral under the terms of the following master agreements as of July 31, 2016.

 

Counterparty   Repurchase
Agreement
Proceeds
to be
Received
    Payable for
Reverse
Repurchase
Agreements
    Payable for
Sale-Buyback
Transactions
     Total
Borrowings and
Other Financing
Transactions
    Collateral
(Received)/Pledged
    Net Exposure  (4)  

Global/Master Repurchase Agreement

  

BCY

  $ 0      $ (1,011   $ 0       $ (1,011   $ 1,427      $ 416   

BOS

    5,000        0        0         5,000        (5,141     (141

MBC

    54,903        0        0         54,903            (56,841         (1,938

MSC

    0        (9,328     0         (9,328     10,421        1,093   

RDR

    0        (4,106     0         (4,106     4,019        (87

SSB

    4,079        0        0         4,079        (4,162     (83

UBS

    0        (10,360     0             (10,360     11,467        1,107   
 

 

 

   

 

 

   

 

 

        

Total Borrowings and Other Financing Transactions

  $     63,982      $     (24,805   $     0          
 

 

 

   

 

 

   

 

 

        

 

(4)

Net Exposure represents the net receivable/(payable) that would be due from/to the counterparty in the event of default. Exposure from borrowings and other financing transactions can only be netted across transactions governed under the same master agreement with the same legal entity. See Note 7, Principal Risks, in the Notes to Financial Statements for more information regarding master netting arrangements.

 

CERTAIN TRANSFERS ACCOUNTED FOR AS SECURED BORROWINGS

 

Remaining Contractual Maturity of the Agreements

 

     Overnight and
Continuous
    Up to 30 days     31-90 days     Greater Than 90 days     Total  

Reverse Repurchase Agreements

         

Corporate Bonds & Notes

  $ 0      $ (2,220   $ (17,468   $ (5,117   $ (24,805
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Borrowings

  $     0      $     (2,220   $     (17,468   $     (5,117   $ (24,805
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross amount of recognized liabilities for reverse repurchase agreements

          $     (24,805
         

 

 

 

 

(j)  FINANCIAL DERIVATIVE INSTRUMENTS: EXCHANGE-TRADED OR CENTRALLY CLEARED

 

SWAP AGREEMENTS:

 

CREDIT DEFAULT SWAPS ON CREDIT INDICES - SELL PROTECTION (1)

 

Index/Tranches   Fixed
Receive Rate
    Maturity
Date
    Notional
Amount  (2)
    Market
Value  (3)
    Unrealized
Appreciation/
(Depreciation)
    Variation Margin  
            Asset     Liability  

CDX.HY-24 5-Year Index

    5.000     06/20/2020      $ 15,386      $ 1,089      $ (97   $     53      $     0   

CDX.HY-25 5-Year Index

    5.000        12/20/2020            23,958            1,313            1,065        93        0   

CDX.HY-26 5-Year Index

    5.000        06/20/2021        3,200        160        40        13        0   

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2016   23


Schedule of Investments PIMCO Corporate & Income Opportunity Fund (Cont.)

 

Index/Tranches   Fixed
Receive Rate
    Maturity
Date
    Notional
Amount  (2)
    Market
Value  (3)
    Unrealized
Appreciation/
(Depreciation)
    Variation Margin  
            Asset     Liability  

CDX.IG-23 5-Year Index

    1.000     12/20/2019      $     11,800      $ 132      $ (59   $ 10      $ 0   

CDX.IG-24 5-Year Index

    1.000        06/20/2020        17,600        206            (106     16        0   

CDX.IG-26 5-Year Index

    1.000        06/20/2021        7,600        109        34        8        0   
       

 

 

   

 

 

   

 

 

   

 

 

 
        $     3,009      $ 877      $     193      $     0   
       

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

If the Fund is a seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) pay to the buyer of protection an amount equal to the notional amount of the swap and take delivery of the referenced obligation or underlying securities comprising the referenced index or (ii) pay a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index.

(2)

The maximum potential amount the Fund could be required to pay as a seller of credit protection or receive as a buyer of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.

(3)

The prices and resulting values for credit default swap agreements on credit indices serve as an indicator of the current status of the payment/performance risk and represent the likelihood of an expected liability (or profit) for the credit derivative should the notional amount of the swap agreement be closed/sold as of the period end. Increasing market values, in absolute terms when compared to the notional amount of the swap, represent a deterioration of the referenced indices’ credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.

 

INTEREST RATE SWAPS

 

Pay/Receive
Floating Rate
  Floating Rate Index   Fixed Rate     Maturity
Date
    Notional
Amount
    Market
Value
    Unrealized
Appreciation/
(Depreciation)
    Variation Margin  
              Asset      Liability  

Pay

 

3-Month USD-LIBOR

    2.750     06/17/2025        $        145,380      $ 18,252      $ 9,059      $ 735       $ 0   

Pay

 

3-Month USD-LIBOR

    2.250        06/15/2026          44,400        3,798        1,698        238         0   

Pay

 

3-Month USD-LIBOR

    3.500        06/19/2044          305,100        126,579        136,532        4,552         0   

Receive

 

3-Month USD-LIBOR *

    2.250        12/21/2046          482,100        (56,215     (14,832     0         (6,819

Pay

 

6-Month AUD-BBR-BBSW

    3.500        06/17/2025        AUD        13,400        1,225        893        75         0   
           

 

 

   

 

 

   

 

 

    

 

 

 
            $ 93,639      $ 133,350      $ 5,600       $ (6,819
           

 

 

   

 

 

   

 

 

    

 

 

 

Total Swap Agreements

  

      $     96,648      $     134,227      $     5,793       $     (6,819
           

 

 

   

 

 

   

 

 

    

 

 

 

 

* This security has a forward starting effective date. See Note 2(a) in the Notes to Financial Statements for further information.

 

FINANCIAL DERIVATIVE INSTRUMENTS: EXCHANGE-TRADED OR CENTRALLY CLEARED SUMMARY

 

The following is a summary of the market value and variation margin of Exchange-Traded or Centrally Cleared Financial Derivative Instruments as of July 31, 2016:

 

(k) Securities with an aggregate market value of $8,696 and cash of $11,274 have been pledged as collateral for exchange-traded and centrally cleared financial derivative instruments as of July 31, 2016. See Note 7, Principal Risks, in the Notes to Financial Statements for more information regarding master netting arrangements.

 

    Financial Derivative Assets           Financial Derivative Liabilities  
    Market Value     Variation Margin
Asset
    Total           Market Value     Variation Margin
Liability
    Total  
     Purchased
Options
    Futures     Swap
Agreements
            Written
Options
    Futures     Swap
Agreements
   

Total Exchange-Traded or Centrally Cleared

  $     0      $     0      $     5,793      $     5,793        $     0      $     0      $     (6,819   $     (6,819
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

 

(l)  FINANCIAL DERIVATIVE INSTRUMENTS: OVER THE COUNTER

 

FORWARD FOREIGN CURRENCY CONTRACTS:

 

Counterparty

   Settlement
Month
   

Currency to

be Delivered

    Currency to
be Received
    Unrealized Appreciation/
(Depreciation)
 
         Asset     Liability  

AZD

     08/2016      EUR     508      $     562      $ 0      $ (6

BOA

     08/2016          27,641          30,493        0            (410
     08/2016      GBP     64,368          85,664            477        0   
     08/2016      $     28,490      EUR     25,900        466        0   
     09/2016      EUR     25,900      $     28,526        0        (465

BPS

     08/2016      BRL     5,405          1,653        0        (14
     08/2016      GBP     396          519        0        (5
     08/2016      $     1,574      BRL     5,405        93        0   
     09/2016          1,449          4,791        13        0   

CBK

     08/2016      AUD     182      $     133        0        (5
     08/2016      EUR     505          560        0        (5

 

24   PIMCO CLOSED-END FUNDS        See Accompanying Notes   


 

July 31, 2016

 

Counterparty

   Settlement
Month
    Currency to
be Delivered
    Currency to
be Received
    Unrealized Appreciation/
(Depreciation)
 
         Asset     Liability  
     08/2016      GBP     1,416      $     1,874      $ 5      $ (5
     08/2016      $     2,784      EUR     2,528        42        0   
     09/2016      GBP     144      $     190        0        0   

GLM

     08/2016      AUD     246          182        0        (5
     08/2016      EUR     86          95        0        (2
     08/2016      GBP     575          755        0        (6
     09/2016          218          287        0        (2

JPM

     08/2016      AUD     123          93        0        (1
     08/2016      BRL     614          187        0        (3
     08/2016      GBP     822          1,076        0        (11
     08/2016      JPY     19,600          186        0        (6
     08/2016      $     190      BRL     614        0        0   
     08/2016          1,309      GBP     985        0        (5
     09/2016      EUR     172      $     191        0        (1

MSB

     08/2016      GBP     142          188        0        0   

NAB

     08/2016      $     6,380      JPY     673,141        218        0   
     09/2016      JPY     673,141      $     6,388        0        (216

SCX

     08/2016      EUR     172          189        0        (3
     08/2016      JPY     653,541          6,420        15        0   
     08/2016      $     88,178      GBP     67,204        763        0   
     09/2016      EUR     897      $     996        0        (8
     09/2016      GBP     67,204          88,219        0        (765

TOR

     08/2016          1,010          1,305        0        (32

UAG

     08/2016      EUR     549          606        0        (8
     08/2016      $     1,051      EUR     947        8        0   
            

 

 

   

 

 

 

Total Forward Foreign Currency Contracts

  

          $     2,100      $     (1,989
            

 

 

   

 

 

 

 

SWAP AGREEMENTS:

 

CREDIT DEFAULT SWAPS ON CORPORATE AND SOVEREIGN ISSUES - SELL PROTECTION (1)

 

Counterparty

  Reference Entity   Fixed
Receive Rate
    Maturity
Date
    Implied
Credit Spread at
July 31, 2016 (2)
    Notional
Amount  (3)
    Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
    Swap Agreements,
at Value
 
                Asset     Liability  
BPS  

Banco Espirito Santo S.A.

    5.000     09/20/2020        13.620     EUR      3,000      $ (115   $ (606   $ 0      $ (721
 

Navient Corp.

    5.000        12/20/2020        4.419        $      5,000        (51     194        143        0   
 

Petrobras Global Finance BV

    1.000        12/20/2024        6.275        1,800        (352     (217     0        (569
BRC  

Navient Corp.

    5.000        12/20/2020        4.419        3,000        12        73        85        0   
GST  

Navient Corp.

    5.000        12/20/2020        4.419        2,000        8        49        57        0   
 

Petrobras Global Finance BV

    1.000        09/20/2020        5.476        20        (3     0        0        (3
 

Petrobras Global Finance BV

    1.000        12/20/2024        6.275        2,400        (476     (283     0        (759
HUS  

Petrobras Global Finance BV

    1.000        12/20/2019        4.923        500        (41     (20     0        (61
 

Petrobras Global Finance BV

    1.000        09/20/2020        5.476        60        (8     (2     0        (10
 

Petrobras Global Finance BV

    1.000        12/20/2024        6.275        3,000        (623     (326     0        (949
JPM  

Banco Espirito Santo S.A.

    5.000        09/20/2020        13.620        EUR     5,000        (206     (996     0        (1,202
 

Navient Corp.

    5.000        12/20/2020        4.419        $     5,000        31        112        143        0   
 

Russia Government International Bond

    1.000        06/20/2019        1.559        28,600        (1,957     1,539        0        (418
 

Russia Government International Bond

    1.000        12/20/2020        2.190        1,300        (149     86        0        (63
MYC  

Banco Espirito Santo S.A.

    5.000        09/20/2020        13.620        EUR     3,000        (28     (693     0        (721
 

Chesapeake Energy Corp.

    5.000        09/20/2020        12.934        $        100        (10     (15     0        (25
 

Petrobras Global Finance BV

    1.000        12/20/2019        4.923        14,500        (1,342     (410     0        (1,752
           

 

 

   

 

 

   

 

 

   

 

 

 
            $     (5,310   $     (1,515   $     428      $     (7,253
           

 

 

   

 

 

   

 

 

   

 

 

 

 

CREDIT DEFAULT SWAPS ON CREDIT INDICES - SELL PROTECTION (1)

 

Counterparty

 

Index/Tranches

 

Fixed
Receive Rate

   

Maturity
Date

         

Notional
Amount (3)

   

Premiums
(Received)

   

Unrealized
Appreciation

    Swap Agreements,
at  Value (4)
 
                     Asset     Liability  
BOA  

ABX.HE.AAA.6-2 Index

    0.110     05/25/2046          $    66,373      $     (12,957   $ 1,017      $ 0      $ (11,940
BRC  

ABX.HE.AAA.6-2 Index

    0.110        05/25/2046          82,676        (16,852     1,979        0        (14,873
GST  

ABX.HE.AAA.6-2 Index

    0.110        05/25/2046          5,808        (1,192     147        0        (1,045
MEI  

ABX.HE.AAA.6-2 Index

    0.110        05/25/2046          80,022        (15,732     1,337        0        (14,395
MYC  

ABX.HE.AAA.6-2 Index

    0.110        05/25/2046          20,742        (4,035     304        0        (3,731
           

 

 

   

 

 

   

 

 

   

 

 

 
          $     (50,768   $     4,784      $     0      $     (45,984
           

 

 

   

 

 

   

 

 

   

 

 

 

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2016   25


Schedule of Investments PIMCO Corporate & Income Opportunity Fund (Cont.)

 

 

(1)

If the Fund is a seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) pay to the buyer of protection an amount equal to the notional amount of the swap and take delivery of the referenced obligation or underlying securities comprising the referenced index or (ii) pay a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index.

(2)

Implied credit spreads, represented in absolute terms, utilized in determining the market value of credit default swap agreements on corporate or sovereign issues as of period end serve as an indicator of the current status of the payment/performance risk and represent the likelihood or risk of default for the credit derivative. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection and may include upfront payments required to be made to enter into the agreement. Wider credit spreads represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.

(3)

The maximum potential amount the Fund could be required to pay as a seller of credit protection or receive as a buyer of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.

(4)

The prices and resulting values for credit default swap agreements on credit indices serve as an indicator of the current status of the payment/performance risk and represent the likelihood of an expected liability (or profit) for the credit derivative should the notional amount of the swap agreement be closed/sold as of the period end. Increasing market values, in absolute terms when compared to the notional amount of the swap, represent a deterioration of the referenced indices’ credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.

 

INTEREST RATE SWAPS

 

Counterparty

 

Pay/Receive

Floating Rate

  Floating Rate Index   Fixed Rate    

Maturity

Date

    Notional
Amount
   

Premiums
Paid/(Received)

    Unrealized
Appreciation/
(Depreciation)
    Swap Agreements, at Value  
                Asset     Liability  
BOA  

Pay

 

1-Year BRL-CDI

    11.500     01/04/2021      BRL     61,500      $ 52      $ (576   $ 0      $ (524
CBK  

Receive

 

1-Year BRL-CDI

    12.230        01/04/2021          41,600        609        (669     0        (60
 

Pay

 

3-Month USD-LIBOR

    1.500        09/16/2021      $     2,700        (1     6        5        0   
DUB  

Pay

 

3-Month USD-LIBOR

    1.500        09/16/2021          11,600        (2     24        22        0   
UAG  

Pay

 

1-Year BRL-CDI

    11.250        01/04/2021      BRL     105,000        (156     (1,096     0        (1,252
             

 

 

   

 

 

   

 

 

   

 

 

 
              $ 502      $     (2,311   $ 27      $ (1,836
             

 

 

   

 

 

   

 

 

   

 

 

 

Total Swap Agreements

    $     (55,576   $ 958      $     455      $     (55,073
             

 

 

   

 

 

   

 

 

   

 

 

 

 

FINANCIAL DERIVATIVE INSTRUMENTS: OVER THE COUNTER SUMMARY

 

The following is a summary by counterparty of the market value of OTC financial derivative instruments and collateral (received)/pledged as of July 31, 2016:

 

(m) Securities with an aggregate market value of $54,068 have been pledged as collateral for financial derivative instruments as governed by International Swaps and Derivatives Association, Inc. master agreements as of July 31, 2016.

 

    Financial Derivative Assets           Financial Derivative Liabilities                    
Counterparty   Forward
Foreign
Currency
Contracts
     Purchased
Options
     Swap
Agreements
     Total
Over the
Counter
           Forward
Foreign
Currency
Contracts
    Written
Options
     Swap
Agreements
    Total
Over the
Counter
    Net Market
Value of OTC
Derivatives
    Collateral
(Received)/
Pledged
    Net
Exposure  (5)
 

AZD

  $ 0       $ 0       $ 0       $ 0        $ (6   $ 0       $ 0      $ (6   $ (6   $ 0      $ (6

BOA

    943         0         0         943          (875     0         (12,464     (13,339       (12,396       11,387          (1,009

BPS

    106         0         143         249          (19     0         (1,290     (1,309     (1,060     1,143        83   

BRC

    0         0         85         85          0        0         (14,873     (14,873     (14,788     14,998        210   

CBK

    47         0         5         52          (15     0         (60     (75     (23     0        (23

DUB

    0         0         22         22          0        0         0        0        22        (20     2   

GLM

    0         0         0         0          (15     0         0        (15     (15     0        (15

GST

    0         0         57         57          0        0         (1,807     (1,807     (1,750     1,751        1   

HUS

    0         0         0         0          0        0         (1,020     (1,020     (1,020     1,098        78   

JPM

    0         0         143         143          (27     0         (1,683     (1,710     (1,567     1,607        40   

MEI

    0         0         0         0          0        0         (14,395     (14,395     (14,395     14,405        10   

MYC

    0         0         0         0          0        0         (6,229     (6,229     (6,229     6,264        35   

NAB

    218         0         0         218          (216     0         0        (216     2        0        2   

SCX

    778         0         0         778          (776     0         0        (776     2        (270     (268

TOR

    0         0         0         0          (32     0         0        (32     (32     0        (32

UAG

    8         0         0         8          (8     0         (1,252     (1,260     (1,252     1,243        (9
 

 

 

    

 

 

    

 

 

    

 

 

     

 

 

   

 

 

    

 

 

   

 

 

       

Total Over the Counter

  $  2,100       $  0       $  455       $  2,555        $  (1,989   $  0       $  (55,073   $  (57,062      
 

 

 

    

 

 

    

 

 

    

 

 

     

 

 

   

 

 

    

 

 

   

 

 

       

 

(5)

Net Exposure represents the net receivable/(payable) that would be due from/to the counterparty in the event of default. Exposure from OTC financial derivative instruments can only be netted across transactions governed under the same master agreement with the same legal entity. See Note 7, Principal Risks, in the Notes to Financial Statements for more information regarding master netting arrangements.

 

26   PIMCO CLOSED-END FUNDS        See Accompanying Notes   


 

July 31, 2016

 

 

FAIR VALUE OF FINANCIAL DERIVATIVE INSTRUMENTS

 

The following is a summary of the fair valuation of the Fund’s derivative instruments categorized by risk exposure. See Note 7, Principal Risks, in the Notes to Financial Statements on risks of the Fund.

 

Fair Values of Financial Derivative Instruments on the Statements of Assets and Liabilities as of July 31, 2016:

 

    Derivatives not accounted for as hedging instruments  
     Commodity
Contracts
    Credit
Contracts
    Equity
Contracts
    Foreign
Exchange
Contracts
    Interest
Rate Contracts
    Total  

Financial Derivative Instruments - Assets

  

Exchange-traded or centrally cleared

           

Swap Agreements

  $ 0      $ 193      $ 0      $ 0      $ 5,600      $ 5,793   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

           

Forward Foreign Currency Contracts

  $ 0      $ 0      $ 0      $ 2,100      $ 0      $ 2,100   

Swap Agreements

    0        428        0        0        27        455   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0      $ 428      $ 0      $ 2,100      $ 27      $ 2,555   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0      $ 621      $ 0      $ 2,100      $ 5,627      $ 8,348   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial Derivative Instruments - Liabilities

  

Exchange-traded or centrally cleared

           

Swap Agreements

  $ 0      $ 0      $ 0      $ 0      $ 6,819      $ 6,819   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

           

Forward Foreign Currency Contracts

  $ 0      $ 0      $ 0      $ 1,989      $ 0      $ 1,989   

Swap Agreements

    0        53,237        0        0        1,836        55,073   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0      $ 53,237      $ 0      $ 1,989      $ 1,836      $ 57,062   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $     0      $     53,237      $     0      $     1,989      $     8,655      $     63,881   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

The effect of Financial Derivative Instruments on the Statements of Operations for the period ended July 31, 2016:

 

    Derivatives not accounted for as hedging instruments  
     Commodity
Contracts
    Credit
Contracts
    Equity
Contracts
    Foreign
Exchange
Contracts
    Interest
Rate Contracts
    Total  

Net Realized Gain (Loss) on Financial Derivative Instruments

  

Exchange-traded or centrally cleared

           

Swap Agreements

  $ 0      $ 1,134      $ 0      $ 0      $ (118,874   $     (117,740
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

           

Forward Foreign Currency Contracts

  $ 0      $ 0      $ 0      $ 17,604      $ 0      $ 17,604   

Swap Agreements

    0        13        0        0        705        718   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0      $ 13      $ 0      $ 17,604      $ 705      $ 18,322   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0      $ 1,147      $ 0      $     17,604      $     (118,169   $ (99,418
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Change in Unrealized Appreciation (Depreciation) on Financial Derivative Instruments

  

Exchange-traded or centrally cleared

           

Swap Agreements

  $ 0      $ 1,498      $ 0      $ 0      $ 98,305      $ 99,803   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

           

Forward Foreign Currency Contracts

  $ 0      $ 0      $ 0      $ (2,113   $ 0      $ (2,113

Swap Agreements

    0        3,818        0        0        (3,155     663   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0      $ 3,818      $ 0      $ (2,113   $ (3,155   $ (1,450
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $     0      $     5,316      $     0      $     (2,113   $ 95,150      $ 98,353   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2016   27


Schedule of Investments PIMCO Corporate & Income Opportunity Fund (Cont.)

 

July 31, 2016

 

 

FAIR VALUE MEASUREMENTS

 

The following is a summary of the fair valuations according to the inputs used as of July 31, 2016 in valuing the Fund’s assets and liabilities:

 

Category and Subcategory   Level 1     Level 2     Level 3     Fair
Value at
07/31/2016
 

Bank Loan Obligations

  $ 0      $ 16,214      $ 5,670      $ 21,884   

Corporate Bonds & Notes

       

Banking & Finance

    0        230,951        10,421        241,372   

Industrials

    0        195,685        10,850        206,535   

Utilities

    0        55,350        0        55,350   

Municipal Bonds & Notes

       

California

    0        44,729        0        44,729   

Illinois

    0        25,076        0        25,076   

Virginia

    0        1,195        0        1,195   

West Virginia

    0        10,311        0        10,311   

U.S. Government Agencies

    0        28,131        7,929        36,060   

Non-Agency Mortgage-Backed Securities

    0            278,954        0        278,954   

Asset-Backed Securities

    0        177,195            17,050            194,245   

Sovereign Issues

    0        15,890        0        15,890   

Common Stocks

       

Financials

    0        0        505        505   

Preferred Securities

       

Banking & Finance

        2,408        9,463        0        11,871   

Short-Term Instruments

       

Repurchase Agreements

    0        63,979        0        63,979   
Category and Subcategory   Level 1     Level 2     Level 3     Fair
Value at
07/31/2016
 

U.S. Treasury Bills

  $ 0      $ 63,290      $ 0      $ 63,290   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Investments

  $     2,408      $     1,216,413      $     52,425      $     1,271,246   
 

 

 

   

 

 

   

 

 

   

 

 

 

Financial Derivative Instruments - Assets

  

Exchange-traded or centrally cleared

    0        5,793        0        5,793   

Over the counter

    0        2,555        0        2,555   
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0      $ 8,348      $ 0      $ 8,348   
 

 

 

   

 

 

   

 

 

   

 

 

 

Financial Derivative Instruments - Liabilities

  

Exchange-traded or centrally cleared

    0        (6,819     0        (6,819

Over the counter

    0        (57,062     0        (57,062
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0      $ (63,881   $ 0      $ (63,881
 

 

 

   

 

 

   

 

 

   

 

 

 

Totals

  $     2,408      $     1,160,880      $     52,425      $     1,215,713   
 

 

 

   

 

 

   

 

 

   

 

 

 
 

 

There were no significant transfers between Levels 1 and 2 during the period ended July 31, 2016.

 

The following is a reconciliation of the fair valuations using significant unobservable inputs (Level 3) for the Fund during the period ended July 31, 2016:

 

Category and Subcategory   Beginning
Balance
at 07/31/2015
    Net
Purchases
    Net
Sales
    Accrued
Discounts/
(Premiums)
    Realized
Gain/(Loss)
    Net Change in
Unrealized
Appreciation/
(Depreciation) (1)
    Transfers into
Level 3
    Transfers out
of Level 3
    Ending
Balance
at 07/31/2016
    Net Change in
Unrealized
Appreciation/
(Depreciation)
on Investments
Held  at
07/31/2016 (1)
 

Investments in Securities, at Value

  

               

Bank Loan Obligations

  $ 8,897      $ 0      $ (2,022   $ 110      $ 6      $ (1,321   $ 0      $ 0      $ 5,670      $ (1,204

Corporate Bonds & Notes

                   

Banking & Finance

    10,454        0        (253     5        3        212        0        0        10,421        244   

Industrials

    10,941        0        0        13        0        (104     0        0        10,850        (104

U.S. Government Agencies

    0        8,796        (120     70        48        (865     0        0        7,929        (865

Non-Agency Mortgage-Backed Securities

    8,290        0        (8,338     0        47        1        0        0        0        0   

Asset-Backed Securities

    0        17,023        0        0        0        27        0        0        17,050        27   

Common Stocks

                   

Financials

    832        0        0        0        0        (327     0        0        505        (327
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals

  $     39,414      $     25,819      $     (10,733   $     198      $     104      $     (2,377   $     0      $     0      $     52,425      $     (2,229
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

The following is a summary of significant unobservable inputs used in the fair valuations of assets and liabilities categorized within Level 3 of the fair value hierarchy:

 

Category and
Subcategory
  Ending
Balance
at 07/31/2016
     Valuation
Technique
     Unobservable
Inputs
     Input Value(s)
(% Unless
Noted
Otherwise)
 

Investments in Securities, at Value

  

        

Bank Loan Obligations

  $ 5,670         Third Party Vendor         Broker Quote         77.00   

Corporate Bonds & Notes

          

Banking & Finance

    10,421         Proxy Pricing         Base Price         113.75   

Industrials

    10,850         Proxy Pricing         Base Price         99.50   

U.S. Government Agencies

    7,929         Proxy Pricing         Base Price         53.65   

Asset-Backed Securities

    17,050         Proxy Pricing         Base Price         106,003.18-115,005.75   

Common Stocks

          

Financials

    505         Other Valuation Techniques (2)                   
 

 

 

          

Total

  $     52,425            
 

 

 

          

 

(1)

Any difference between Net Change in Unrealized Appreciation/(Depreciation) and Net Change in Unrealized Appreciation/(Depreciation) on Investments Held at July 31, 2016 may be due to an investment no longer held or categorized as Level 3 at period end.

(2) 

Includes valuation techniques not defined in the Notes to Financial Statements as securities valued using such techniques are not considered significant to the Fund.

 

28   PIMCO CLOSED-END FUNDS        See Accompanying Notes   


Schedule of Investments PIMCO Corporate & Income Strategy Fund

 

July 31, 2016

 

        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 
INVESTMENTS IN SECURITIES 124.2%   
BANK LOAN OBLIGATIONS 1.5%   

iHeartCommunications, Inc.

  

7.246% due 01/30/2019

  $     5,800      $     4,521   

Sequa Corp.

  

5.250% due 06/19/2017

      4,912          3,939   
       

 

 

 

Total Bank Loan Obligations (Cost $10,181)

      8,460   
       

 

 

 
CORPORATE BONDS & NOTES 58.1%   
BANKING & FINANCE 31.8%   

AGFC Capital Trust

  

6.000% due 01/15/2067

      2,300          1,265   

Ally Financial, Inc.

  

8.000% due 11/01/2031

      2,186          2,672   

Banco do Brasil S.A.

  

6.250% due 04/15/2024 (g)

      4,460          2,741   

9.000% due 06/18/2024 (g)

      3,827          3,102   

Banco Espirito Santo S.A.

  

2.625% due 05/08/2017 ^

  EUR     1,100          351   

4.000% due 01/21/2019 ^

      4,300          1,370   

4.750% due 01/15/2018 ^

      5,100          1,625   

Banco Santander S.A.

  

6.250% due 09/11/2021 (g)

      1,300          1,300   

Barclays PLC

  

6.500% due 09/15/2019 (g)

      300          317   

7.875% due 09/15/2022 (g)

  GBP     7,567          9,676   

8.000% due 12/15/2020 (g)

  EUR     1,900          2,141   

Blackstone CQP Holdco LP

  

9.296% due 03/19/2019

  $     9,188          9,269   

BNP Paribas S.A.

  

7.375% due 08/19/2025 (g)(j)

      6,200          6,332   

Cantor Fitzgerald LP

  

6.500% due 06/17/2022 (j)

      8,000          8,437   

Co-operative Group Holdings Ltd.

  

7.500% due 07/08/2026

  GBP     6,000          8,724   

Communications Sales & Leasing, Inc.

  

8.250% due 10/15/2023 (j)

  $     3,100          3,181   

Credit Agricole S.A.

  

7.875% due 01/23/2024 (g)(j)

      8,500          8,458   

Credit Suisse Group AG

  

7.500% due 12/11/2023 (g)

      1,725          1,792   

7.500% due 12/11/2023 (g)(j)

      6,000          6,233   

Flagstar Bancorp, Inc.

  

6.125% due 07/15/2021

      3,500          3,593   

GSPA Monetization Trust

  

6.422% due 10/09/2029 (j)

      4,822          5,517   

HSBC Holdings PLC

  

5.250% due 09/16/2022 (g)

  EUR     3,900          4,180   

6.000% due 09/29/2023 (g)

      3,393          3,874   

Jefferies Finance LLC

  

7.375% due 04/01/2020

  $     200          188   

7.500% due 04/15/2021

      344          318   

Jefferies LoanCore LLC

  

6.875% due 06/01/2020 (j)

      6,100          5,475   

Lloyds Banking Group PLC

  

7.625% due 06/27/2023 (g)

  GBP     5,700          7,575   

7.875% due 06/27/2029 (g)

      1,500          1,985   

MPT Operating Partnership LP

  

5.250% due 08/01/2026

  $     1,283          1,352   

National Bank of Greece S.A.

  

3.875% due 10/07/2016

  EUR     1,350          1,510   

Nationwide Building Society

  

10.250% (g)

  GBP     12          2,065   

Navient Corp.

  

5.500% due 01/15/2019 (j)

  $     7,405          7,636   

5.625% due 08/01/2033 (j)

      2,648          2,072   

Novo Banco S.A.

  

5.000% due 04/04/2019

  EUR     298          253   

5.000% due 04/23/2019

      608          517   

5.000% due 05/14/2019

      402          342   

5.000% due 05/21/2019

      225          191   

5.000% due 05/23/2019

      224          190   
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Omega Healthcare Investors, Inc.

  

4.375% due 08/01/2023

  $     1,500      $     1,520   

OneMain Financial Holdings LLC

  

6.750% due 12/15/2019

      1,349          1,371   

PHH Corp.

  

6.375% due 08/15/2021

      170          158   

7.375% due 09/01/2019

      700          714   

Rio Oil Finance Trust

  

9.250% due 07/06/2024

      3,426          2,964   

9.750% due 01/06/2027

      241          205   

Royal Bank of Scotland Group PLC

  

7.500% due 08/10/2020 (g)

      4,070          3,968   

8.000% due 08/10/2025 (g)

      6,190          6,167   

Santander UK Group Holdings PLC

  

7.375% due 06/24/2022 (g)

  GBP     4,200          5,507   

Sberbank of Russia Via SB Capital S.A.

  

5.717% due 06/16/2021

  $     1,900          2,034   

6.125% due 02/07/2022

      1,500          1,639   

Springleaf Finance Corp.

  

5.250% due 12/15/2019

      335          326   

8.250% due 12/15/2020

      2,700          2,801   

Tesco Property Finance PLC

  

5.411% due 07/13/2044

  GBP     7,751          9,814   

6.052% due 10/13/2039

      1,871          2,618   

TIG FinCo PLC

  

8.500% due 03/02/2020

      252          340   

8.750% due 04/02/2020

      5,189          5,270   

Vnesheconombank Via VEB Finance PLC

  

6.902% due 07/09/2020

  $     600          644   
       

 

 

 
            175,879   
       

 

 

 
INDUSTRIALS 19.6%   

Altice Financing S.A.

  

7.500% due 05/15/2026

      1,800          1,822   

BMC Software Finance, Inc.

  

8.125% due 07/15/2021

      1,688          1,384   

Boxer Parent Co., Inc. (9.000% Cash or 9.750% PIK)

  

9.000% due 10/15/2019 (d)(j)

      4,342          3,691   

Caesars Entertainment Operating Co., Inc.

  

8.500% due 02/15/2020 ^

      3,300          3,193   

9.000% due 02/15/2020 ^

      1,885          1,824   

11.250% due 06/01/2017 ^

      8,170          7,864   

Chesapeake Energy Corp.

  

3.930% due 04/15/2019

      115          97   

8.000% due 12/15/2022

      100          91   

Continental Airlines Pass-Through Trust

  

9.798% due 10/01/2022

      1,058          1,176   

Diamond 1 Finance Corp.

  

5.450% due 06/15/2023

      128          136   

6.020% due 06/15/2026

      119          128   

DISH DBS Corp.

  

7.750% due 07/01/2026 (j)

      1,400          1,455   

Eagle Materials, Inc.

  

4.500% due 08/01/2026 (c)

      1,530          1,556   

FAGE International S.A.

  

5.625% due 08/15/2026 (c)

      800          819   

Forbes Energy Services Ltd.

  

9.000% due 06/15/2019 ^

      308          123   

Ford Motor Co.

  

7.700% due 05/15/2097 (j)

      7,830          10,143   

9.980% due 02/15/2047 (j)

      1,500          2,561   

Fresh Market, Inc.

  

9.750% due 05/01/2023

      800          744   

Harvest Operations Corp.

  

2.330% due 04/14/2021

      5,032          5,016   

HCA, Inc.

  

7.500% due 11/15/2095

      1,200          1,229   

iHeartCommunications, Inc.

  

9.000% due 09/15/2022

      3,440          2,541   

Intelsat Luxembourg S.A.

  

7.750% due 06/01/2021

      6,692          1,573   

8.125% due 06/01/2023

      1,121          266   
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Intrepid Aviation Group Holdings LLC

  

6.875% due 02/15/2019

  $     7,070      $     6,416   

Kinder Morgan Energy Partners LP

  

6.375% due 03/01/2041

      400          423   

Kinder Morgan, Inc.

  

7.800% due 08/01/2031

      3,580          4,274   

NXP BV

  

4.125% due 06/01/2021

      2,830          2,936   

Post Holdings, Inc.

  

5.000% due 08/15/2026 (c)

      2,500          2,498   

Prime Security Services Borrower LLC

  

9.250% due 05/15/2023 (j)

      3,850          4,119   

Revlon Escrow Corp.

  

6.250% due 08/01/2024 (c)

      1,300          1,320   

Russian Railways via RZD Capital PLC

  

7.487% due 03/25/2031

  GBP     1,000          1,532   

Sabine Pass Liquefaction LLC

  

5.875% due 06/30/2026

  $     3,100          3,185   

Safeway, Inc.

  

7.250% due 02/01/2031

      120          118   

Sequa Corp.

  

7.000% due 12/15/2017

      7,480          1,272   

SFR Group S.A.

  

7.375% due 05/01/2026 (j)

      5,340          5,340   

Spanish Broadcasting System, Inc.

  

12.500% due 04/15/2017

      2,100          2,084   

Tembec Industries, Inc.

  

9.000% due 12/15/2019 (j)

      2,200          1,732   

Times Square Hotel Trust

  

8.528% due 08/01/2026

      1,796          2,149   

Transocean, Inc.

  

9.000% due 07/15/2023

      1,054          991   

UCP, Inc.

  

8.500% due 10/21/2017

      6,000          5,973   

Unique Pub Finance Co. PLC

  

5.659% due 06/30/2027

  GBP     3,825          5,121   

6.542% due 03/30/2021

      1,857          2,570   

Valvoline, Inc.

  

5.500% due 07/15/2024

  $     437          457   

Westmoreland Coal Co.

  

8.750% due 01/01/2022

      5,955          4,570   
       

 

 

 
          108,512   
       

 

 

 
UTILITIES 6.7%   

CenturyLink, Inc.

  

7.500% due 04/01/2024

      870          931   

Gazprom Neft OAO Via GPN Capital S.A.

  

4.375% due 09/19/2022 (j)

      8,800          8,514   

4.375% due 09/19/2022

      280          271   

6.000% due 11/27/2023 (j)

      4,900          5,163   

Illinois Power Generating Co.

  

6.300% due 04/01/2020

      6,400          2,560   

7.000% due 04/15/2018

      1,900          760   

7.950% due 06/01/2032

      700          280   

Mountain States Telephone & Telegraph Co.

  

7.375% due 05/01/2030

      8,200          8,753   

Odebrecht Drilling Norbe Ltd.

  

6.350% due 06/30/2022

      300          82   

Odebrecht Offshore Drilling Finance Ltd.

  

6.625% due 10/01/2023

      2,748          467   

6.750% due 10/01/2023

      2,949          501   

Petrobras Global Finance BV

  

3.536% due 03/17/2020

      270          250   

4.875% due 03/17/2020

      420          410   

5.750% due 01/20/2020

      220          220   

6.250% due 12/14/2026

  GBP     4,800          5,630   

6.625% due 01/16/2034

      100          112   

6.750% due 01/27/2041

  $     2,300          1,898   

7.875% due 03/15/2019

      315          335   
       

 

 

 
          37,137   
       

 

 

 

Total Corporate Bonds & Notes
(Cost $342,782)

      321,528   
       

 

 

 
 

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2016   29


Schedule of Investments PIMCO Corporate & Income Strategy Fund (Cont.)

 

        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 
MUNICIPAL BONDS & NOTES 4.5%   
CALIFORNIA 1.0%   

Riverside County, California Redevelopment Successor Agency Tax Allocation Bonds, Series 2010

   

7.750% due 10/01/2037

  $     1,220      $     1,356   

Stockton Public Financing Authority, California Revenue Bonds, (BABs), Series 2009

   

7.942% due 10/01/2038

      3,400          3,887   
       

 

 

 
          5,243   
       

 

 

 
ILLINOIS 2.4%   

Chicago, Illinois General Obligation Bonds, (BABs), Series 2010

   

7.517% due 01/01/2040

      12,700          13,437   
       

 

 

 
       
VIRGINIA 0.1%   

Tobacco Settlement Financing Corp., Virginia Revenue Bonds, Series 2007

   

6.706% due 06/01/2046

      785          670   
       

 

 

 
       
WEST VIRGINIA 1.0%   

Tobacco Settlement Finance Authority, West Virginia Revenue Bonds, Series 2007

   

7.467% due 06/01/2047

      6,010          5,770   
       

 

 

 

Total Municipal Bonds & Notes (Cost $23,301)

      25,120   
       

 

 

 
U.S. GOVERNMENT AGENCIES 3.8%   

Fannie Mae

  

3.000% due 02/25/2043 (a)

      69,161          11,617   

4.743% due 01/25/2029

      400          403   

5.788% due 10/25/2028

      600          642   

Freddie Mac

  

6.175% due 11/25/2055

      8,332          4,470   

8.038% due 12/25/2027

      3,300          3,221   

11.238% due 03/25/2025

      745          752   
       

 

 

 

Total U.S. Government Agencies (Cost $22,216)

    21,105   
       

 

 

 
NON-AGENCY MORTGAGE-BACKED SECURITIES 29.9%   

Banc of America Alternative Loan Trust

  

5.500% due 10/25/2035 ^

      5,718          5,110   

6.000% due 01/25/2036 ^

      155          133   

Banc of America Funding Trust

  

6.000% due 07/25/2037 ^

      436          346   

Banc of America Mortgage Trust

  

3.066% due 03/25/2035

      142          132   

5.500% due 11/25/2035 ^

      2,665          2,514   

6.000% due 03/25/2037 ^

      572          523   

6.500% due 09/25/2033

      224          235   

BCAP LLC Trust

  

2.973% due 03/27/2036

      2,236          1,161   

3.247% due 08/28/2037

      6,553          5,013   

5.196% due 03/26/2037

      1,313          384   

9.325% due 07/26/2036

      1,733          1,782   

Bear Stearns ALT-A Trust

  

0.988% due 01/25/2036 ^

      1,832          1,491   

2.840% due 11/25/2036 ^

      5,262          3,875   

2.864% due 09/25/2047 ^

      8,110          5,693   

2.898% due 11/25/2035 ^

      9,290          7,440   

3.076% due 08/25/2036 ^

      1,238          920   

3.379% due 09/25/2035 ^

      912          753   

Bear Stearns Mortgage Funding Trust

  

7.000% due 08/25/2036

      1,603          1,532   

Chase Mortgage Finance Trust

  

2.695% due 12/25/2035 ^

      16          15   

6.000% due 07/25/2037 ^

      1,090          922   

Chase Mortgage Trust

  

3.750% due 02/25/2044

      600          571   

Citigroup Mortgage Loan Trust, Inc.

  

5.097% due 09/25/2037 ^

      3,555          3,273   

5.242% due 04/25/2037 ^

      370          318   
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Countrywide Alternative Loan Resecuritization Trust

  

6.000% due 08/25/2037 ^

  $     1,544      $     1,223   

Countrywide Alternative Loan Trust

  

5.500% due 03/25/2035

      429          355   

5.500% due 03/25/2036 ^

      214          161   

5.500% due 05/25/2036 ^

      2,663          1,898   

5.750% due 01/25/2035

      539          545   

5.750% due 02/25/2035

      594          586   

5.750% due 03/25/2037 ^

      1,078          946   

6.000% due 02/25/2035

      1,350          1,385   

6.000% due 04/25/2036

      1,482          1,172   

6.000% due 02/25/2037 ^

      7,332          5,201   

6.000% due 04/25/2037 ^

      1,676          1,211   

6.000% due 07/25/2037 ^

      483          468   

6.250% due 12/25/2036 ^

      1,943          1,459   

6.500% due 08/25/2036 ^

      677          473   

Countrywide Home Loan Mortgage Pass-Through Trust

  

2.930% due 09/20/2036 ^

      421          332   

6.000% due 07/25/2037

      2,447          2,003   

Credit Suisse Mortgage Capital Certificates

  

3.064% due 10/26/2036

      7,931          4,601   

Credit Suisse Mortgage Capital Mortgage-Backed Trust

  

6.000% due 02/25/2037 ^

      672          584   

Deco Pan Europe Ltd.

  

0.503% due 04/27/2018

  EUR     1,031          1,134   

Epic Drummond Ltd.

  

0.137% due 01/25/2022

      1,499          1,617   

First Horizon Alternative Mortgage Securities Trust

  

6.000% due 08/25/2036 ^

  $     6,569          5,546   

GSR Mortgage Loan Trust

  

3.286% due 08/25/2034

      624          595   

5.500% due 05/25/2036 ^

      600          572   

6.000% due 02/25/2036 ^

      4,170          3,465   

HarborView Mortgage Loan Trust

  

0.723% due 01/19/2036 ^

      5,985          3,942   

3.295% due 06/19/2036 ^

      9,431          5,916   

IndyMac Mortgage Loan Trust

  

6.500% due 07/25/2037 ^

      3,852          2,389   

Jefferies Resecuritization Trust

  

6.000% due 05/26/2036

      18,264            13,716   

JPMorgan Alternative Loan Trust

  

2.756% due 03/25/2037 ^

      2,611          2,227   

6.000% due 12/25/2035 ^

      2,461          2,265   

JPMorgan Mortgage Trust

  

2.839% due 01/25/2037 ^

      1,111          996   

2.861% due 02/25/2036 ^

      4,251          3,752   

2.895% due 04/25/2037

      14          13   

LB-UBS Commercial Mortgage Trust

  

5.407% due 11/15/2038

      1,699          1,328   

5.562% due 02/15/2040

      1,801          1,357   

Lehman Mortgage Trust

  

6.000% due 07/25/2036 ^

      1,286          965   

6.000% due 07/25/2037 ^

      298          269   

Lehman XS Trust

  

0.708% due 06/25/2047

      3,229          2,293   

MASTR Alternative Loan Trust

  

6.750% due 07/25/2036

      2,396          1,765   

Merrill Lynch Mortgage Investors Trust

  

2.820% due 03/25/2036 ^

      959          639   

Mesdag Delta BV

  

0.094% due 01/25/2020

  EUR     1,304          1,252   

Residential Accredit Loans, Inc. Trust

  

0.718% due 05/25/2037 ^

  $     274          64   

3.848% due 12/26/2034 ^

      2,829          2,310   

6.000% due 08/25/2036 ^

      508          424   

Residential Asset Mortgage Products Trust

  

6.500% due 12/25/2031

      800          815   

Residential Asset Securitization Trust

  

6.000% due 11/25/2036 ^

      3,251          2,149   

6.250% due 09/25/2037 ^

      3,025          2,132   

6.250% due 06/25/2046

      1,751          1,463   

Residential Funding Mortgage Securities, Inc. Trust

  

3.530% due 02/25/2037

      2,471          2,000   

6.500% due 03/25/2032

      240          249   
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Sequoia Mortgage Trust

  

2.781% due 02/20/2047

  $     545      $     469   

5.977% due 07/20/2037 ^

      1,117          1,002   

Structured Adjustable Rate Mortgage Loan Trust

  

2.795% due 11/25/2036 ^

      3,897          2,982   

2.857% due 01/25/2036 ^

      3,127          2,368   

2.924% due 07/25/2036 ^

      963          777   

3.130% due 07/25/2035 ^

      1,246          1,072   

3.441% due 07/25/2036 ^

      9,007          6,173   

4.559% due 03/25/2037 ^

      4,274          2,959   

Suntrust Adjustable Rate Mortgage Loan Trust

  

2.867% due 02/25/2037 ^

      559          493   

3.034% due 04/25/2037 ^

      1,029          878   

WaMu Mortgage Pass-Through Certificates Trust

  

2.542% due 07/25/2037 ^

      653          533   

4.179% due 02/25/2037 ^

      849          771   

4.412% due 07/25/2037 ^

      1,572          1,430   

6.002% due 10/25/2036 ^

      3,274          2,577   

Washington Mutual Mortgage Pass-Through Certificates Trust

   

1.295% due 05/25/2047 ^

      331          22   

6.000% due 10/25/2035 ^

      2,426          1,786   

Wells Fargo Mortgage-Backed Securities Trust

  

2.911% due 07/25/2036 ^

      641          605   

3.086% due 05/25/2036 ^

      117          112   
       

 

 

 

Total Non-Agency Mortgage-Backed Securities (Cost $164,099)

      165,367   
       

 

 

 
ASSET-BACKED SECURITIES 19.7%   

ACE Securities Corp. Home Equity Loan Trust

  

0.878% due 02/25/2036

      31,045          11,461   

Argent Securities Trust

  

0.678% due 03/25/2036

      4,230          2,207   

Bear Stearns Asset-Backed Securities Trust

  

0.628% due 10/25/2036 ^

      6,635          5,433   

6.500% due 10/25/2036 ^

      390          298   

CIFC Funding Ltd.

  

0.000% due 05/24/2026 (f)

      2,300          1,626   

0.000% due 07/22/2026

      1,500          917   

Citigroup Mortgage Loan Trust, Inc.

  

0.648% due 12/25/2036

      5,271          3,480   

Countrywide Asset-Backed Certificates

  

0.628% due 06/25/2047 ^

      2,026          1,454   

0.658% due 03/25/2037

      3,138          2,855   

1.208% due 01/25/2036

      4,000          3,318   

4.992% due 10/25/2046 ^

      8,823          7,889   

Credit-Based Asset Servicing and Securitization LLC

  

0.598% due 11/25/2036

      898          562   

First Franklin Mortgage Loan Trust

  

1.118% due 09/25/2035

      3,949          1,817   

1.463% due 05/25/2036

      8,213          3,448   

Fremont Home Loan Trust

  

1.418% due 06/25/2035 ^

      6,000          4,444   

HSI Asset Securitization Corp. Trust

  

0.000% due 10/25/2036 (b)(f)

      3,688          1,633   

IndyMac Home Equity Mortgage Loan Asset-Backed Trust

   

0.648% due 07/25/2037

      11,981          7,385   

JPMorgan Mortgage Acquisition Corp.

  

0.778% due 01/25/2036

      820          761   

JPMorgan Mortgage Acquisition Trust

  

0.648% due 11/25/2036

      5,564          4,308   

4.893% due 01/25/2037 ^

      7,298          5,178   

Lehman XS Trust

  

5.170% due 08/25/2035 ^

      537          506   

Long Beach Mortgage Loan Trust

  

0.788% due 01/25/2036

      5,000          3,024   

Merrill Lynch Mortgage Investors Trust

  

0.648% due 04/25/2037

      600          324   

Morgan Stanley ABS Capital, Inc. Trust

  

0.638% due 06/25/2036

      2,258          2,015   

Morgan Stanley Mortgage Loan Trust

  

6.250% due 07/25/2047 ^

      879          615   
 

 

30   PIMCO CLOSED-END FUNDS        See Accompanying Notes   


 

July 31, 2016

 

        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Park Place Securities, Inc. Asset-Backed Pass-Through Certificates

   

1.008% due 08/25/2035

  $     5,000      $     3,383   

2.258% due 10/25/2034

      573          405   

Residential Asset Mortgage Products Trust

  

1.583% due 12/25/2033

      236          219   

1.688% due 01/25/2035 ^

      3,040          2,008   

SLM Student Loan Trust

  

0.000% due 10/28/2029 (f)

      3          3,910   

0.000% due 01/25/2042 (f)

      4          4,255   

Soundview Home Loan Trust

  

0.738% due 08/25/2037

      2,000          1,439   

South Coast Funding Ltd.

  

1.230% due 08/10/2038

      10,886          2,295   

Taberna Preferred Funding Ltd.

  

1.013% due 08/05/2036 ^

      9,518          6,663   

1.013% due 08/05/2036

      514          360   

1.123% due 07/05/2035

      10,129          7,394   
       

 

 

 

Total Asset-Backed Securities
(Cost $109,781)

      109,289   
       

 

 

 
SOVEREIGN ISSUES 1.5%   

Athens Urban Transportation Organisation

  

4.851% due 09/19/2016

  EUR     200          223   

Autonomous Community of Catalonia

  

4.300% due 11/15/2016

      3,250          3,657   

4.900% due 09/15/2021

      1,500          1,726   

Republic of Greece Government International Bond

  

3.000% due 02/24/2023

      142          121   

3.000% due 02/24/2024

      142          118   

3.000% due 02/24/2025

      142          115   

3.000% due 02/24/2026

      142          113   

3.000% due 02/24/2027

      142          110   

3.000% due 02/24/2028

      142          108   
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

3.000% due 02/24/2029

  EUR     142      $     106   

3.000% due 02/24/2030

      142          104   

3.000% due 02/24/2031

      142          103   

3.000% due 02/24/2032

      142          101   

3.000% due 02/24/2033

      142          100   

3.000% due 02/24/2034

      142          99   

3.000% due 02/24/2035

      142          98   

3.000% due 02/24/2036

      142          97   

3.000% due 02/24/2037

      142          96   

3.000% due 02/24/2038

      142          95   

3.000% due 02/24/2039

      142          95   

3.000% due 02/24/2040

      142          95   

3.000% due 02/24/2041

      142          95   

3.000% due 02/24/2042

      142          95   

3.800% due 08/08/2017

  JPY     47,000          439   

4.750% due 04/17/2019

  EUR     400          403   
       

 

 

 

Total Sovereign Issues (Cost $8,054)

    8,512   
       

 

 

 
        SHARES            
COMMON STOCKS 0.0%   
FINANCIALS 0.0%   

TIG FinCo PLC (h)

      182,606          116   
       

 

 

 

Total Common Stocks (Cost $271)

        116   
       

 

 

 
PREFERRED SECURITIES 2.1%   
BANKING & FINANCE 2.1%   

Farm Credit Bank of Texas

  

10.000% due 12/15/2020 (g)

      8,450          10,161   

GMAC Capital Trust

  

6.411% due 02/15/2040

      54,325          1,381   
       

 

 

 

Total Preferred Securities (Cost $11,884)

      11,542   
       

 

 

 
                  MARKET
VALUE
(000S)
 
SHORT-TERM INSTRUMENTS 3.1%   
REPURCHASE AGREEMENTS (i) 2.5%  
      $     13,671   
       

 

 

 
        PRINCIPAL
AMOUNT
(000S)
           
U.S. TREASURY BILLS 0.6%   

0.296% due 10/06/2016 - 11/03/2016 (e)(f)(l)(n)

  $     3,058          3,056   
       

 

 

 
Total Short-Term Instruments
(Cost $16,727)
    16,727   
       

 

 

 
       
Total Investments in Securities (Cost $709,296)     687,766   
       
Total Investments 124.2%
(Cost $709,296)
      $     687,766   

Financial Derivative
Instruments (k)(m) (0.3)%

(Cost or Premiums, net $(1,166))

    (1,437
 
Preferred Shares (10.0)%     (55,525
 
Other Assets and Liabilities, net (13.9)%     (77,235
       

 

 

 
Net Assets Applicable to Common Shareholders 100.0%       $       553,569   
       

 

 

 
 

NOTES TO SCHEDULE OF INVESTMENTS (AMOUNTS IN THOUSANDS*):

 

* A zero balance may reflect actual amounts rounding to less than one thousand.
^ Security is in default.
(a) Interest only security.
(b) Principal only security.
(c) When-issued security.
(d) Payment in-kind security.
(e) Coupon represents a weighted average yield to maturity.
(f) Zero coupon security.
(g) Perpetual maturity; date shown, if applicable, represents next contractual call date.

 

(h)  RESTRICTED SECURITIES:

 

Issuer Description                Acquisition
Date
    Cost     Market
Value
    Market Value
as Percentage
of Net Assets
 

TIG FinCo PLC

         04/02/2015        $    271      $     116        0.02%   
        

 

 

   

 

 

   

 

 

 

 

BORROWINGS AND OTHER FINANCING TRANSACTIONS

 

(i)  REPURCHASE AGREEMENTS:

 

Counterparty   Lending
Rate
    Settlement
Date
    Maturity
Date
    Principal
Amount
    Collateralized By   Collateral
(Received)
    Repurchase
Agreements,
at Value
    Repurchase
Agreement
Proceeds
to be
Received (1)
 
MBC     0.550     07/29/2016        08/01/2016      $     10,600      U.S. Treasury Notes 1.375% due 03/31/2020   $ (10,975   $ 10,600      $ 10,600   
SSB     0.010        07/29/2016        08/01/2016        3,071      U.S. Treasury Notes 1.000% due 05/15/2018     (3,134     3,071        3,071   
           

 

 

   

 

 

   

 

 

 

Total Repurchase Agreements

  

        $     (14,109   $     13,671      $     13,671   
           

 

 

   

 

 

   

 

 

 

 

(1)

Includes accrued interest.

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2016   31


Schedule of Investments PIMCO Corporate & Income Strategy Fund (Cont.)

 

 

REVERSE REPURCHASE AGREEMENTS:

 

Counterparty   Borrowing
Rate  (3)
    Borrowing
Date
    Maturity
Date
    Amount
Borrowed  (3)
    Payable for
Reverse
Repurchase
Agreements
 

BCY

    (0.250 )%      02/18/2016        TBD  (2)    $ (1,571   $ (1,569

DEU

    1.000        06/27/2016        06/27/2017        (587     (586
    1.550        07/27/2016        10/27/2016        (2,848     (2,849

JML

    1.300        07/19/2016        08/04/2016        (7,060     (7,063
    1.300        08/02/2016        08/16/2016        (4,171     (4,171

MSC

    1.000        05/02/2016        08/02/2016        (13,286     (13,320
    1.000        05/10/2016        08/08/2016        (2,064     (2,069
    1.150        08/02/2016        11/02/2016        (13,724     (13,724

RBC

    1.560        03/16/2016        09/06/2016        (6,540     (6,579
    1.610        05/23/2016        11/14/2016        (1,231     (1,235
    1.640        07/18/2016        01/18/2017        (2,777     (2,779

RDR

    1.030        05/17/2016        08/17/2016        (8,113     (8,131

UBS

    1.150        07/08/2016        08/03/2016        (3,411     (3,414
    1.430        05/18/2016        08/18/2016            (10,432     (10,463
    1.450        07/21/2016        10/20/2016        (5,442     (5,444
    1.500        06/14/2016        09/14/2016        (3,594     (3,601
    1.630        07/15/2016        11/14/2016        (4,401     (4,404
         

 

 

 

Total Reverse Repurchase Agreements

  

      $     (91,401
         

 

 

 

 

(2)

Open maturity reverse repurchase agreement.

(3)

The average amount of borrowings outstanding during the period ended July 31, 2016 was $(35,135) at a weighted average interest rate of 1.102%.

 

BORROWINGS AND OTHER FINANCING TRANSACTIONS SUMMARY

 

The following is a summary by counterparty of the market value of Borrowings and Other Financing Transactions and collateral (received)/pledged as of July 31, 2016:

 

(j) Securities with an aggregate market value of $92,296 have been pledged as collateral under the terms of the following master agreements as of July 31, 2016.

 

Counterparty   Repurchase
Agreement
Proceeds to
be
Received
    Payable for
Reverse
Repurchase
Agreements
    Payable for
Sale-Buyback
Transactions
     Total
Borrowings and
Other Financing
Transactions
    Collateral
(Received)/Pledged
    Net Exposure  (4)  

Global/Master Repurchase Agreement

            

BCY

  $ 0      $ (1,569   $ 0       $ (1,569   $ 1,879      $ 310   

DEU

    0        (3,435     0         (3,435     4,115        680   

JML

    0        (11,234     0             (11,234     13,677        2,443   

MBC

    10,600        0        0         10,600            (10,975     (375

MSC

    0        (29,113     0         (29,113     17,231            (11,882

RBC

    0        (10,593     0         (10,593     11,927        1,334   

RDR

    0        (8,131     0         (8,131     8,437        306   

SSB

    3,071        0        0         3,071        (3,134     (63

UBS

    0        (27,326     0         (27,326     32,085        4,759   
 

 

 

   

 

 

   

 

 

        

Total Borrowings and Other Financing Transactions

  $     13,671      $     (91,401   $     0          
 

 

 

   

 

 

   

 

 

        

 

(4)

Net Exposure represents the net receivable/(payable) that would be due from/to the counterparty in the event of default. Exposure from borrowings and other financing transactions can only be netted across transactions governed under the same master agreement with the same legal entity. See Note 7, Principal Risks, in the Notes to Financial Statements for more information regarding master netting arrangements.

 

CERTAIN TRANSFERS ACCOUNTED FOR AS SECURED BORROWINGS

 

Remaining Contractual Maturity of the Agreements

 

     Overnight and
Continuous
    Up to 30 days     31-90 days     Greater Than 90 days     Total  

Reverse Repurchase Agreements

         

Corporate Bonds & Notes

  $ 0      $ (44,460   $ (18,473   $ (10,573   $ (73,506
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Borrowings

  $     0      $     (44,460   $     (18,473   $     (10,573   $     (73,506
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross amount of recognized liabilities for reverse repurchase agreements (5)

          $ (73,506
         

 

 

 

 

(5)

Unsettled reverse repurchase agreements liability of $(17,895) is outstanding at period end.

 

32   PIMCO CLOSED-END FUNDS        See Accompanying Notes   


 

July 31, 2016

 

 

(k)  FINANCIAL DERIVATIVE INSTRUMENTS: EXCHANGE-TRADED OR CENTRALLY CLEARED

 

SWAP AGREEMENTS:

 

CREDIT DEFAULT SWAPS ON CREDIT INDICES - SELL PROTECTION (1)

 

Index/Tranches   Fixed
Receive Rate
  Maturity
Date
    Notional
Amount  (2)
    Market
Value  (3)
    Unrealized
Appreciation/
(Depreciation)
    Variation Margin  
            Asset     Liability  

CDX.HY-24 5-Year Index

  5.000%     06/20/2020      $ 8,330      $ 590      $ (53   $ 29      $ 0   

CDX.HY-25 5-Year Index

  5.000     12/20/2020            12,771        700        612        50        0   

CDX.HY-26 5-Year Index

  5.000     06/20/2021        1,600        80        20        6        0   
       

 

 

   

 

 

   

 

 

   

 

 

 
        $     1,370      $     579      $     85      $     0   
       

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

If the Fund is a seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) pay to the buyer of protection an amount equal to the notional amount of the swap and take delivery of the referenced obligation or underlying securities comprising the referenced index or (ii) pay a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index.

(2)

The maximum potential amount the Fund could be required to pay as a seller of credit protection or receive as a buyer of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.

(3)

The prices and resulting values for credit default swap agreements on credit indices serve as an indicator of the current status of the payment/performance risk and represent the likelihood of an expected liability (or profit) for the credit derivative should the notional amount of the swap agreement be closed/sold as of the period end. Increasing market values, in absolute terms when compared to the notional amount of the swap, represent a deterioration of the referenced indices’ credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.

 

INTEREST RATE SWAPS

 

Pay/Receive
Floating Rate
  Floating Rate Index   Fixed Rate     Maturity
Date
    Notional
Amount
    Market
Value
    Unrealized
Appreciation/
(Depreciation)
    Variation Margin  
              Asset      Liability  

Pay

 

3-Month USD-LIBOR

    2.000     12/16/2020        $      59,300      $ 2,589      $ 1,043      $ 158       $ 0   

Pay

 

3-Month USD-LIBOR

    2.000        06/15/2021        36,800        1,726        478        111         0   

Pay

 

3-Month USD-LIBOR

    2.750        06/17/2025        75,590        9,490        4,827        382         0   

Pay

 

3-Month USD-LIBOR

    3.500        06/19/2044            169,400        70,280        75,806        2,528         0   

Receive

 

3-Month USD-LIBOR *

    2.250        12/21/2046        234,240            (27,306     (7,207     0         (3,315

Pay

 

6-Month AUD-BBR-BBSW

    3.500        06/17/2025        AUD        7,600        695        507        42         0   
         

 

 

   

 

 

   

 

 

    

 

 

 
          $ 57,474      $ 75,454      $ 3,221       $ (3,315
         

 

 

   

 

 

   

 

 

    

 

 

 

Total Swap Agreements

          $ 58,844      $     76,033      $     3,306       $     (3,315
         

 

 

   

 

 

   

 

 

    

 

 

 

 

* This security has a forward starting effective date. See Note 2(a) in the Notes to Financial Statements for further information.

 

FINANCIAL DERIVATIVE INSTRUMENTS: EXCHANGE-TRADED OR CENTRALLY CLEARED SUMMARY

 

The following is a summary of the market value and variation margin of Exchange-Traded or Centrally Cleared Financial Derivative Instruments as of July 31, 2016:

 

(l) Securities with an aggregate market value of $984 and cash of $8,639 have been pledged as collateral for exchange-traded and centrally cleared financial derivative instruments as of July 31, 2016. See Note 7, Principal Risks, in the Notes to Financial Statements for more information regarding master netting arrangements.

 

    Financial Derivative Assets           Financial Derivative Liabilities  
    Market Value     Variation Margin
Asset
   

Total

          Market Value     Variation Margin
Liability
   

Total

 
     Purchased
Options
    Futures     Swap
Agreements
            Written
Options
    Futures     Swap
Agreements
   

Total Exchange-Traded or Centrally Cleared

  $     0      $     0      $     3,306      $     3,306        $     0      $     0      $     (3,315)      $     (3,315)   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

 

(m)  FINANCIAL DERIVATIVE INSTRUMENTS: OVER THE COUNTER

 

FORWARD FOREIGN CURRENCY CONTRACTS:

 

Counterparty    Settlement
Month
    Currency to
be Delivered
    Currency to
be Received
    Unrealized Appreciation/
(Depreciation)
 
         Asset     Liability  

AZD

     08/2016      EUR     494      $     548      $ 0      $ (5
     09/2016          100          112        0        0   

BOA

     08/2016          27,581          30,427        0        (409
     08/2016      GBP     48,588          64,663        360        0   
     08/2016      $     29,835      EUR     27,123               488        0   
     09/2016      EUR     27,123      $     29,872        0               (487

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2016   33


Schedule of Investments PIMCO Corporate & Income Strategy Fund (Cont.)

 

Counterparty    Settlement
Month
    Currency to
be Delivered
    Currency to
be Received
    Unrealized Appreciation/
(Depreciation)
 
         Asset     Liability  

CBK

     08/2016      EUR     150      $     165      $ 0      $ (2
     08/2016      GBP     1,402          1,858        6        (4
     08/2016      MXN     170          9        0        0   
     08/2016      $     152      AUD     201        0        0   
     08/2016          1,628      EUR     1,478        25        0   
     09/2016      GBP     84      $     111        0        0   

GLM

     08/2016      AUD     74          54        0        (2
     08/2016      EUR     50          55        0        (1
     08/2016      GBP     377          495        0        (4
     08/2016      $     586      GBP     450        10        0   
     09/2016      GBP     170      $     224        0        (1

JPM

     08/2016      AUD     215          162        0        (1
     08/2016      EUR     275          307        0        (1
     08/2016      GBP     1,315          1,749        10        (1
     08/2016      $     1,200      GBP     903        0        (5
     09/2016      EUR     201      $     223        0        (2

MSB

     08/2016      GBP     197          260        0        (1

SCX

     08/2016      EUR     100          110        0        (2
     08/2016      JPY     46,100          453        1        0   
     08/2016      $     67,288      GBP     51,283        582        0   
     09/2016      GBP     51,283      $     67,320        0        (584

TOR

     08/2016          799          1,032        0        (25
            

 

 

   

 

 

 

Total Forward Foreign Currency Contracts

        $     1,482      $     (1,537
            

 

 

   

 

 

 

 

SWAP AGREEMENTS:

 

CREDIT DEFAULT SWAPS ON CORPORATE ISSUES - SELL PROTECTION (1)

 

Counterparty   Reference Entity   Fixed
Receive Rate
    Maturity
Date
    Implied
Credit Spread at
July 31, 2016 (2)
    Notional
Amount  (3)
    Premiums
(Received)
    Unrealized
Appreciation/
(Depreciation)
    Swap Agreements,
at Value
 
                Asset     Liability  
BPS  

Petrobras Global Finance BV

    1.000     12/20/2019        4.923     $    2,400      $ (247   $ (43   $ 0      $ (290
GST  

Petrobras Global Finance BV

    1.000        12/20/2019        4.923            8,900        (912     (163     0        (1,075
 

Petrobras Global Finance BV

    1.000        09/20/2020        5.476        10        (1     (1     0        (2
HUS  

Petrobras Global Finance BV

    1.000        09/20/2020        5.476        40        (6     0        0        (6
           

 

 

   

 

 

   

 

 

   

 

 

 
            $ (1,166   $ (207   $ 0      $ (1,373
           

 

 

   

 

 

   

 

 

   

 

 

 

Total Swap Agreements

  

        $     (1,166   $     (207   $     0      $     (1,373
           

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

If the Fund is a seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) pay to the buyer of protection an amount equal to the notional amount of the swap and take delivery of the referenced obligation or underlying securities comprising the referenced index or (ii) pay a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index.

(2)

Implied credit spreads, represented in absolute terms, utilized in determining the market value of credit default swap agreements on corporate issues as of period end serve as an indicator of the current status of the payment/performance risk and represent the likelihood or risk of default for the credit derivative. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection and may include upfront payments required to be made to enter into the agreement. Wider credit spreads represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.

(3)

The maximum potential amount the Fund could be required to pay as a seller of credit protection or receive as a buyer of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.

 

FINANCIAL DERIVATIVE INSTRUMENTS: OVER THE COUNTER SUMMARY

 

The following is a summary by counterparty of the market value of OTC financial derivative instruments and collateral (received)/pledged as of July 31, 2016:

 

(n) Securities with an aggregate market value of $1,520 have been pledged as collateral for financial derivative instruments as governed by International Swaps and Derivatives Association, Inc. master agreements as of July 31, 2016.

 

    Financial Derivative Assets           Financial Derivative Liabilities                    
Counterparty   Forward
Foreign
Currency
Contracts
     Purchased
Options
     Swap
Agreements
     Total
Over the
Counter
           Forward
Foreign
Currency
Contracts
    Written
Options
     Swap
Agreements
     Total
Over the
Counter
    Net Market
Value of OTC
Derivatives
    Collateral
(Received)/
Pledged
    Net
Exposure  (4)
 

AZD

  $ 0       $ 0       $ 0       $ 0        $ (5   $ 0       $ 0       $ (5   $ (5   $ 0      $ (5

BOA

     848          0          0          848           (896      0          0          (896      (48      (760      (808

 

34   PIMCO CLOSED-END FUNDS        See Accompanying Notes   


 

July 31, 2016

 

    Financial Derivative Assets           Financial Derivative Liabilities                     
Counterparty   Forward
Foreign
Currency
Contracts
     Purchased
Options
     Swap
Agreements
     Total
Over the
Counter
           Forward
Foreign
Currency
Contracts
    Written
Options
     Swap
Agreements
    Total
Over the
Counter
    Net Market
Value of OTC
Derivatives
    Collateral
(Received)/
Pledged
     Net
Exposure  (4)
 

BPS

  $ 0       $ 0       $ 0       $ 0        $ 0      $ 0       $ (290   $ (290   $ (290   $ 303       $ 13   

CBK

    31         0         0         31          (6     0         0        (6     25        0         25   

GLM

    10         0         0         10          (8     0         0        (8     2        0         2   

GST

    0         0         0         0          0        0         (1,077     (1,077      (1,077      1,217          140   

HUS

    0         0         0         0          0        0         (6     (6     (6     0         (6

JPM

    10         0         0         10          (10     0         0        (10     0        0         0   

MSB

    0         0         0         0          (1     0         0        (1     (1     0         (1

SCX

    583         0         0         583          (586     0         0        (586     (3     0         (3

TOR

    0         0         0         0          (25     0         0        (25     (25     0         (25
 

 

 

    

 

 

    

 

 

    

 

 

     

 

 

   

 

 

    

 

 

   

 

 

        

Total Over the Counter

  $  1,482       $  0       $  0       $  1,482        $  (1,537   $  0       $  (1,373   $  (2,910       
 

 

 

    

 

 

    

 

 

    

 

 

     

 

 

   

 

 

    

 

 

   

 

 

        

 

(4)

Net Exposure represents the net receivable/(payable) that would be due from/to the counterparty in the event of default. Exposure from OTC financial derivative instruments can only be netted across transactions governed under the same master agreement with the same legal entity. See Note 7, Principal Risks, in the Notes to Financial Statements for more information regarding master netting arrangements.

 

FAIR VALUE OF FINANCIAL DERIVATIVE INSTRUMENTS

 

The following is a summary of the fair valuation of the Fund’s derivative instruments categorized by risk exposure. See Note 7, Principal Risks, in the Notes to Financial Statements on risks of the Fund.

 

Fair Values of Financial Derivative Instruments on the Statements of Assets and Liabilities as of July 31, 2016:

 

    Derivatives not accounted for as hedging instruments  
     Commodity
Contracts
    Credit
Contracts
    Equity
Contracts
    Foreign
Exchange
Contracts
    Interest
Rate Contracts
    Total  

Financial Derivative Instruments - Assets

           

Exchange-traded or centrally cleared

           

Swap Agreements

  $ 0      $ 85      $ 0      $ 0      $ 3,221      $ 3,306   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

           

Forward Foreign Currency Contracts

  $ 0      $ 0      $ 0      $ 1,482      $ 0      $ 1,482   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0      $ 85      $ 0      $ 1,482      $ 3,221      $ 4,788   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial Derivative Instruments - Liabilities

           

Exchange-traded or centrally cleared

           

Swap Agreements

  $ 0      $ 0      $ 0      $ 0      $ 3,315      $ 3,315   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

           

Forward Foreign Currency Contracts

  $ 0      $ 0      $ 0      $ 1,537      $ 0      $ 1,537   

Swap Agreements

    0        1,373        0        0        0        1,373   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0      $ 1,373      $ 0      $ 1,537      $ 0      $ 2,910   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $     0      $     1,373      $     0      $     1,537      $     3,315      $     6,225   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

The effect of Financial Derivative Instruments on the Statements of Operations for the period ended July 31, 2016:

 

    Derivatives not accounted for as hedging instruments  
     Commodity
Contracts
    Credit
Contracts
    Equity
Contracts
    Foreign
Exchange
Contracts
    Interest
Rate Contracts
    Total  

Net Realized Gain (Loss) on Financial Derivative Instruments

  

       

Exchange-traded or centrally cleared

           

Swap Agreements

  $ 0      $ 136      $ 0      $ 0      $ (55,569   $ (55,433
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

           

Forward Foreign Currency Contracts

  $ 0      $ 0      $ 0      $ 10,637      $ 0      $ 10,637   

Swap Agreements

    0        133        0        0        (4,131     (3,998
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0      $ 133      $ 0      $ 10,637      $ (4,131   $ 6,639   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0      $ 269      $ 0      $     10,637      $     (59,700   $     (48,794
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Change in Unrealized Appreciation (Depreciation) on Financial Derivative Instruments

  

     

Exchange-traded or centrally cleared

           

Swap Agreements

  $ 0      $ 803      $ 0      $ 0      $ 53,461      $ 54,264   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

           

Forward Foreign Currency Contracts

  $ 0      $ 0      $ 0      $ (462   $ 0      $ (462

Swap Agreements

    0        162        0        0        335        497   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0      $ 162      $ 0      $ (462   $ 335      $ 35   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $     0      $     965      $     0      $ (462   $ 53,796      $ 54,299   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2016   35


Schedule of Investments PIMCO Corporate & Income Strategy Fund (Cont.)

 

July 31, 2016

 

 

FAIR VALUE MEASUREMENTS

 

The following is a summary of the fair valuations according to the inputs used as of July 31, 2016 in valuing the Fund’s assets and liabilities:

 

Category and Subcategory   Level 1     Level 2     Level 3     Fair
Value at
07/31/2016
 

Bank Loan Obligations

  $ 0      $ 8,460      $ 0      $ 8,460   

Corporate Bonds & Notes

       

Banking & Finance

    0            170,362            5,517            175,879   

Industrials

    0        102,539        5,973        108,512   

Utilities

    0        37,137        0        37,137   

Municipal Bonds & Notes

       

California

    0        5,243        0        5,243   

Illinois

    0        13,437        0        13,437   

Virginia

    0        670        0        670   

West Virginia

    0        5,770        0        5,770   

U.S. Government Agencies

    0        16,635        4,470        21,105   

Non-Agency Mortgage-Backed Securities

    0        165,367        0        165,367   

Asset-Backed Securities

    0        101,124        8,165        109,289   

Sovereign Issues

    0        8,512        0        8,512   

Common Stocks

       

Financials

    0        0        116        116   

Preferred Securities

       

Banking & Finance

        1,381        10,161        0        11,542   
Category and Subcategory   Level 1     Level 2     Level 3     Fair
Value at
07/31/2016
 

Short-Term Instruments

       

Repurchase Agreements

  $ 0      $ 13,671      $ 0      $ 13,671   

U.S. Treasury Bills

    0        3,056        0        3,056   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Investments

  $     1,381      $     662,144      $     24,241      $     687,766   
 

 

 

   

 

 

   

 

 

   

 

 

 

Financial Derivative Instruments - Assets

  

Exchange-traded or centrally cleared

    0        3,306        0        3,306   

Over the counter

    0        1,482        0        1,482   
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0      $ 4,788      $ 0      $ 4,788   
 

 

 

   

 

 

   

 

 

   

 

 

 

Financial Derivative Instruments - Liabilities

  

Exchange-traded or centrally cleared

    0        (3,315     0        (3,315

Over the counter

    0        (2,910     0        (2,910
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0      $ (6,225   $ 0      $ (6,225
 

 

 

   

 

 

   

 

 

   

 

 

 

Totals

  $     1,381      $     660,707      $     24,241      $     686,329   
 

 

 

   

 

 

   

 

 

   

 

 

 
 

 

There were no significant transfers between Levels 1 and 2 during the period ended July 31, 2016.

 

The following is a reconciliation of the fair valuations using significant unobservable inputs (Level 3) for the Fund during the period ended July 31, 2016:

 

Category and Subcategory   Beginning
Balance
at 07/31/2015
    Net
Purchases
    Net
Sales
    Accrued
Discounts/
(Premiums)
    Realized
Gain/(Loss)
    Net Change in
Unrealized
Appreciation/
(Depreciation) (1)
    Transfers into
Level 3
    Transfers out
of Level 3
    Ending
Balance
at 07/31/2016
    Net Change in
Unrealized
Appreciation/
(Depreciation)
on Investments
Held  at
07/31/2016 (1)
 

Investments in Securities, at Value

  

           

Corporate Bonds & Notes

                   

Banking & Finance

  $ 5,535      $ 0      $ (134   $ 3      $ 1      $ 112      $ 0      $ 0      $ 5,517      $ 129   

Industrials

    6,022        0        0        7        0        (56     0        0        5,973        (56

U.S. Government Agencies

    0        4,959        (68     40        28        (489     0        0        4,470        (488

Asset-Backed Securities

    0        8,150        0        0        0        15        0        0        8,165        15   

Common Stocks

                   

Financials

    191        0        0        0        0        (75     0        0        116        (75
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals

  $     11,748      $     13,109      $     (202   $     50      $     29      $     (493   $     0      $     0      $     24,241      $     (475
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

The following is a summary of significant unobservable inputs used in the fair valuations of assets and liabilities categorized within Level 3 of the fair value hierarchy:

 

Category and Subcategory   Ending
Balance
at 07/31/2016
     Valuation
Technique
   Unobservable
Inputs
     Input Value(s)
(% Unless
Noted
Otherwise)
 

Investments in Securities, at Value

     

Corporate Bonds & Notes

          

Banking & Finance

  $ 5,517       Proxy Pricing      Base Price         113.75   

Industrials

    5,973       Proxy Pricing      Base Price         99.50   

U.S. Government Agencies

    4,470       Proxy Pricing      Base Price         53.65   

Asset-Backed Securities

    8,165       Proxy Pricing      Base Price         106,003.18-115,005.75   

Common Stocks

          

Financials

    116       Other Valuation Techniques (2)      —           —     
 

 

 

          

Total

  $     24,241            
 

 

 

          

 

(1)

Any difference between Net Change in Unrealized Appreciation/(Depreciation) and Net Change in Unrealized Appreciation/(Depreciation) on Investments Held at July 31, 2016 may be due to an investment no longer held or categorized as Level 3 at period end.

(2)

Includes valuation techniques not defined in the Notes to Financial Statements as securities valued using such techniques are not considered significant to the Fund.

 

36   PIMCO CLOSED-END FUNDS        See Accompanying Notes   


Schedule of Investments PIMCO High Income Fund

 

July 31, 2016

 

        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 
INVESTMENTS IN SECURITIES 129.0%   
BANK LOAN OBLIGATIONS 1.2%   

iHeartCommunications, Inc.

  

7.246% due 01/30/2019

  $     10,450      $     8,145   

Sequa Corp.

  

5.250% due 06/19/2017

      2,573          2,063   
       

 

 

 

Total Bank Loan Obligations (Cost $12,421)

      10,208   
       

 

 

 
CORPORATE BONDS & NOTES 73.0%   
BANKING & FINANCE 37.4%   

AGFC Capital Trust

  

6.000% due 01/15/2067

      27,410          15,075   

Ally Financial, Inc.

  

8.000% due 11/01/2031

      200          245   

Atlantic Marine Corps Communities LLC

  

5.383% due 02/15/2048

      4,634          5,141   

Banco Bilbao Vizcaya Argentaria S.A.

  

6.750% due 02/18/2020 (g)

  EUR     1,600          1,632   

Banco do Brasil S.A.

  

6.250% due 04/15/2024 (g)

  $     7,350          4,517   

9.000% due 06/18/2024 (g)

      9,239          7,488   

Banco Espirito Santo S.A.

  

2.625% due 05/08/2017 ^

  EUR     1,900          605   

4.000% due 01/21/2019 ^

      5,800          1,848   

4.750% due 01/15/2018 ^

      6,400          2,039   

Banco Santander S.A.

  

6.250% due 09/11/2021 (g)

      2,300          2,300   

Barclays PLC

  

7.875% due 09/15/2022 (g)

  GBP     7,210          9,220   

8.000% due 12/15/2020 (g)

  EUR     7,140          8,046   

Blackstone CQP Holdco LP

  

9.296% due 03/19/2019

  $     7,878          7,947   

BNP Paribas S.A.

  

7.375% due 08/19/2025 (g)(j)

      10,000          10,213   

Cantor Fitzgerald LP

  

6.500% due 06/17/2022 (j)

      13,100          13,816   

Co-operative Group Holdings Ltd.

  

7.500% due 07/08/2026

  GBP     3,000          4,362   

Communications Sales & Leasing, Inc.

  

8.250% due 10/15/2023 (j)

  $     5,000          5,131   

Credit Agricole S.A.

  

7.500% due 06/23/2026 (g)

  GBP     400          509   

7.875% due 01/23/2024 (g)

  $     5,950          5,920   

7.875% due 01/23/2024 (g)(j)

      3,600          3,582   

Credit Suisse Group AG

  

7.500% due 12/11/2023 (g)

      2,736          2,842   

Doctors Co.

  

6.500% due 10/15/2023

      10,000          11,243   

Flagstar Bancorp, Inc.

  

6.125% due 07/15/2021

      5,300          5,442   

GSPA Monetization Trust

  

6.422% due 10/09/2029 (j)

      8,037          9,195   

HSBC Holdings PLC

  

6.000% due 09/29/2023 (g)

  EUR     5,800          6,623   

International Lease Finance Corp.

  

6.980% due 10/15/2018

  $     18,000          18,796   

Jefferies Finance LLC

  

7.375% due 04/01/2020

      300          282   

Jefferies LoanCore LLC

  

6.875% due 06/01/2020 (j)

      17,000          15,257   

Lloyds Bank PLC

  

12.000% due 12/16/2024 (g)(j)

      23,790          32,602   

Midwest Family Housing LLC

  

6.631% due 01/01/2051

      4,911          4,607   

MPT Operating Partnership LP

  

5.250% due 08/01/2026

      1,949          2,054   

Nationwide Building Society

  

10.250% (g)

  GBP     19          3,202   

Navient Corp.

  

5.625% due 08/01/2033 (j)

  $     29,295          22,923   
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Novo Banco S.A.

  

5.000% due 04/04/2019

  EUR     439      $     373   

5.000% due 04/23/2019

      1,045          888   

5.000% due 05/14/2019

      792          673   

5.000% due 05/21/2019

      387          329   

5.000% due 05/23/2019

      384          326   

Omega Healthcare Investors, Inc.

  

4.375% due 08/01/2023

  $     2,300          2,330   

PHH Corp.

  

6.375% due 08/15/2021

      250          232   

7.375% due 09/01/2019 (j)

    1,990          2,030   

Provident Funding Associates LP

  

6.750% due 06/15/2021

      650          624   

Rio Oil Finance Trust

  

9.250% due 07/06/2024

      27,313          23,626   

Royal Bank of Scotland Group PLC

  

7.500% due 08/10/2020 (g)

    7,040          6,864   

8.000% due 08/10/2025 (g)

    5,860          5,838   

Santander UK Group Holdings PLC

  

7.375% due 06/24/2022 (g)

  GBP     5,413          7,098   

Tesco Property Finance PLC

  

5.411% due 07/13/2044

      4,443          5,626   

6.052% due 10/13/2039

      4,700          6,575   

TIG FinCo PLC

  

8.500% due 03/02/2020

      937          1,265   

8.750% due 04/02/2020

      4,815          4,891   
       

 

 

 
            314,292   
       

 

 

 
INDUSTRIALS 29.0%   

Altice Financing S.A.

  

7.500% due 05/15/2026 (j)

  $     5,400          5,467   

BMC Software Finance, Inc.

  

8.125% due 07/15/2021 (j)

    2,827          2,318   

Boxer Parent Co., Inc. (9.000% Cash or 9.750% PIK)

  

9.000% due 10/15/2019 (c)(j)

    8,132          6,912   

Caesars Entertainment Operating Co., Inc.

  

9.000% due 02/15/2020 ^

      19,100          18,479   

11.250% due 06/01/2017 ^

      10,700          10,299   

Chesapeake Energy Corp.

  

3.930% due 04/15/2019

      120          101   

8.000% due 12/15/2022

      300          272   

Diamond 1 Finance Corp.

  

5.450% due 06/15/2023

      195          207   

6.020% due 06/15/2026

      181          195   

DriveTime Automotive Group, Inc.

  

8.000% due 06/01/2021 (j)

    5,730          5,472   

Enterprise Inns PLC

  

6.875% due 05/09/2025

  GBP     5,000          6,582   

FAGE International S.A.

  

5.625% due 08/15/2026 (b)

  $     1,300          1,331   

Forbes Energy Services Ltd.

  

9.000% due 06/15/2019 ^

      1,977          791   

Ford Motor Co.

  

7.700% due 05/15/2097 (j)

    16,610          21,516   

Fresh Market, Inc.

  

9.750% due 05/01/2023 (j)

    5,700          5,301   

General Shopping Finance Ltd.

  

10.000% due 08/29/2016 (g)

    5,300          3,259   

General Shopping Investments Ltd.

  

12.000% due 03/20/2017 ^(g)

    2,500          638   

Hampton Roads PPV LLC

  

6.621% due 06/15/2053

      20,444          18,779   

Harvest Operations Corp.

  

2.330% due 04/14/2021

      25,756          25,676   

HCA, Inc.

  

7.500% due 11/15/2095

      700          717   

Hellenic Railways Organization S.A.

  

4.028% due 03/17/2017

  EUR     300          324   

4.500% due 12/06/2016

  JPY     10,000          96   

iHeartCommunications, Inc.

  

9.000% due 09/15/2022 (j)

  $     6,800          5,023   
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Intelsat Luxembourg S.A.

  

7.750% due 06/01/2021

  $     5,615      $     1,320   

8.125% due 06/01/2023

      5,704          1,355   

Intrepid Aviation Group Holdings LLC

  

6.875% due 02/15/2019

      11,650          10,572   

Petroleos de Venezuela S.A.

  

8.500% due 11/02/2017

      67          52   

Post Holdings, Inc.

  

5.000% due 08/15/2026 (b)

    3,800          3,798   

Prime Security One MS, Inc.

  

4.875% due 07/15/2032

      1,560          1,307   

Prime Security Services Borrower LLC

  

9.250% due 05/15/2023 (j)

    5,900          6,313   

Revlon Escrow Corp.

  

6.250% due 08/01/2024 (b)

    1,900          1,929   

Russian Railways via RZD Capital PLC

  

7.487% due 03/25/2031

  GBP     19,600          30,025   

Safeway, Inc.

  

7.250% due 02/01/2031

  $     70          69   

Sequa Corp.

  

7.000% due 12/15/2017

      17,343          2,948   

SFR Group S.A.

  

7.375% due 05/01/2026

      7,227          7,227   

Spanish Broadcasting System, Inc.

  

12.500% due 04/15/2017

      3,320          3,295   

Tembec Industries, Inc.

  

9.000% due 12/15/2019 (j)

    20,075          15,809   

Transocean, Inc.

  

9.000% due 07/15/2023

      1,611          1,514   

UCP, Inc.

  

8.500% due 10/21/2017

      10,300          10,253   

Valvoline, Inc.

  

5.500% due 07/15/2024

      663          694   

Warren Resources, Inc.

  

9.000% due 08/01/2022 ^

      3,000          32   

Westmoreland Coal Co.

  

8.750% due 01/01/2022

      7,638          5,862   
       

 

 

 
          244,129   
       

 

 

 
UTILITIES 6.6%   

CenturyLink, Inc.

  

7.200% due 12/01/2025

      1,122          1,083   

7.500% due 04/01/2024

      1,330          1,423   

Frontier Communications Corp.

  

10.500% due 09/15/2022

      1,070          1,157   

11.000% due 09/15/2025

      1,070          1,147   

Gazprom Neft OAO Via GPN Capital S.A.

  

6.000% due 11/27/2023

      9,900          10,432   

Illinois Power Generating Co.

  

6.300% due 04/01/2020

      30          12   

7.000% due 04/15/2018

      16,800          6,720   

7.950% due 06/01/2032

      900          360   

Mountain States Telephone & Telegraph Co.

  

7.375% due 05/01/2030

      15,200          16,226   

NRG REMA LLC

       

9.237% due 07/02/2017

      78          74   

Odebrecht Drilling Norbe Ltd.

  

6.350% due 06/30/2022

      4,800          1,314   

Odebrecht Offshore Drilling Finance Ltd.

  

6.625% due 10/01/2023

      5,186          882   

6.750% due 10/01/2023

      11,172          1,899   

Petrobras Global Finance BV

  

3.536% due 03/17/2020

      2,520          2,330   

6.250% due 12/14/2026

  GBP     8,600          10,087   

6.625% due 01/16/2034

      200          224   
       

 

 

 
          55,370   
       

 

 

 

Total Corporate Bonds & Notes
(Cost $648,721)

      613,791   
       

 

 

 
 

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2016   37


Schedule of Investments PIMCO High Income Fund (Cont.)

 

        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 
MUNICIPAL BONDS & NOTES 8.9%   
CALIFORNIA 2.5%   

Anaheim Redevelopment Agency, California Tax Allocation Bonds, (AGM Insured), Series 2007

   

6.506% due 02/01/2031

  $     2,000      $     2,464   

Sacramento County, California Revenue Bonds, Series 2013

   

7.250% due 08/01/2025

      1,500          1,872   

San Diego Redevelopment Agency, California Tax Allocation Bonds, Series 2010

   

7.625% due 09/01/2030

      7,500          8,937   

7.750% due 09/01/2040

      6,500          7,440   

San Diego Tobacco Settlement Funding Corp., California Revenue Bonds, Series 2006

   

7.125% due 06/01/2032

      275          323   
       

 

 

 
            21,036   
       

 

 

 
DISTRICT OF COLUMBIA 1.3%   

District of Columbia Revenue Bonds, Series 2011

  

7.625% due 10/01/2035

      9,740          11,305   
       

 

 

 
ILLINOIS 2.5%   

Chicago, Illinois General Obligation Bonds, (BABs), Series 2010

   

6.257% due 01/01/2040

      11,000          10,224   

7.517% due 01/01/2040

      9,805          10,374   
       

 

 

 
          20,598   
       

 

 

 
NEW YORK 0.2%   

Erie Tobacco Asset Securitization Corp., New York Revenue Bonds, Series 2005

   

6.000% due 06/01/2028

      1,960          1,961   
       

 

 

 
TEXAS 1.1%   

El Paso Downtown Development Corp., Texas Revenue Bonds, Series 2013

   

7.250% due 08/15/2043

      7,535          9,469   
       

 

 

 
VIRGINIA 0.1%   

Tobacco Settlement Financing Corp., Virginia Revenue Bonds, Series 2007

   

6.706% due 06/01/2046

      1,375          1,174   
       

 

 

 
WEST VIRGINIA 1.2%   

Tobacco Settlement Finance Authority, West Virginia Revenue Bonds, Series 2007

   

7.467% due 06/01/2047

      10,110          9,706   
       

 

 

 

Total Municipal Bonds & Notes (Cost $68,324)

    75,249   
       

 

 

 
U.S. GOVERNMENT AGENCIES 3.1%   

Fannie Mae

  

3.500% due 09/25/2027 (a)

      650          72   

4.000% due 05/25/2020 (a)

      107          0   

5.788% due 10/25/2028

      800          856   

6.182% due 10/25/2017 -
01/25/2018 (a)

      59,230          937   

6.488% due 09/25/2028

      3,500          3,835   

9.024% due 10/25/2041 (j)

      1,016          1,095   

10.000% due 01/25/2034

      219          270   

14.048% due 05/25/2043 (j)

      1,916          1,990   

Freddie Mac

  

4.000% due 08/15/2020 (a)

      650          33   

4.500% due 10/15/2037 (a)

      1,238          116   

5.000% due 06/15/2033 (a)

      2,211          265   

5.619% due 07/15/2035 (a)

      1,664          258   

5.719% due 02/15/2042 (a)

      2,744          434   

6.175% due 11/25/2055

      14,383          7,716   

6.659% due 08/15/2036 (a)

      961          228   

9.688% due 10/25/2027

      4,347          4,886   
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

10.756% due 12/15/2043 (j)

  $     1,323      $     1,450   

12.037% due 05/15/2033

      69          90   

Ginnie Mae

  

3.500% due 06/20/2042 (a)

    346          26   

3.500% due 03/20/2043 (a)(j)

    4,394          311   

4.500% due 07/20/2042 (a)

    337          58   

5.000% due 09/20/2042 (a)

    591          111   

5.763% due 02/20/2042 (a)(j)

    16,001          1,097   
       

 

 

 

Total U.S. Government Agencies
(Cost $33,180)

   

        26,134   
       

 

 

 
NON-AGENCY MORTGAGE-BACKED SECURITIES 18.9%   

Adjustable Rate Mortgage Trust

  

0.658% due 05/25/2036

      5,184          2,856   

Banc of America Alternative Loan Trust

  

5.112% due 06/25/2046 ^(a)

    9,849          1,761   

Banc of America Funding Trust

  

6.000% due 07/25/2037 ^

      755          600   

6.250% due 10/26/2036

      12,554          9,824   

Banc of America Mortgage Trust

  

2.892% due 02/25/2036 ^

      31          28   

BCAP LLC Trust

  

5.196% due 03/26/2037

      2,469          721   

6.000% due 05/26/2037

      7,213          4,857   

8.120% due 10/26/2036

      7,696          6,770   

8.787% due 09/26/2036

      7,380          6,747   

11.881% due 06/26/2036

      3,587          1,331   

Bear Stearns Adjustable Rate Mortgage Trust

  

2.972% due 11/25/2034

      157          151   

3.133% due 05/25/2047 ^

      479          434   

Bellemeade Re Ltd.

  

6.788% due 07/25/2025

      1,250          1,235   

Chase Mortgage Finance Trust

  

2.695% due 12/25/2035 ^

      33          31   

4.381% due 09/25/2036 ^

      177          157   

5.500% due 05/25/2036 ^

      9          8   

Citigroup Mortgage Loan Trust, Inc.

  

0.803% due 07/25/2036

      10          10   

3.114% due 07/25/2037 ^

      209          199   

3.143% due 08/25/2037 ^

      949          839   

3.797% due 11/25/2035

      16,756          9,440   

6.500% due 09/25/2036

      4,993          3,814   

Citigroup/Deutsche Bank Commercial Mortgage Trust

  

5.398% due 12/11/2049

      15,639          12,514   

Countrywide Alternative Loan Trust

  

0.738% due 12/25/2035

      193          192   

0.738% due 12/25/2046

      3,242          1,975   

2.955% due 02/25/2037 ^

      460          397   

3.297% due 07/25/2046 ^

      383          361   

4.441% due 07/25/2021 ^

      399          380   

4.512% due 04/25/2035 (a)

    6,084          869   

5.500% due 03/25/2036 ^

      388          293   

6.000% due 11/25/2036 ^

      295          248   

6.000% due 02/25/2037 ^

      7,667          5,441   

6.250% due 12/25/2036 ^

      4,077          3,060   

6.250% due 08/25/2037 ^

      357          305   

6.500% due 06/25/2036 ^

      1,218          899   

Countrywide Home Loan Mortgage Pass-Through Trust

  

2.785% due 09/25/2047 ^

      84          75   

2.930% due 09/20/2036 ^

      743          585   

4.862% due 12/25/2036 (a)

    4,576          870   

Credit Suisse Commercial Mortgage Trust

  

5.668% due 02/15/2039

      1,000          910   

Credit Suisse First Boston Mortgage Securities Corp.

  

6.000% due 01/25/2036

      2,632          2,023   

Epic Drummond Ltd.

  

0.044% due 01/25/2022

  EUR     2,388          2,576   

Grifonas Finance PLC

  

0.152% due 08/28/2039

      5,969          4,709   

HarborView Mortgage Loan Trust

  

2.987% due 08/19/2036 ^

  $     620          463   

3.162% due 08/19/2036 ^

      34          31   

IM Pastor Fondo de Titluzacion Hipotecaria

  

0.000% due 03/22/2043

  EUR     8,001          6,664   
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

JPMorgan Alternative Loan Trust

  

2.756% due 03/25/2037 ^

  $     10,257      $     8,748   

JPMorgan Mortgage Trust

  

6.132% due 01/25/2037 ^(a)

    25,046          6,562   

LB-UBS Commercial Mortgage Trust

  

5.407% due 11/15/2038

      2,614          2,043   

5.562% due 02/15/2040

      2,791          2,104   

Lehman XS Trust

  

0.708% due 06/25/2047

      4,987          3,541   

Nomura Asset Acceptance Corp. Alternative Loan Trust

  

3.360% due 04/25/2036 ^

      6,124          4,608   

RBSSP Resecuritization Trust

  

9.000% due 06/26/2037

      5,547          3,771   

Residential Asset Securitization Trust

  

6.250% due 10/25/2036 ^

      734          618   

6.250% due 09/25/2037 ^

      5,707          4,023   

6.500% due 08/25/2036 ^

      974          566   

Structured Adjustable Rate Mortgage Loan Trust

  

2.857% due 01/25/2036 ^

      249          189   

3.055% due 04/25/2047

      933          724   

Structured Asset Mortgage Investments Trust

  

0.678% due 07/25/2046 ^

      16,435          12,101   

WaMu Mortgage Pass-Through Certificates Trust

  

2.406% due 05/25/2037 ^

      223          178   

Washington Mutual Mortgage Pass-Through Certificates Trust

   

6.192% due 04/25/2037 (a)

    15,486          4,985   

6.500% due 03/25/2036 ^

      9,166          6,932   
       

 

 

 

Total Non-Agency Mortgage-Backed Securities (Cost $151,095)

      159,346   
       

 

 

 
ASSET-BACKED SECURITIES 18.8%   

ACE Securities Corp. Home Equity Loan Trust

  

0.628% due 07/25/2036

      6,069          4,347   

Apidos CLO

  

0.000% due 07/22/2026

      3,000          1,524   

Argent Securities Trust

  

0.678% due 03/25/2036

      6,526          3,406   

Argent Securities, Inc. Asset-Backed Pass-Through Certificates

   

0.718% due 01/25/2036

      12,289          10,067   

CIFC Funding Ltd.

  

0.000% due 05/24/2026 (e)

    4,000          2,828   

0.000% due 07/22/2026

      3,000          1,834   

Citigroup Mortgage Loan Trust, Inc.

  

0.588% due 12/25/2036

      14,537          9,590   

0.648% due 12/25/2036

      8,024          5,298   

Countrywide Asset-Backed Certificates

  

4.906% due 07/25/2036

      13,700          11,269   

4.992% due 10/25/2046 ^

      14,226          12,719   

Credit-Based Asset Servicing and Securitization LLC

  

0.598% due 11/25/2036

      1,348          843   

Duke Funding Ltd.

  

1.272% due 08/07/2033

      20,946          9,436   

GSAA Trust

  

5.917% due 03/25/2037 ^

      3,142          1,385   

JPMorgan Mortgage Acquisition Trust

  

4.893% due 01/25/2037 ^

      3,389          2,405   

Long Beach Mortgage Loan Trust

  

0.678% due 02/25/2036

      1,747          955   

Merrill Lynch Mortgage Investors Trust

  

0.648% due 04/25/2037

      1,000          540   

4.244% due 03/25/2037

      4,179          1,446   

Morgan Stanley Mortgage Loan Trust

  

2.164% due 11/25/2036 ^

      945          462   

5.965% due 09/25/2046 ^

      9,179          5,346   

NovaStar Mortgage Funding Trust

  

0.648% due 10/25/2036

      39,351          20,410   

People’s Financial Realty Mortgage Securities Trust

  

0.648% due 09/25/2036

      23,444          7,342   

Renaissance Home Equity Loan Trust

  

5.812% due 11/25/2036

      9,754          5,728   
 

 

38   PIMCO CLOSED-END FUNDS        See Accompanying Notes   


 

July 31, 2016

 

        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

6.998% due 09/25/2037 ^

  $     8,404      $     5,061   

7.238% due 09/25/2037 ^

      7,087          4,266   

Sherwood Funding CDO Ltd.

  

0.830% due 11/06/2039

      35,564          10,136   

South Coast Funding Ltd.

  

1.230% due 08/10/2038

      28,316          5,969   

Taberna Preferred Funding Ltd.

  

1.013% due 08/05/2036

      772          540   

1.013% due 08/05/2036 ^

      15,113          10,579   

Trainer Wortham First Republic CBO Ltd.

  

1.834% due 11/06/2038

      2,015          1,976   

Washington Mutual Asset-Backed Certificates Trust

  

0.638% due 05/25/2036

      308          224   
       

 

 

 

Total Asset-Backed Securities
(Cost $159,199)

      157,931   
       

 

 

 
SOVEREIGN ISSUES 1.4%   

Athens Urban Transportation Organisation

  

4.851% due 09/19/2016

  EUR     800          891   

Autonomous Community of Catalonia

  

4.300% due 11/15/2016

      3,900          4,389   

4.900% due 09/15/2021

      2,350          2,704   

Republic of Greece Government International Bond

  

3.000% due 02/24/2023

      25          21   

3.000% due 02/24/2024

      25          21   

3.000% due 02/24/2025

      25          20   

3.000% due 02/24/2026

      25          20   

3.000% due 02/24/2027

      25          19   

3.000% due 02/24/2028

      25          19   

3.000% due 02/24/2029

      25          19   

3.000% due 02/24/2030

      25          18   

3.000% due 02/24/2031

      25          18   

3.000% due 02/24/2032

      25          18   
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

3.000% due 02/24/2033

  EUR     25      $     18   

3.000% due 02/24/2034

      25          17   

3.000% due 02/24/2035

      25          17   

3.000% due 02/24/2036

      25          17   

3.000% due 02/24/2037

      25          17   

3.000% due 02/24/2038

      25          17   

3.000% due 02/24/2039

      25          17   

3.000% due 02/24/2040

      25          17   

3.000% due 02/24/2041

      25          17   

3.000% due 02/24/2042

      25          17   

4.500% due 11/08/2016

  JPY     50,000          485   

4.750% due 04/17/2019

  EUR     3,000          3,025   
       

 

 

 

Total Sovereign Issues (Cost $11,277)

  

        11,858   
       

 

 

 
        SHARES            
COMMON STOCKS 0.1%   
FINANCIALS 0.1%   

TIG FinCo PLC (h)

      828,934          527   
       

 

 

 

Total Common Stocks (Cost $1,229)

    527   
       

 

 

 
PREFERRED SECURITIES 0.4%   
BANKING & FINANCE 0.4%   

Farm Credit Bank of Texas

  

10.000% due 12/15/2020 (g)

      2,490          2,994   
       

 

 

 

Total Preferred Securities (Cost $2,932)

    2,994   
       

 

 

 
       
SHORT-TERM INSTRUMENTS 3.2%   
REPURCHASE AGREEMENTS (i) 1.9%   
          16,067   
       

 

 

 
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 
SHORT-TERM NOTES 0.5%   

Federal Home Loan Bank

  

0.330% due 09/16/2016 (e)(f)

  $     2,200      $     2,199   

0.345% due 10/17/2016 (e)(f)

      1,600          1,599   
       

 

 

 
          3,798   
       

 

 

 
U.S. TREASURY BILLS 0.8%   

0.298% due 10/06/2016 - 11/03/2016 (d)(e)(l)(n)

      6,725          6,722   
       

 

 

 
Total Short-Term Instruments
(Cost $26,586)
          26,587   
       

 

 

 
       
Total Investments in Securities
(Cost $1,114,964)
          1,084,625   
       
Total Investments 129.0%
(Cost $1,114,964)
      $     1,084,625   

Financial Derivative
Instruments (k)(m) (0.6)%

(Cost or Premiums, net $(3,020))

    (5,417

Preferred Shares (12.1)%

    (101,975
Other Assets and Liabilities, net (16.3)%     (136,131
       

 

 

 
Net Assets Applicable to Common Shareholders 100.0%       $     841,102   
       

 

 

 
 

NOTES TO SCHEDULE OF INVESTMENTS (AMOUNTS IN THOUSANDS*):

 

* A zero balance may reflect actual amounts rounding to less than one thousand.
^ Security is in default.
(a) Interest only security.
(b) When-issued security.
(c) Payment in-kind security.
(d) Coupon represents a weighted average yield to maturity.
(e) Zero coupon security.
(f) Coupon represents a yield to maturity.
(g) Perpetual maturity; date shown, if applicable, represents next contractual call date.

 

(h)  RESTRICTED SECURITIES:

 

Issuer Description                Acquisition
Date
    Cost     Market
Value
    Market Value
as Percentage
of Net Assets
 

TIG FinCo PLC

         04/02/2015        $    1,229      $     527        0.06%   
        

 

 

   

 

 

   

 

 

 

 

BORROWINGS AND OTHER FINANCING TRANSACTIONS

 

(i)  REPURCHASE AGREEMENTS:

 

Counterparty   Lending
Rate
  Settlement
Date
    Maturity
Date
    Principal
Amount
    Collateralized By   Collateral
(Received)
    Repurchase
Agreements,
at Value
    Repurchase
Agreement
Proceeds
to be
Received (1)
 

BOS

  0.480%     07/29/2016        08/01/2016      $     5,000      U.S. Treasury Notes 1.750% due 03/31/2022   $ (5,141   $ 5,000      $ 5,000   

SAL

  0.550     07/29/2016        08/01/2016        8,300      U.S. Treasury Notes 2.125% due 12/31/2022     (8,485     8,300        8,300   

SSB

  0.010     07/29/2016        08/01/2016        2,767      U.S. Treasury Notes 1.000% due 05/15/2018     (2,827     2,767        2,767   
           

 

 

   

 

 

   

 

 

 

Total Repurchase Agreements

  $     (16,453   $     16,067      $     16,067   
           

 

 

   

 

 

   

 

 

 

 

(1) 

Includes accrued interest.

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2016   39


Schedule of Investments PIMCO High Income Fund (Cont.)

 

 

REVERSE REPURCHASE AGREEMENTS:

 

Counterparty   Borrowing
Rate (3)
    Borrowing
Date
    Maturity
Date
    Amount
Borrowed  (3)
    Payable for
Reverse
Repurchase
Agreements
 

BCY

    (0.250 )%      02/18/2016        TBD (2)    $ (2,594   $ (2,591

BPS

    1.420        05/13/2016        08/15/2016        (6,109     (6,128
    1.440        07/11/2016        10/06/2016        (3,081     (3,084
    1.450        07/08/2016        08/08/2016        (5,159     (5,164
    1.450        07/08/2016        10/07/2016        (26,279     (26,304
    1.690        07/26/2016        01/26/2017        (5,101     (5,103

DEU

    (1.000     06/27/2016        06/27/2017        (356     (356
    1.500        06/13/2016        09/09/2016            (12,727     (12,753

MSC

    1.000        05/10/2016        08/08/2016        (19,386     (19,431

RBC

    1.470        02/04/2016        08/04/2016        (10,575     (10,652
    1.550        04/01/2016        09/16/2016        (3,981     (4,002
    1.550        04/08/2016        10/07/2016        (6,142     (6,172
    1.560        05/13/2016        11/14/2016        (5,230     (5,248
    1.600        06/07/2016        12/07/2016        (8,247     (8,267
    1.600        06/08/2016        12/07/2016        (1,703     (1,707
    1.610        05/23/2016        11/14/2016        (6,235     (6,255

RDR

    (1.000     01/22/2016        01/21/2018        (905     (900
    1.030        05/10/2016        08/04/2016        (13,176     (13,207

UBS

    1.520        05/27/2016        08/29/2016        (8,532     (8,556
         

 

 

 

Total Reverse Repurchase Agreements

  

    $     (145,880
         

 

 

 

 

(2) 

Open maturity reverse repurchase agreement.

(3) 

The average amount of borrowings outstanding during the period ended July 31, 2016 was $(96,494) at a weighted average interest rate of 0.862%. Average borrowings includes sale-buyback transactions, of which there were none open at period end.

 

BORROWINGS AND OTHER FINANCING TRANSACTIONS SUMMARY

 

The following is a summary by counterparty of the market value of Borrowings and Other Financing Transactions and collateral (received)/pledged as of July 31, 2016:

 

(j) Securities with an aggregate market value of $174,109 have been pledged as collateral under the terms of the following master agreements as of July 31, 2016.

 

Counterparty   Repurchase
Agreement
Proceeds
to be
Received
   

Payable for
Reverse

Repurchase
Agreements

    Payable for
Sale-Buyback
Transactions
     Total
Borrowings and
Other Financing
Transactions
   

Collateral

(Received)/Pledged

    Net Exposure  (4)  

Global/Master Repurchase Agreement

            

BCY

  $ 0      $ (2,591   $ 0       $ (2,591   $ 3,143      $ 552   

BOS

    5,000        0        0         5,000        (5,141     (141

BPS

    0        (45,783     0         (45,783     52,226        6,443   

DEU

    0        (13,109     0         (13,109     15,355        2,246   

MSC

    0        (19,431     0         (19,431     21,889        2,458   

RBC

    0        (42,303     0             (42,303         47,798            5,495   

RDR

    0        (14,107     0         (14,107     14,655        548   

SAL

    8,300        0        0         8,300        (8,485     (185

SSB

    2,767        0        0         2,767        (2,827     (60

UBS

    0        (8,556     0         (8,556     9,923        1,367   
 

 

 

   

 

 

   

 

 

        

Total Borrowings and Other Financing Transactions

  $     16,067      $     (145,880   $     0          
 

 

 

   

 

 

   

 

 

        

 

(4) 

Net Exposure represents the net receivable/(payable) that would be due from/to the counterparty in the event of default. Exposure from borrowings and other financing transactions can only be netted across transactions governed under the same master agreement with the same legal entity. See Note 7, Principal Risks, in the Notes to Financial Statements for more information regarding master netting arrangements.

 

CERTAIN TRANSFERS ACCOUNTED FOR AS SECURED BORROWINGS

 

Remaining Contractual Maturity of the Agreements

 

     Overnight and
Continuous
    Up to 30 days     31-90 days     Greater Than 90 days     Total  

Reverse Repurchase Agreements

         

Corporate Bonds & Notes

  $ 0      $ (63,138   $ (52,315   $ (25,324   $ (140,777

U.S. Government Agencies

    0        0        0        (5,103     (5,103
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Borrowings

  $     0      $     (63,138   $     (52,315   $     (30,427   $ (145,880
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross amount of recognized liabilities for reverse repurchase agreements

  

      $     (145,880
         

 

 

 

 

40   PIMCO CLOSED-END FUNDS        See Accompanying Notes   


 

July 31, 2016

 

 

(k)  FINANCIAL DERIVATIVE INSTRUMENTS: EXCHANGE-TRADED OR CENTRALLY CLEARED

 

SWAP AGREEMENTS:

 

CREDIT DEFAULT SWAPS ON CREDIT INDICES - SELL PROTECTION (1)

 

Index/Tranches

  Fixed
Receive Rate
    Maturity
Date
    Notional
Amount  (2)
    Market
Value  (3)
    Unrealized
Appreciation
    Variation Margin  
            Asset     Liability  

CDX.HY-24 5-Year Index

    5.000     06/20/2020      $ 6,958      $ 493      $ 500      $ 24      $ 0   

CDX.HY-25 5-Year Index

    5.000        12/20/2020            12,375        678        1,050        48        0   

CDX.HY-26 5-Year Index

    5.000        06/20/2021        1,600        80        20        7        0   
       

 

 

   

 

 

   

 

 

   

 

 

 
        $     1,251      $     1,570      $     79      $     0   
       

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

If the Fund is a seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) pay to the buyer of protection an amount equal to the notional amount of the swap and take delivery of the referenced obligation or underlying securities comprising the referenced index or (ii) pay a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index.

(2) 

The maximum potential amount the Fund could be required to pay as a seller of credit protection or receive as a buyer of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.

(3) 

The prices and resulting values for credit default swap agreements on credit indices serve as an indicator of the current status of the payment/performance risk and represent the likelihood of an expected liability (or profit) for the credit derivative should the notional amount of the swap agreement be closed/sold as of the period end. Increasing market values, in absolute terms when compared to the notional amount of the swap, represent a deterioration of the referenced indices’ credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.

 

INTEREST RATE SWAPS

 

Pay/Receive
Floating Rate
  Floating Rate Index   Fixed Rate     Maturity
Date
    Notional
Amount
    Market
Value
    Unrealized
Appreciation/
(Depreciation)
    Variation Margin  
              Asset      Liability  

Pay

 

3-Month USD-LIBOR

    2.750     06/17/2025      $ 241,310      $ 30,296      $ 7,877      $ 1,220       $ 0   

Pay

 

3-Month USD-LIBOR

    2.250        06/15/2026        37,000        3,165        1,415        198         0   

Pay

 

3-Month USD-LIBOR

    3.500        06/19/2044        617,800        256,310        72,241        9,218         0   

Receive

 

3-Month USD-LIBOR *

    2.250        12/21/2046            846,220        (98,600         (26,032     0         (11,990
         

 

 

   

 

 

   

 

 

    

 

 

 
          $ 191,171      $ 55,501      $ 10,636       $ (11,990
         

 

 

   

 

 

   

 

 

    

 

 

 

Total Swap Agreements

  

      $     192,422      $     57,071      $     10,715       $     (11,990
         

 

 

   

 

 

   

 

 

    

 

 

 

 

* This security has a forward starting effective date. See Note 2(a) in the Notes to Financial Statements for further information.

 

FINANCIAL DERIVATIVE INSTRUMENTS: EXCHANGE-TRADED OR CENTRALLY CLEARED SUMMARY

 

The following is a summary of the market value and variation margin of Exchange-Traded or Centrally Cleared Financial Derivative Instruments as of July 31, 2016:

 

(l) Securities with an aggregate market value of $578 and cash of $21,470 have been pledged as collateral for exchange-traded and centrally cleared financial derivative instruments as of July 31, 2016. See Note 7, Principal Risks, in the Notes to Financial Statements for more information regarding master netting arrangements.

 

    Financial Derivative Assets           Financial Derivative Liabilities  
    Market Value     Variation Margin
Asset
   

Total

          Market Value     Variation Margin
Liability
   

Total

 
     Purchased
Options
    Futures     Swap
Agreements
            Written
Options
    Futures     Swap
Agreements
   

Total Exchange-Traded or Centrally Cleared

  $     0      $     0      $     10,715      $     10,715        $     0      $     0      $     (11,990)      $     (11,990)   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

 

(m)  FINANCIAL DERIVATIVE INSTRUMENTS: OVER THE COUNTER

 

FORWARD FOREIGN CURRENCY CONTRACTS:

 

Counterparty

   Settlement
Month
    Currency to
be Delivered
    Currency to
be Received
    Unrealized Appreciation/
(Depreciation)
 
         Asset     Liability  

AZD

     08/2016      EUR     377      $     417      $ 0      $ (5
     09/2016          152          170        0        0   

BOA

     08/2016      BRL     804          248        0        0   
     08/2016      EUR     43,632          48,134        0               (647
     08/2016      GBP     60,730          80,823               449        0   
     08/2016      $     244      BRL     803        4        0   
     08/2016          49,211      EUR     44,737        805        0   
     09/2016      BRL     804      $     242        0        (4
     09/2016      EUR     44,737          49,272        0        (803

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2016   41


Schedule of Investments PIMCO High Income Fund (Cont.)

 

Counterparty

   Settlement
Month
    Currency to
be Delivered
    Currency to
be Received
    Unrealized Appreciation/
(Depreciation)
 
         Asset     Liability  

BPS

     08/2016      GBP     342      $     448      $ 0      $ (4

CBK

     08/2016      EUR     151          167        0        (2
     08/2016      GBP     1,632          2,163        7        (4
     08/2016      $     2,262      EUR     2,054        34        0   
     09/2016      GBP     128      $     169        0        0   

GLM

     08/2016      EUR     76          84        0        (1
     08/2016      GBP     765          1,004        0        (9
     09/2016          129          170        0        (1

JPM

     08/2016          4,144          5,528        44        (1
     09/2016      EUR     305          339        0        (2

MSB

     08/2016      BRL     804          249        1        0   
     08/2016      $     248      BRL     803        0        0   

SCX

     08/2016      EUR     228      $     250        0        (5
     08/2016      JPY     62,200          611        2        0   
     08/2016      $     90,120      GBP     68,683        780        0   
     09/2016      GBP     68,683      $     90,161        0        (782

TOR

     08/2016          1,412          1,824        0        (45

UAG

     08/2016      EUR     2,403          2,668        0        (19
            

 

 

   

 

 

 

Total Forward Foreign Currency Contracts

  

  $     2,126      $     (2,334
            

 

 

   

 

 

 

 

SWAP AGREEMENTS:

 

CREDIT DEFAULT SWAPS ON CORPORATE ISSUES - SELL PROTECTION (1)

 

Counterparty   Reference Entity   Fixed
Receive Rate
   

Maturity
Date

    Implied
Credit Spread at
July 31, 2016 (2)
   

Notional
Amount (3)

    Premiums
Paid/(Received)
    Unrealized
(Depreciation)
    Swap Agreements,
at Value
 
                Asset     Liability  
BPS  

Banco Espirito Santo S.A.

    5.000     09/20/2020        13.620     EUR        5,000      $ 0      $ (1,202   $ 0      $ (1,202
 

Petrobras Global Finance BV

    1.000        12/20/2024        6.275        $        1,700        (332     (206     0        (538
GST  

Petrobras Global Finance BV

    1.000        12/20/2024        6.275          2,200        (437     (259     0        (696
HUS  

Petrobras Global Finance BV

    1.000        12/20/2019        4.923          400        (33     (15     0        (48
 

Petrobras Global Finance BV

    1.000        12/20/2024        6.275          2,800        (581     (304     0        (885
MYC  

Chesapeake Energy Corp.

    5.000        09/20/2020        12.934          100        (10     (15     0        (25
 

Petrobras Global Finance BV

    1.000        12/20/2019        4.923              13,700        (1,268     (387     0        (1,655
             

 

 

   

 

 

   

 

 

   

 

 

 
              $     (2,661   $     (2,388   $     0      $     (5,049
             

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

If the Fund is a seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) pay to the buyer of protection an amount equal to the notional amount of the swap and take delivery of the referenced obligation or underlying securities comprising the referenced index or (ii) pay a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index.

(2) 

Implied credit spreads, represented in absolute terms, utilized in determining the market value of credit default swap agreements on corporate issues as of period end serve as an indicator of the current status of the payment/performance risk and represent the likelihood or risk of default for the credit derivative. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection and may include upfront payments required to be made to enter into the agreement. Wider credit spreads represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.

(3) 

The maximum potential amount the Fund could be required to pay as a seller of credit protection or receive as a buyer of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.

 

INTEREST RATE SWAPS

 

Counterparty   Pay/Receive
Floating Rate
  Floating Rate Index   Fixed Rate     Maturity
Date
    Notional
Amount
    Premiums
(Received)
    Unrealized
Appreciation
    Swap Agreements, at Value  
                Asset     Liability  
CBK  

Pay

 

3-Month USD-LIBOR

    1.500     09/16/2021      $     25,700      $ (6   $ 55      $ 49      $ 0   
DUB  

Pay

 

3-Month USD-LIBOR

    1.500        09/16/2021          111,100        (18     230        212        0   
GLM  

Pay

 

3-Month USD-LIBOR

    1.450        10/20/2021          1,000,000        (335     1,189        854        0   
             

 

 

   

 

 

   

 

 

   

 

 

 
              $ (359   $     1,474      $ 1,115      $ 0   
             

 

 

   

 

 

   

 

 

   

 

 

 

Total Swap Agreements

  

        $     (3,020   $ (914   $     1,115      $     (5,049
             

 

 

   

 

 

   

 

 

   

 

 

 

 

42   PIMCO CLOSED-END FUNDS        See Accompanying Notes   


 

July 31, 2016

 

 

FINANCIAL DERIVATIVE INSTRUMENTS: OVER THE COUNTER SUMMARY

 

The following is a summary by counterparty of the market value of OTC financial derivative instruments and collateral (received)/pledged as of July 31, 2016:

 

(n) Securities with an aggregate market value of $5,642 have been pledged as collateral for financial derivative instruments as governed by International Swaps and Derivatives Association, Inc. master agreements as of July 31, 2016.

 

    Financial Derivative Assets           Financial Derivative Liabilities                    
Counterparty   Forward
Foreign
Currency
Contracts
     Purchased
Options
     Swap
Agreements
     Total
Over the
Counter
           Forward
Foreign
Currency
Contracts
    Written
Options
     Swap
Agreements
    Total
Over the
Counter
    Net Market
Value of OTC
Derivatives
    Collateral
(Received)/
Pledged
    Net
Exposure  (4)
 

AZD

  $ 0       $ 0       $ 0       $ 0        $ (5   $ 0       $ 0      $ (5   $ (5   $ 0      $ (5

BOA

    1,258         0         0         1,258          (1,454     0         0        (1,454     (196     (900     (1,096

BPS

    0         0         0         0          (4     0         (1,740     (1,744      (1,744      1,745        1   

CBK

    41         0         49         90          (6     0         0        (6     84        0        84   

DUB

    0         0         212         212          0        0         0        0        212        (240     (28

GLM

    0         0         854         854          (11     0         0        (11     843        222         1,065   

GST

    0         0         0         0          0        0         (696     (696     (696     724        28   

HUS

    0         0         0         0          0        0         (933     (933     (933     1,057        124   

JPM

    44         0         0         44          (3     0         0        (3     41        0        41   

MSB

    1         0         0         1          0        0         0        0        1        (10     (9

MYC

    0         0         0         0          0        0         (1,680     (1,680     (1,680     1,754        74   

NAB

    0         0         0         0          0        0         0        0        0        (20     (20

SCX

    782         0         0         782          (787     0         0        (787     (5     0        (5

TOR

    0         0         0         0          (45     0         0        (45     (45     0        (45

UAG

    0         0         0         0          (19     0         0        (19     (19     0        (19
 

 

 

    

 

 

    

 

 

    

 

 

     

 

 

   

 

 

    

 

 

   

 

 

       

Total Over the Counter

  $  2,126       $  0       $  1,115       $  3,241        $  (2,334   $  0       $  (5,049   $  (7,383      
 

 

 

    

 

 

    

 

 

    

 

 

     

 

 

   

 

 

    

 

 

   

 

 

       

 

(4) 

Net Exposure represents the net receivable/(payable) that would be due from/to the counterparty in the event of default. Exposure from OTC financial derivative instruments can only be netted across transactions governed under the same master agreement with the same legal entity. See Note 7, Principal Risks, in the Notes to Financial Statements for more information regarding master netting arrangements.

 

FAIR VALUE OF FINANCIAL DERIVATIVE INSTRUMENTS

 

The following is a summary of the fair valuation of the Fund’s derivative instruments categorized by risk exposure. See Note 7, Principal Risks, in the Notes to Financial Statements on risks of the Fund.

 

Fair Values of Financial Derivative Instruments on the Statements of Assets and Liabilities as of July 31, 2016:

 

    Derivatives not accounted for as hedging instruments  
     Commodity
Contracts
    Credit
Contracts
    Equity
Contracts
    Foreign
Exchange
Contracts
    Interest
Rate Contracts
    Total  

Financial Derivative Instruments - Assets

           

Exchange-traded or centrally cleared

           

Swap Agreements

  $ 0      $ 79      $ 0      $ 0      $ 10,636      $ 10,715   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

           

Forward Foreign Currency Contracts

  $ 0      $ 0      $ 0      $ 2,126      $ 0      $ 2,126   

Swap Agreements

    0        0        0        0        1,115        1,115   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0      $ 0      $ 0      $ 2,126      $ 1,115      $ 3,241   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0      $ 79      $ 0      $ 2,126      $ 11,751      $ 13,956   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial Derivative Instruments - Liabilities

           

Exchange-traded or centrally cleared

           

Swap Agreements

  $ 0      $ 0      $ 0      $ 0      $ 11,990      $ 11,990   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

           

Forward Foreign Currency Contracts

  $ 0      $ 0      $ 0      $ 2,334      $ 0      $ 2,334   

Swap Agreements

    0        5,049        0        0        0        5,049   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0      $ 5,049      $ 0      $ 2,334      $ 0      $ 7,383   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $     0      $     5,049      $     0      $     2,334      $     11,990      $     19,373   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2016   43


Schedule of Investments PIMCO High Income Fund (Cont.)

 

 

The effect of Financial Derivative Instruments on the Statements of Operations for the period ended July 31, 2016:

 

    Derivatives not accounted for as hedging instruments  
     Commodity
Contracts
    Credit
Contracts
    Equity
Contracts
    Foreign
Exchange
Contracts
    Interest
Rate Contracts
    Total  

Net Realized Gain (Loss) on Financial Derivative Instruments

  

   

Exchange-traded or centrally cleared

           

Swap Agreements

  $     0      $ (678   $ 0      $ 0      $ (1,928   $ (2,606
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

           

Forward Foreign Currency Contracts

  $ 0      $ 0      $ 0      $     18,947      $ 0      $ 18,947   

Purchased Options

    0        0        0        0        (3,171     (3,171

Swap Agreements

    0        306        0        0        23,713        24,019   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0      $ 306      $ 0      $ 18,947      $ 20,542      $ 39,795   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0      $ (372   $ 0      $ 18,947      $ 18,614      $ 37,189   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Change in Unrealized Appreciation (Depreciation) on Financial Derivative Instruments

  

Exchange-traded or centrally cleared

           

Swap Agreements

  $ 0      $ 1,762      $ 0      $ 0      $     (15,847   $     (14,085
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

           

Forward Foreign Currency Contracts

  $ 0      $ 0      $ 0      $ (5,140   $ 0      $ (5,140

Swap Agreements

    0        (1,129     0        0        (14,709     (15,838
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0      $     (1,129   $     0      $ (5,140   $ (14,709   $ (20,978
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0      $ 633      $ 0      $ (5,140   $ (30,556   $ (35,063
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

FAIR VALUE MEASUREMENTS

 

The following is a summary of the fair valuations according to the inputs used as of July 31, 2016 in valuing the Fund’s assets and liabilities:

 

Category and Subcategory   Level 1     Level 2     Level 3     Fair
Value at
07/31/2016
 

Bank Loan Obligations

  $     0      $ 10,208      $ 0      $ 10,208   

Corporate Bonds & Notes

       

Banking & Finance

    0        305,097        9,195         314,292   

Industrials

    0            233,876            10,253            244,129   

Utilities

    0        55,370        0        55,370   

Municipal Bonds & Notes

       

California

    0        21,036        0        21,036   

District of Columbia

    0        11,305        0        11,305   

Illinois

    0        20,598        0        20,598   

New York

    0        1,961        0        1,961   

Texas

    0        9,469        0        9,469   

Virginia

    0        1,174        0        1,174   

West Virginia

    0        9,706        0        9,706   

U.S. Government Agencies

    0        18,418        7,716        26,134   

Non-Agency Mortgage-Backed Securities

    0        158,111        1,235        159,346   

Asset-Backed Securities

    0         157,931        0        157,931   

Sovereign Issues

    0        11,858        0        11,858   

Common Stocks

       

Financials

    0        0        527        527   

Preferred Securities

       

Banking & Finance

    0        2,994        0        2,994   
Category and Subcategory   Level 1     Level 2     Level 3     Fair
Value at
07/31/2016
 

Short-Term Instruments

       

Repurchase Agreements

  $ 0      $ 16,067      $ 0      $ 16,067   

Short-Term Notes

    0        3,798        0        3,798   

U.S. Treasury Bills

    0        6,722        0        6,722   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Investments

  $ 0      $ 1,055,699      $ 28,926      $ 1,084,625   
 

 

 

   

 

 

   

 

 

   

 

 

 

Financial Derivative Instruments - Assets

  

Exchange-traded or centrally cleared

    0        10,715        0        10,715   

Over the counter

    0        3,241        0        3,241   
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0      $ 13,956      $ 0      $ 13,956   
 

 

 

   

 

 

   

 

 

   

 

 

 

Financial Derivative Instruments - Liabilities

  

Exchange-traded or centrally cleared

    0        (11,990     0        (11,990

Over the counter

    0        (7,383     0        (7,383
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0      $ (19,373   $ 0      $ (19,373
 

 

 

   

 

 

   

 

 

   

 

 

 

Totals

  $     0      $     1,050,282      $     28,926      $     1,079,208   
 

 

 

   

 

 

   

 

 

   

 

 

 
 

 

There were no significant transfers between Levels 1 and 2 during the period ended July 31, 2016.

 

44   PIMCO CLOSED-END FUNDS        See Accompanying Notes   


 

July 31, 2016

 

 

The following is a reconciliation of the fair valuations using significant unobservable inputs (Level 3) for the Fund during the period ended July 31, 2016:

 

Category and Subcategory   Beginning
Balance
at 07/31/2015
    Net
Purchases
    Net
Sales
    Accrued
Discounts/
(Premiums)
    Realized
Gain/(Loss)
    Net Change in
Unrealized
Appreciation/
(Depreciation) (1)
    Transfers into
Level 3
    Transfers out
of Level 3
    Ending
Balance
at 07/31/2016
    Net Change in
Unrealized
Appreciation/
(Depreciation)
on Investments
Held at
07/31/2016 (1)
 

Investments in Securities, at Value

  

           

Corporate Bonds & Notes

                   

Banking & Finance

  $ 9,224      $ 0      $ (223   $ 4      $ 3      $ 187      $ 0      $ 0      $ 9,195      $ 215   

Industrials

    10,339        0        0        12        0        (98     0        0        10,253        (98

U.S. Government Agencies

    5,491        8,560        (117     (5,015     47        (313     0        (937     7,716        (842

Non-Agency Mortgage-Backed Securities

    3,427        0        (2,123     0        55        (124     0        0        1,235        (14

Common Stocks

                   

Financials

    867        0        0        0        0        (340     0        0        527        (340
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals

  $     29,348      $     8,560      $     (2,463   $     (4,999   $     105      $     (688   $     0      $     (937   $     28,926      $     (1,079
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

The following is a summary of significant unobservable inputs used in the fair valuations of assets and liabilities categorized within Level 3 of the fair value hierarchy:

 

Category and Subcategory   Ending
Balance
at 07/31/2016
     Valuation
Technique
   Unobservable
Inputs
   Input Value(s)
(% Unless
Noted
Otherwise)
 

Investments in Securities, at Value

  

Corporate Bonds & Notes

          

Banking & Finance

  $ 9,195       Proxy Pricing    Base Price      113.75   

Industrials

    10,253       Proxy Pricing    Base Price      99.50   

U.S. Government Agencies

    7,716       Proxy Pricing    Base Price      53.65   

Non-Agency Mortgage-Backed Securities

    1,235       Proxy Pricing    Base Price      98.85   

Common Stocks

          

Financials

    527       Other Valuation Techniques (2)    —        —     
 

 

 

          

Total

  $     28,926            
 

 

 

          

 

(1) 

Any difference between Net Change in Unrealized Appreciation/(Depreciation) and Net Change in Unrealized Appreciation/(Depreciation) on Investments Held at July 31, 2016 may be due to an investment no longer held or categorized as Level 3 at period end.

(2) 

Includes valuation techniques not defined in the Notes to Financial Statements as securities valued using such techniques are not considered significant to the Fund.

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2016   45


Schedule of Investments PIMCO Income Strategy Fund

 

        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 
INVESTMENTS IN SECURITIES 123.8%   
BANK LOAN OBLIGATIONS 1.7%   

iHeartCommunications, Inc.

  

7.246% due 01/30/2019

  $     3,100      $     2,416   

Sequa Corp.

  

5.250% due 06/19/2017

      2,521          2,022   
       

 

 

 

Total Bank Loan Obligations (Cost $5,347)

  

        4,438   
       

 

 

 
CORPORATE BONDS & NOTES 61.0%   
BANKING & FINANCE 31.6%   

Ally Financial, Inc.

  

8.000% due 11/01/2031

      637          779   

Banco Bilbao Vizcaya Argentaria S.A.

  

6.750% due 02/18/2020 (g)

  EUR     400          408   

Banco do Brasil S.A.

  

6.250% due 04/15/2024 (g)

  $     1,700          1,045   

9.000% due 06/18/2024 (g)

      2,219          1,798   

Banco Espirito Santo S.A.

  

2.625% due 05/08/2017 ^

  EUR     1,400          446   

4.000% due 01/21/2019 ^

      3,800          1,211   

4.750% due 01/15/2018 ^

      1,200          382   

Banco Santander S.A.

  

6.250% due 09/11/2021 (g)

      500          500   

Barclays Bank PLC

  

14.000% due 06/15/2019 (g)

  GBP     3,700          6,176   

Blackstone CQP Holdco LP

  

9.296% due 03/19/2019

  $     4,401          4,440   

BNP Paribas S.A.

  

7.375% due 08/19/2025 (g)

      3,100          3,166   

Cantor Fitzgerald LP

  

6.500% due 06/17/2022 (j)

      3,000          3,164   

Co-operative Group Holdings Ltd.

  

7.500% due 07/08/2026

  GBP     3,050          4,435   

Communications Sales & Leasing, Inc.

  

8.250% due 10/15/2023

  $     1,500          1,539   

Credit Agricole S.A.

  

7.500% due 06/23/2026 (g)

  GBP     1,700          2,165   

7.875% due 01/23/2024 (g)

  $     1,600          1,592   

Credit Suisse Group AG

  

7.500% due 12/11/2023 (g)

      3,740          3,885   

Flagstar Bancorp, Inc.

  

6.125% due 07/15/2021

      1,700          1,745   

GSPA Monetization Trust

  

6.422% due 10/09/2029

      2,322          2,656   

HSBC Holdings PLC

  

6.000% due 09/29/2023 (g)

  EUR     2,000          2,284   

Jefferies Finance LLC

  

6.875% due 04/15/2022

  $     3,200          2,844   

7.500% due 04/15/2021

      200          185   

Lloyds Bank PLC

  

12.000% due 12/16/2024 (g)

      300          411   

Lloyds Banking Group PLC

  

7.625% due 06/27/2023 (g)

  GBP     3,300            4,386   

MPT Operating Partnership LP

  

5.250% due 08/01/2026

  $     618          651   

National Bank of Greece S.A.

  

3.875% due 10/07/2016

  EUR     500          559   

Nationwide Building Society

  

10.250% (g)

  GBP     6          936   

Navient Corp.

  

5.500% due 01/15/2019 (j)

  $     4,030          4,156   

5.625% due 08/01/2033

      100          78   

Novo Banco S.A.

  

5.000% due 04/04/2019

  EUR     101          86   

5.000% due 04/23/2019

      311          264   

5.000% due 05/14/2019

      206          175   

5.000% due 05/21/2019

      115          98   

5.000% due 05/23/2019

      115          98   

Omega Healthcare Investors, Inc.

  

4.375% due 08/01/2023

  $     700          709   
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

OneMain Financial Holdings LLC

  

6.750% due 12/15/2019

  $     544      $     553   

7.250% due 12/15/2021

      30          30   

PHH Corp.

  

6.375% due 08/15/2021

      80          74   

7.375% due 09/01/2019

      300          306   

Rio Oil Finance Trust

  

9.250% due 07/06/2024

      7,914          6,846   

Royal Bank of Scotland Group PLC

  

7.500% due 08/10/2020 (g)

      1,600          1,560   

8.000% due 08/10/2025 (g)

      3,000          2,989   

Santander UK Group Holdings PLC

  

7.375% due 06/24/2022 (g)

  GBP     1,800          2,360   

Springleaf Finance Corp.

  

5.250% due 12/15/2019

  $     525          511   

8.250% due 12/15/2020

      2,120          2,200   

Tesco Property Finance PLC

  

5.411% due 07/13/2044

  GBP     2,152          2,725   

6.052% due 10/13/2039

      1,265          1,770   

TIG FinCo PLC

  

8.500% due 03/02/2020

      111          150   

8.750% due 04/02/2020

      2,432          2,471   

Vnesheconombank Via VEB Finance PLC

  

6.902% due 07/09/2020

  $     300          322   
       

 

 

 
            84,319   
       

 

 

 
INDUSTRIALS 21.4%   

Altice Financing S.A.

  

7.500% due 05/15/2026

      1,700          1,721   

BMC Software Finance, Inc.

  

8.125% due 07/15/2021

      866          710   

Boxer Parent Co., Inc. (9.000% Cash or 9.750% PIK)

  

9.000% due 10/15/2019 (c)(j)

      2,204          1,873   

Caesars Entertainment Operating Co., Inc.

  

8.500% due 02/15/2020 ^

      600          581   

9.000% due 02/15/2020 ^

      3,855          3,730   

11.250% due 06/01/2017 ^

      1,989          1,914   

Chesapeake Energy Corp.

  

3.930% due 04/15/2019

      62          52   

Continental Airlines Pass-Through Trust

  

9.798% due 10/01/2022

      846          940   

Diamond 1 Finance Corp.

  

5.450% due 06/15/2023

      61          65   

6.020% due 06/15/2026

      57          61   

DISH DBS Corp.

  

7.750% due 07/01/2026

      700          728   

Eagle Materials, Inc.

  

4.500% due 08/01/2026 (b)

      740          753   

FAGE International S.A.

  

5.625% due 08/15/2026 (b)

      400          410   

Forbes Energy Services Ltd.

  

9.000% due 06/15/2019 ^

      612          245   

Ford Motor Co.

  

7.700% due 05/15/2097 (j)

      9,030          11,697   

Fresh Market, Inc.

  

9.750% due 05/01/2023

      400          372   

Harvest Operations Corp.

  

2.330% due 04/14/2021

      2,127          2,120   

HCA, Inc.

  

7.500% due 11/15/2095

      200          205   

iHeartCommunications, Inc.

  

9.000% due 09/15/2022

      1,000          739   

Intelsat Luxembourg S.A.

  

7.750% due 06/01/2021

      3,279          771   

8.125% due 06/01/2023

      524          124   

Intrepid Aviation Group Holdings LLC

  

6.875% due 02/15/2019

      3,430          3,113   

Kinder Morgan Energy Partners LP

  

6.375% due 03/01/2041

      200          211   

Kinder Morgan, Inc.

  

7.750% due 01/15/2032

      800          938   

7.800% due 08/01/2031

      1,600          1,910   
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

NXP BV

  

4.125% due 06/01/2021

  $     1,360      $     1,411   

Post Holdings, Inc.

  

5.000% due 08/15/2026 (b)

      1,200          1,199   

Prime Security Services Borrower LLC

  

9.250% due 05/15/2023

      1,900          2,033   

Revlon Escrow Corp.

  

6.250% due 08/01/2024 (b)

      600          609   

Russian Railways via RZD Capital PLC

  

7.487% due 03/25/2031

  GBP     700          1,072   

Sabine Pass Liquefaction LLC

  

5.875% due 06/30/2026

  $     1,500          1,541   

Safeway, Inc.

  

7.250% due 02/01/2031

      70          69   

Scientific Games International, Inc.

  

10.000% due 12/01/2022

      1,600          1,430   

Sequa Corp.

  

7.000% due 12/15/2017

      3,804          647   

SFR Group S.A.

  

7.375% due 05/01/2026

      2,558          2,558   

Spanish Broadcasting System, Inc.

  

12.500% due 04/15/2017

      1,000          993   

Tembec Industries, Inc.

  

9.000% due 12/15/2019

      1,100          866   

Transocean, Inc.

  

9.000% due 07/15/2023

      508          478   

Unique Pub Finance Co. PLC

  

5.659% due 06/30/2027

  GBP     1,963          2,628   

6.542% due 03/30/2021

      619          857   

Valvoline, Inc.

  

5.500% due 07/15/2024

  $     211          221   

Westmoreland Coal Co.

  

8.750% due 01/01/2022

      3,026          2,322   
       

 

 

 
          56,917   
       

 

 

 
UTILITIES 8.0%   

CenturyLink, Inc.

  

7.500% due 04/01/2024

      420          449   

Frontier Communications Corp.

  

10.500% due 09/15/2022

      340          368   

11.000% due 09/15/2025

      340          365   

Gazprom Neft OAO Via GPN Capital S.A.

  

6.000% due 11/27/2023 (j)

      6,600          6,955   

6.000% due 11/27/2023

      800          843   

Illinois Power Generating Co.

  

6.300% due 04/01/2020

      1,420          568   

7.000% due 04/15/2018

      2,600          1,040   

7.950% due 06/01/2032

      300          120   

Northwestern Bell Telephone

  

7.750% due 05/01/2030

      7,000          7,585   

Odebrecht Drilling Norbe Ltd.

  

6.350% due 06/30/2022

      225          61   

Odebrecht Offshore Drilling Finance Ltd.

  

6.625% due 10/01/2023

      1,330          226   

6.750% due 10/01/2023

      1,952          332   

Petrobras Global Finance BV

  

3.536% due 03/17/2020

      130          120   

4.875% due 03/17/2020

      210          205   

5.750% due 01/20/2020

      70          70   

6.625% due 01/16/2034

  GBP     100          112   

6.750% due 01/27/2041

  $     1,200          990   

7.875% due 03/15/2019

      745          792   
       

 

 

 
          21,201   
       

 

 

 

Total Corporate Bonds & Notes
(Cost $176,942)

   

        162,437   
       

 

 

 
MUNICIPAL BONDS & NOTES 5.6%   
CALIFORNIA 0.9%   

Riverside County, California Redevelopment Successor Agency Tax Allocation Bonds, Series 2010

   

7.500% due 10/01/2030

      600          675   
 

 

46   PIMCO CLOSED-END FUNDS        See Accompanying Notes   


 

July 31, 2016

 

        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Stockton Public Financing Authority, California Revenue Bonds, (BABs), Series 2009

   

7.942% due 10/01/2038

  $     1,600      $     1,829   
       

 

 

 
          2,504   
       

 

 

 
ILLINOIS 2.4%   

Chicago, Illinois General Obligation Bonds, (BABs), Series 2010

   

7.517% due 01/01/2040

      6,000          6,348   
       

 

 

 
VIRGINIA 0.1%   

Tobacco Settlement Financing Corp., Virginia Revenue Bonds, Series 2007

   

6.706% due 06/01/2046

      395          337   
       

 

 

 
WEST VIRGINIA 2.2%   

Tobacco Settlement Finance Authority, West Virginia Revenue Bonds, Series 2007

   

7.467% due 06/01/2047

      6,040          5,799   
       

 

 

 

Total Municipal Bonds & Notes
(Cost $13,844)

      14,988   
       

 

 

 
U.S. GOVERNMENT AGENCIES 2.1%   

Fannie Mae

  

3.500% due 12/25/2032 (a)

      842          106   

4.000% due 11/25/2042 (a)

      3,001          472   

4.743% due 01/25/2029

      200          201   

5.788% due 10/25/2028

      300          321   

13.600% due 12/25/2040

      132          214   

Freddie Mac

  

6.175% due 11/25/2055

      4,166          2,235   

8.038% due 12/25/2027

      1,500          1,464   

9.067% due 11/15/2040

      251          298   

11.238% due 03/25/2025

      298          301   
       

 

 

 

Total U.S. Government Agencies
(Cost $5,764)

   

      5,612   
       

 

 

 
NON-AGENCY MORTGAGE-BACKED SECURITIES 17.7%   

Banc of America Alternative Loan Trust

  

6.000% due 01/25/2036 ^

      67          57   

Banc of America Funding Trust

  

6.000% due 08/25/2036 ^

      2,163          2,116   

BCAP LLC Trust

  

2.973% due 03/27/2036

      1,048          544   

5.196% due 03/26/2037

      630          184   

11.881% due 06/26/2036

      316          117   

Bear Stearns ALT-A Trust

  

0.808% due 06/25/2046 ^

      2,786          1,995   

2.840% due 11/25/2036 ^

      294          217   

2.864% due 09/25/2047 ^

      3,875          2,720   

3.379% due 09/25/2035 ^

      446          368   

Bear Stearns Mortgage Funding Trust

  

7.000% due 08/25/2036

      769          735   

Chase Mortgage Finance Trust

  

2.695% due 12/25/2035 ^

      7          7   

6.000% due 02/25/2037 ^

      668          556   

6.000% due 07/25/2037 ^

      424          358   

6.250% due 10/25/2036 ^

      1,324          1,127   

Chase Mortgage Trust

  

3.750% due 02/25/2044

      300          285   

Citicorp Mortgage Securities Trust

  

5.500% due 04/25/2037

      94          93   

Countrywide Alternative Loan Resecuritization Trust

  

6.000% due 05/25/2036 ^

      1,783          1,519   

6.000% due 08/25/2037 ^

      772          611   

Countrywide Alternative Loan Trust

  

0.838% due 05/25/2037 ^

      275          153   

2.915% due 04/25/2036 ^

      850          596   

5.500% due 03/25/2035

      214          177   

5.500% due 12/25/2035 ^

      2,456          2,071   

5.500% due 03/25/2036 ^

      107          81   
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

5.750% due 01/25/2035

  $     260      $     262   

6.000% due 02/25/2035

      244          250   

6.000% due 08/25/2036 ^

      337          302   

6.000% due 04/25/2037 ^

      838          606   

6.250% due 11/25/2036 ^

      544          485   

6.250% due 12/25/2036 ^

      1,181          887   

6.500% due 08/25/2036 ^

      339          237   

Countrywide Home Loan Mortgage Pass-Through Trust

  

2.835% due 02/20/2035

      42          42   

5.500% due 10/25/2035 ^

      539          491   

6.250% due 09/25/2036 ^

      456          395   

Credit Suisse Mortgage Capital Mortgage-Backed Trust

  

6.000% due 02/25/2037 ^

      269          234   

Deco Pan Europe Ltd.

  

0.503% due 04/27/2018

  EUR     498          547   

Deutsche Mortgage Securities, Inc. Mortgage Loan Trust

   

2.403% due 06/25/2034

  $     2,030          1,541   

Epic Drummond Ltd.

  

0.044% due 01/25/2022

  EUR     737          795   

GSR Mortgage Loan Trust

  

5.500% due 05/25/2036 ^

  $     84          80   

6.000% due 02/25/2036 ^

      3,326          2,764   

HarborView Mortgage Loan Trust

  

1.203% due 01/19/2035

      270          241   

3.058% due 07/19/2035

      43          37   

IndyMac Mortgage Loan Trust

  

6.500% due 07/25/2037 ^

      1,883          1,168   

JPMorgan Alternative Loan Trust

  

2.756% due 03/25/2037 ^

      1,306          1,114   

2.905% due 03/25/2036 ^

      1,409          1,103   

JPMorgan Mortgage Trust

  

2.839% due 01/25/2037 ^

      427          383   

2.861% due 02/25/2036 ^

      377          333   

LB-UBS Commercial Mortgage Trust

  

5.407% due 11/15/2038

      813          635   

5.562% due 02/15/2040

      810          611   

Lehman XS Trust

  

0.708% due 06/25/2047

      1,544          1,096   

Merrill Lynch Mortgage Investors Trust

  

2.820% due 03/25/2036 ^

      1,258          837   

Morgan Stanley Mortgage Loan Trust

  

5.962% due 06/25/2036

      2,882          1,453   

Residential Asset Securitization Trust

  

5.750% due 02/25/2036 ^

      734          577   

6.000% due 07/25/2037 ^

      885          629   

6.250% due 09/25/2037 ^

      1,463          1,032   

Residential Funding Mortgage Securities, Inc. Trust

  

4.071% due 08/25/2036 ^

      1,332          1,176   

6.000% due 09/25/2036 ^

      170          156   

6.000% due 06/25/2037 ^

      2,269          2,086   

Structured Adjustable Rate Mortgage Loan Trust

  

2.795% due 11/25/2036 ^

      1,328          1,016   

2.857% due 01/25/2036 ^

      1,071          811   

2.924% due 07/25/2036 ^

      473          382   

4.559% due 03/25/2037 ^

      427          296   

Suntrust Adjustable Rate Mortgage Loan Trust

  

2.867% due 02/25/2037 ^

      233          205   

3.034% due 04/25/2037 ^

      1,458          1,244   

WaMu Mortgage Pass-Through Certificates Trust

  

2.190% due 12/25/2046

      396          363   

4.179% due 02/25/2037 ^

      424          386   

6.002% due 10/25/2036 ^

      626          493   

Wells Fargo Mortgage-Backed Securities Trust

  

2.911% due 07/25/2036 ^

      252          238   

5.750% due 03/25/2037 ^

      233          228   

6.000% due 06/25/2037 ^

      136          136   
       

 

 

 

Total Non-Agency Mortgage-Backed Securities (Cost $44,739)

   

        47,070   
       

 

 

 
ASSET-BACKED SECURITIES 29.6%   

Argent Securities Trust

  

0.678% due 03/25/2036

      8,278          4,320   
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Asset-Backed Funding Certificates Trust

  

0.638% due 10/25/2036

  $     7,723      $     6,669   

Bear Stearns Asset-Backed Securities Trust

  

6.500% due 10/25/2036 ^

      244          186   

CIFC Funding Ltd.

  

0.000% due 05/24/2026 (e)

      1,200          848   

0.000% due 07/22/2026

      1,000          611   

Citigroup Mortgage Loan Trust, Inc.

  

0.638% due 12/25/2036

      4,638          2,638   

0.648% due 12/25/2036

      2,517          1,662   

Countrywide Asset-Backed Certificates

  

0.628% due 06/25/2047 ^

      950          682   

0.688% due 06/25/2047

      6,001          4,084   

0.748% due 09/25/2046 ^

      3,189          2,079   

1.048% due 12/25/2035

      5,550          5,409   

Countrywide Asset-Backed Certificates Trust

  

4.981% due 08/25/2035

      2,809          2,896   

Credit-Based Asset Servicing and Securitization LLC

  

0.598% due 11/25/2036

      449          281   

GSAMP Trust

  

0.748% due 02/25/2046

      4,777          3,667   

1.463% due 03/25/2035 ^

      7,936          5,239   

JPMorgan Mortgage Acquisition Corp.

  

0.778% due 01/25/2036

      410          380   

JPMorgan Mortgage Acquisition Trust

  

0.808% due 04/25/2036

      6,000          4,230   

Lehman XS Trust

  

6.290% due 06/24/2046

      2,714          2,538   

MASTR Asset-Backed Securities Trust

  

5.233% due 11/25/2035

      124          124   

Merrill Lynch Mortgage Investors Trust

  

0.648% due 04/25/2037

      300          162   

Morgan Stanley Capital, Inc. Trust

  

0.778% due 01/25/2036

      3,848          3,461   

Morgan Stanley Mortgage Loan Trust

  

0.608% due 04/25/2037

      4,144          2,046   

6.250% due 07/25/2047 ^

      440          307   

Residential Asset Mortgage Products Trust

  

0.768% due 09/25/2036

      394          348   

Residential Asset Securities Corp. Trust

  

0.958% due 09/25/2035

      13,627          11,178   

Securitized Asset-Backed Receivables LLC Trust

  

0.628% due 05/25/2036

      6,181          3,590   

SLM Student Loan Trust

  

0.000% due 10/28/2029 (e)

      1          1,564   

0.000% due 01/25/2042 (e)

      2          2,128   

South Coast Funding Ltd.

  

1.230% due 08/10/2038

      6,183          1,303   

Taberna Preferred Funding Ltd.

  

1.013% due 08/05/2036 ^

      4,823          3,376   

1.013% due 08/05/2036

      257          180   

Trainer Wortham First Republic CBO Ltd.

  

1.834% due 11/06/2038

      619          607   
       

 

 

 

Total Asset-Backed Securities (Cost $77,324)

      78,793   
       

 

 

 
SOVEREIGN ISSUES 1.9%   

Autonomous Community of Catalonia

  

4.750% due 06/04/2018

  EUR     1,700          1,953   

4.900% due 09/15/2021

      700          805   

Republic of Greece Government International Bond

  

3.800% due 08/08/2017

  JPY     201,000          1,879   

4.750% due 04/17/2019

  EUR     300          303   
       

 

 

 

Total Sovereign Issues (Cost $4,571)

  

      4,940   
       

 

 

 
        SHARES            
COMMON STOCKS 0.0%   
FINANCIALS 0.0%   

TIG FinCo PLC (h)

      91,836          58   
       

 

 

 

Total Common Stocks (Cost $136)

  

      58   
       

 

 

 
 

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2016   47


Schedule of Investments PIMCO Income Strategy Fund (Cont.)

 

        SHARES         MARKET
VALUE
(000S)
 
PREFERRED SECURITIES 2.0%   
BANKING & FINANCE 2.0%   

Farm Credit Bank of Texas

  

10.000% due 12/15/2020 (g)

    2,790        $ 3,355   

GMAC Capital Trust

  

6.411% due 02/15/2040

      77,800          1,978   
       

 

 

 

Total Preferred Securities (Cost $5,336)

  

        5,333   
       

 

 

 
SHORT-TERM INSTRUMENTS 2.2%   
REPURCHASE AGREEMENTS (i) 1.4%   
          3,824   
       

 

 

 
        PRINCIPAL
AMOUNT
(000S)
           
SHORT-TERM NOTES 0.2%   

Federal Home Loan Bank

  

0.330% due 09/14/2016 (e)(f)

  $     600          600   
       

 

 

 
       

PRINCIPAL
AMOUNT
(000S)

        MARKET
VALUE
(000S)
 
U.S. TREASURY BILLS 0.6%   

0.292% due 10/06/2016 - 11/03/2016 (d)(e)(m)

  $     1,665      $     1,664   
       

 

 

 
Total Short-Term Instruments
(Cost $6,088)
          6,088   
       

 

 

 
       
Total Investments in Securities
(Cost $340,091)
          329,757   
       
Total Investments 123.8%
(Cost $340,091)
      $     329,757   

Financial Derivative
Instruments (k)(l) (0.5)%

(Cost or Premiums, net $(801))

  

  

      (1,310
       

Preferred Shares (19.3)%

  

      (51,275
Other Assets and Liabilities, net (4.0)%          (10,825
       

 

 

 
Net Assets Applicable to Common Shareholders 100.0%       $       266,347   
       

 

 

 
 

NOTES TO SCHEDULE OF INVESTMENTS (AMOUNTS IN THOUSANDS*):

 

* A zero balance may reflect actual amounts rounding to less than one thousand.
^ Security is in default.
(a) Interest only security.
(b) When-issued security.
(c) Payment in-kind security.
(d) Coupon represents a weighted average yield to maturity.
(e) Zero coupon security.
(f) Coupon represents a yield to maturity.
(g) Perpetual maturity; date shown, if applicable, represents next contractual call date.

 

(h)  RESTRICTED SECURITIES:

 

Issuer Description              Acquisition
Date
  Cost     Market
Value
    Market Value
as Percentage
of Net Assets
 

TIG FinCo PLC

       04/02/2015   $     136      $     58        0.02%   
        

 

 

   

 

 

   

 

 

 

 

BORROWINGS AND OTHER FINANCING TRANSACTIONS

 

(i)  REPURCHASE AGREEMENTS:

 

Counterparty   Lending
Rate
    Settlement
Date
    Maturity
Date
    Principal
Amount
    Collateralized By   Collateral
(Received)
    Repurchase
Agreements,
at Value
    Repurchase
Agreement
Proceeds
to be
Received (1)
 
JPS     0.540     07/29/2016        08/01/2016      $     2,100      U.S. Treasury Notes 1.375% due 02/29/2020   $ (2,149   $ 2,100      $ 2,100   
SSB     0.010        07/29/2016        08/01/2016        1,724      U.S. Treasury Notes 1.000% due 05/15/2018     (1,763     1,724        1,724   
           

 

 

   

 

 

   

 

 

 

Total Repurchase Agreements

  

        $     (3,912   $     3,824      $     3,824   
           

 

 

   

 

 

   

 

 

 

 

(1) 

Includes accrued interest.

 

REVERSE REPURCHASE AGREEMENTS:

 

Counterparty   Borrowing
Rate (3)
    Borrowing
Date
    Maturity
Date
    Amount
Borrowed  (3)
    Payable for
Reverse
Repurchase
Agreements
 

BCY

    (0.250 )%      02/18/2016        TBD  (2)    $ (344   $ (344

JML

    1.300        08/02/2016        08/16/2016            (5,618     (5,618

RBC

    1.550        05/02/2016        11/02/2016        (3,616     (3,630

RDR

    (1.000     01/22/2016        TBD  (2)      (730     (726
    1.050        05/04/2016        08/04/2016        (3,021     (3,029

UBS

    0.900        07/11/2016        10/06/2016        (2,764     (2,765
         

 

 

 

Total Reverse Repurchase Agreements

          $     (16,112
         

 

 

 

 

(2) 

Open maturity reverse repurchase agreement.

(3) 

The average amount of borrowings outstanding during the period ended July 31, 2016 was $(13,439) at a weighted average interest rate of 0.763%. Average borrowings includes sale-buyback transactions, of which there were none open at period end.

 

48   PIMCO CLOSED-END FUNDS        See Accompanying Notes   


 

July 31, 2016

 

 

BORROWINGS AND OTHER FINANCING TRANSACTIONS SUMMARY

 

The following is a summary by counterparty of the market value of Borrowings and Other Financing Transactions and collateral (received)/pledged as of July 31, 2016:

 

(j) Securities with an aggregate market value of $19,090 have been pledged as collateral under the terms of the following master agreements as of July 31, 2016.

 

Counterparty   Repurchase
Agreement
Proceeds
to be
Received
    Payable for
Reverse
Repurchase
Agreements
    Payable for
Sale-Buyback
Transactions
     Total
Borrowings and
Other Financing
Transactions
     Collateral
(Received)/Pledged
     Net Exposure  (4)  

Global/Master Repurchase Agreement

              

BCY

  $ 0      $ (344   $ 0       $ (344    $ 423       $ 79   

JML

    0        (5,618     0             (5,618      6,955         1,337   

JPS

    2,100        0        0         2,100             (2,149      (49

RBC

    0        (3,630     0         (3,630      4,156         526   

RDR

    0        (3,755     0         (3,755      4,004         249   

SSB

    1,724        0        0         1,724         (1,763      (39

UBS

    0        (2,765     0         (2,765      2,979         214   
 

 

 

   

 

 

   

 

 

          

Total Borrowings and Other Financing Transactions

  $     3,824      $     (16,112   $     0            
 

 

 

   

 

 

   

 

 

          

 

(4) 

Net Exposure represents the net receivable/(payable) that would be due from/to the counterparty in the event of default. Exposure from borrowings and other financing transactions can only be netted across transactions governed under the same master agreement with the same legal entity. See Note 7, Principal Risks, in the Notes to Financial Statements for more information regarding master netting arrangements.

 

CERTAIN TRANSFERS ACCOUNTED FOR AS SECURED BORROWINGS

 

Remaining Contractual Maturity of the Agreements

 

     Overnight and
Continuous
    Up to 30 days     31-90 days     Greater Than 90 days     Total  

Reverse Repurchase Agreements

  

 

Corporate Bonds & Notes

  $ 0      $ (3,029   $ (2,765   $ (4,700   $ (10,494
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Borrowings

  $     0      $     (3,029   $     (2,765   $     (4,700   $     (10,494
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross amount of recognized liabilities for reverse repurchase agreements (5)

          $ (10,494
         

 

 

 

 

(5) 

Unsettled reverse repurchase agreements liability of $(5,618) is outstanding at period end.

 

(k)  FINANCIAL DERIVATIVE INSTRUMENTS: EXCHANGE-TRADED OR CENTRALLY CLEARED

 

SWAP AGREEMENTS:

 

CREDIT DEFAULT SWAPS ON CREDIT INDICES - SELL PROTECTION (1)

 

Index/Tranches   Fixed
Receive Rate
    Maturity
Date
    Notional
Amount  (2)
    Market
Value  (3)
    Unrealized
Appreciation/
(Depreciation)
    Variation Margin  
            Asset     Liability  

CDX.HY-24 5-Year Index

    5.000     06/20/2020      $ 4,410      $ 313      $ (28   $ 15      $ 0   

CDX.HY-25 5-Year Index

    5.000        12/20/2020            2,376        130        137        9        0   

CDX.HY-26 5-Year Index

    5.000        06/20/2021        500        25        8        2        0   
       

 

 

   

 

 

   

 

 

   

 

 

 
        $     468      $     117      $     26      $     0   
       

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

If the Fund is a seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) pay to the buyer of protection an amount equal to the notional amount of the swap and take delivery of the referenced obligation or underlying securities comprising the referenced index or (ii) pay a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index.

(2) 

The maximum potential amount the Fund could be required to pay as a seller of credit protection or receive as a buyer of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.

(3) 

The prices and resulting values for credit default swap agreements on credit indices serve as an indicator of the current status of the payment/performance risk and represent the likelihood of an expected liability (or profit) for the credit derivative should the notional amount of the swap agreement be closed/sold as of the period end. Increasing market values, in absolute terms when compared to the notional amount of the swap, represent a deterioration of the referenced indices’ credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2016   49


Schedule of Investments PIMCO Income Strategy Fund (Cont.)

 

 

INTEREST RATE SWAPS

 

Pay/Receive
Floating Rate
  Floating Rate Index   Fixed Rate     Maturity
Date
    Notional
Amount
    Market
Value
    Unrealized
Appreciation/
(Depreciation)
    Variation Margin  
              Asset      Liability  

Pay

 

3-Month USD-LIBOR

    2.750     06/17/2025        $        70,420      $ 8,841      $ 4,605      $ 356       $ 0   

Pay

 

3-Month USD-LIBOR

    2.250        06/15/2026          15,300        1,309        585        82         0   

Pay

 

3-Month USD-LIBOR

    3.500        06/19/2044          83,100        34,476        37,187        1,240         0   

Receive

 

3-Month USD-LIBOR *

    2.250        12/21/2046              134,560        (15,691     (4,140     0         (1,903

Pay

 

6-Month AUD-BBR-BBSW

    3.000        12/17/2019        AUD        6,200        174        81        8         0   

Pay

 

6-Month AUD-BBR-BBSW

    3.500        06/17/2025          3,900        357        260        22         0   
           

 

 

   

 

 

   

 

 

    

 

 

 
            $ 29,466      $ 38,578      $ 1,708       $ (1,903
           

 

 

   

 

 

   

 

 

    

 

 

 

Total Swap Agreements

  

      $     29,934      $     38,695      $     1,734       $     (1,903
           

 

 

   

 

 

   

 

 

    

 

 

 

 

* This security has a forward starting effective date. See Note 2(a) in the Notes to Financial Statements for further information.

 

FINANCIAL DERIVATIVE INSTRUMENTS: EXCHANGE-TRADED OR CENTRALLY CLEARED SUMMARY

 

The following is a summary of the market value and variation margin of Exchange-Traded or Centrally Cleared Financial Derivative Instruments as of July 31, 2016:

 

Cash of $5,299 has been pledged as collateral for exchange-traded and centrally cleared financial derivative instruments as of July 31, 2016. See Note 7, Principal Risks, in the Notes to Financial Statements for more information regarding master netting arrangements.

 

    Financial Derivative Assets           Financial Derivative Liabilities  
    Market Value     Variation Margin
Asset
   

Total

          Market Value     Variation Margin
Liability
   

Total

 
     Purchased
Options
    Futures     Swap
Agreements
            Written
Options
    Futures     Swap
Agreements
   

Total Exchange-Traded or Centrally Cleared

  $     0      $     0      $     1,734      $     1,734        $     0      $     0      $     (1,903)      $     (1,903)   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

 

(l)  FINANCIAL DERIVATIVE INSTRUMENTS: OVER THE COUNTER

 

FORWARD FOREIGN CURRENCY CONTRACTS:

 

Counterparty    Settlement
Month
    Currency to
be Delivered
    Currency to
be Received
    Unrealized  Appreciation/

(Depreciation)
 
         Asset      Liability  

AZD

     08/2016      AUD     35      $     25      $ 0       $ (1
     08/2016      EUR     143          158        0         (1
     09/2016          48          54        0         0   

BOA

     08/2016      BRL     339          105        0         0   
     08/2016      EUR     10,042          11,078        0             (149
     08/2016      GBP     23,717          31,564            175         0   
     08/2016      $     103      BRL     339        2         0   
     08/2016          10,675      EUR     9,705        175         0   
     09/2016      BRL     339      $     102        0         (2
     09/2016      EUR     9,705          10,689        0         (174

CBK

     08/2016      AUD     368          269        0         (10
     08/2016      EUR     72          79        0         (1
     08/2016      GBP     517          685        2         (2
     08/2016      $     790      EUR     717        12         0   
     09/2016      GBP     61      $     81        0         0   

GLM

     08/2016      EUR     24          26        0         0   
     08/2016      GBP     203          267        0         (2
     08/2016      $     298      GBP     229        5         0   
     09/2016      GBP     61      $     80        0         (1

JPM

     08/2016      AUD     69          52        0         0   
     08/2016      GBP     139          184        0         0   
     08/2016      $     609      GBP     458        0         (3
     09/2016      EUR     97      $     108        0         (1

MSB

     08/2016      BRL     339          105        1         0   
     08/2016      JPY     5,592          53        0         (2
     08/2016      $     104      BRL     339        0         0   

NAB

     08/2016      EUR     117      $     130        0         (1
     08/2016      $     1,843      JPY     194,476        63         0   
     09/2016      JPY     194,476      $     1,845        0         (63

 

50   PIMCO CLOSED-END FUNDS        See Accompanying Notes   


 

July 31, 2016

 

Counterparty    Settlement
Month
    Currency to
be Delivered
    Currency to
be Received
    Unrealized  Appreciation/

(Depreciation)
 
         Asset     Liability  

SCX

     08/2016      EUR     48      $     53      $ 0      $ (1
     08/2016      JPY     188,884          1,855        4        0   
     08/2016      $     31,716      GBP     24,172        274        0   
     09/2016      GBP     24,172      $     31,731        0        (275

TOR

     08/2016          324          418        0        (10
            

 

 

   

 

 

 

Total Forward Foreign Currency Contracts

  

          $     713      $     (699
            

 

 

   

 

 

 

 

SWAP AGREEMENTS:

 

CREDIT DEFAULT SWAPS ON CORPORATE ISSUES - SELL PROTECTION (1)

 

Counterparty   Reference Entity   Fixed
Receive Rate
    Maturity
Date
    Implied
Credit Spread at
July 31, 2016 (2)
    Notional
Amount  (3)
    Premiums
(Received)
    Unrealized
Appreciation/
(Depreciation)
    Swap Agreements,
at Value
 
                Asset     Liability  
BPS  

Petrobras Global Finance BV

    1.000     12/20/2024        6.275     $    500      $ (98   $ (60   $ 0      $ (158
GST  

Petrobras Global Finance BV

    1.000        12/20/2024        6.275        700        (139     (83     0        (222
HUS  

Petrobras Global Finance BV

    1.000        12/20/2019        4.923        200        (16     (8     0        (24
 

Petrobras Global Finance BV

    1.000        09/20/2020        5.476        20        (3     0        0        (3
 

Petrobras Global Finance BV

    1.000        12/20/2024        6.275        800        (166     (87     0        (253
MYC  

Petrobras Global Finance BV

    1.000        12/20/2019        4.923            4,100        (379     (116     0        (495
           

 

 

   

 

 

   

 

 

   

 

 

 
            $ (801   $ (354   $ 0      $ (1,155
           

 

 

   

 

 

   

 

 

   

 

 

 

Total Swap Agreements

          $     (801   $     (354   $     0      $     (1,155
           

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

If the Fund is a seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) pay to the buyer of protection an amount equal to the notional amount of the swap and take delivery of the referenced obligation or underlying securities comprising the referenced index or (ii) pay a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index.

(2)

Implied credit spreads, represented in absolute terms, utilized in determining the market value of credit default swap agreements on corporate issues as of period end serve as an indicator of the current status of the payment/performance risk and represent the likelihood or risk of default for the credit derivative. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection and may include upfront payments required to be made to enter into the agreement. Wider credit spreads represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.

(3)

The maximum potential amount the Fund could be required to pay as a seller of credit protection or receive as a buyer of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.

 

FINANCIAL DERIVATIVE INSTRUMENTS: OVER THE COUNTER SUMMARY

 

The following is a summary by counterparty of the market value of OTC financial derivative instruments and collateral (received)/pledged as of July 31, 2016:

 

(m) Securities with an aggregate market value of $1,664 have been pledged as collateral for financial derivative instruments as governed by International Swaps and Derivatives Association, Inc. master agreements as of July 31, 2016.

 

    Financial Derivative Assets           Financial Derivative Liabilities                    
Counterparty   Forward
Foreign
Currency
Contracts
     Purchased
Options
     Swap
Agreements
     Total
Over the
Counter
           Forward
Foreign
Currency
Contracts
    Written
Options
     Swap
Agreements
    Total
Over the
Counter
    Net Market
Value of OTC
Derivatives
    Collateral
(Received)/
Pledged
    Net
Exposure  (4)
 

AZD

  $ 0       $ 0       $ 0       $ 0        $ (2   $ 0       $ 0      $ (2   $ (2   $ 0      $ (2

BOA

        352             0             0             352              (325         0         0        (325     27        (430     (403

BPS

    0         0         0         0          0        0             (158         (158         (158         282            124   

CBK

    14         0         0         14          (13     0         0        (13     1        0        1   

GLM

    5         0         0         5          (3     0         0        (3     2        0        2   

GST

    0         0         0         0          0        0         (222     (222     (222     267        45   

HUS

    0         0         0         0          0        0         (280     (280         (280     401        121   

JPM

    0         0         0         0          (4     0         0        (4     (4     0        (4

MSB

    1         0         0         1          (2     0         0        (2     (1     0        (1

MYC

    0         0         0         0          0        0         (495     (495         (495         715            220   

NAB

    63         0         0         63          (64     0         0        (64     (1     0        (1

SCX

    278         0         0         278          (276     0         0        (276     2        0        2   

TOR

    0         0         0         0          (10     0         0        (10     (10     0        (10
 

 

 

    

 

 

    

 

 

    

 

 

     

 

 

   

 

 

    

 

 

   

 

 

       

Total Over the Counter

  $     713       $     0       $     0       $     713        $     (699   $     0       $     (1,155   $     (1,854      
 

 

 

    

 

 

    

 

 

    

 

 

     

 

 

   

 

 

    

 

 

   

 

 

       

 

(4) 

Net Exposure represents the net receivable/(payable) that would be due from/to the counterparty in the event of default. Exposure from OTC financial derivative instruments can only be netted across transactions governed under the same master agreement with the same legal entity. See Note 7, Principal Risks, in the Notes to Financial Statements for more information regarding master netting arrangements.

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2016   51


Schedule of Investments PIMCO Income Strategy Fund (Cont.)

 

 

FAIR VALUE OF FINANCIAL DERIVATIVE INSTRUMENTS

 

The following is a summary of the fair valuation of the Fund’s derivative instruments categorized by risk exposure. See Note 7, Principal Risks, in the Notes to Financial Statements on risks of the Fund.

 

Fair Values of Financial Derivative Instruments on the Statements of Assets and Liabilities as of July 31, 2016:

 

    Derivatives not accounted for as hedging instruments  
     Commodity
Contracts
    Credit
Contracts
    Equity
Contracts
    Foreign
Exchange
Contracts
    Interest
Rate Contracts
    Total  

Financial Derivative Instruments - Assets

           

Exchange-traded or centrally cleared

           

Swap Agreements

  $ 0      $ 26      $ 0      $ 0      $ 1,708      $ 1,734   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

           

Forward Foreign Currency Contracts

  $ 0      $ 0      $ 0      $ 713      $ 0      $ 713   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0      $ 26      $ 0      $ 713      $ 1,708      $ 2,447   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial Derivative Instruments - Liabilities

           

Exchange-traded or centrally cleared

           

Swap Agreements

  $ 0      $ 0      $ 0      $ 0      $ 1,903      $ 1,903   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

           

Forward Foreign Currency Contracts

  $ 0      $ 0      $ 0      $ 699      $ 0      $ 699   

Swap Agreements

    0        1,155        0        0        0        1,155   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0      $ 1,155      $ 0      $ 699      $ 0      $ 1,854   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $     0      $     1,155      $     0      $     699      $     1,903      $     3,757   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

The effect of Financial Derivative Instruments on the Statements of Operations for the period ended July 31, 2016:

 

    Derivatives not accounted for as hedging instruments  
     Commodity
Contracts
    Credit
Contracts
    Equity
Contracts
    Foreign
Exchange
Contracts
    Interest
Rate Contracts
    Total  

Net Realized Gain (Loss) on Financial Derivative Instruments

  

         

Exchange-traded or centrally cleared

           

Swap Agreements

  $ 0      $ 19      $ 0      $ 0      $ (30,653   $ (30,634
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

           

Forward Foreign Currency Contracts

  $ 0      $ 0      $ 0      $ 5,460      $ 0      $ 5,460   

Swap Agreements

    0        24        0        0        (2,302     (2,278
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0      $ 24      $ 0      $ 5,460      $ (2,302   $ 3,182   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0      $ 43      $ 0      $     5,460      $     (32,955   $     (27,452
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Change in Unrealized Appreciation (Depreciation) on Financial Derivative Instruments

  

     

Exchange-traded or centrally cleared

           

Swap Agreements

  $ 0      $ 229      $ 0      $ 0      $ 27,663      $ 27,892   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

           

Forward Foreign Currency Contracts

  $ 0      $ 0      $ 0      $ (193   $ 0      $ (193

Swap Agreements

    0        28        0        0        123        151   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0      $ 28      $ 0      $ (193   $ 123      $ (42
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $     0      $     257      $     0      $ (193   $ 27,786      $ 27,850   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

52   PIMCO CLOSED-END FUNDS        See Accompanying Notes   


 

July 31, 2016

 

 

FAIR VALUE MEASUREMENTS

 

The following is a summary of the fair valuations according to the inputs used as of July 31, 2016 in valuing the Fund’s assets and liabilities:

 

Category and Subcategory   Level 1     Level 2     Level 3     Fair
Value at
07/31/2016
 

Bank Loan Obligations

  $ 0      $ 4,438      $ 0      $ 4,438   

Corporate Bonds & Notes

       

Banking & Finance

    0        81,663        2,656        84,319   

Industrials

    0        56,917        0        56,917   

Utilities

    0        21,201        0        21,201   

Municipal Bonds & Notes

       

California

    0        2,504        0        2,504   

Illinois

    0        6,348        0        6,348   

Virginia

    0        337        0        337   

West Virginia

    0        5,799        0        5,799   

U.S. Government Agencies

    0        3,377        2,235        5,612   

Non-Agency Mortgage-Backed Securities

    0            47,070        0        47,070   

Asset-Backed Securities

    0        75,101            3,692            78,793   

Sovereign Issues

    0        4,940        0        4,940   

Common Stocks

       

Financials

    0        0        58        58   

Preferred Securities

       

Banking & Finance

        1,978        3,355        0        5,333   

Short-Term Instruments

       

Repurchase Agreements

    0        3,824        0        3,824   
Category and Subcategory   Level 1     Level 2     Level 3     Fair
Value at
07/31/2016
 

Short-Term Notes

  $ 0      $ 600      $ 0      $ 600   

U.S. Treasury Bills

    0        1,664        0        1,664   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Investments

  $     1,978      $     319,138      $     8,641      $     329,757   
 

 

 

   

 

 

   

 

 

   

 

 

 

Financial Derivative Instruments - Assets

  

 

Exchange-traded or centrally cleared

    0        1,734        0        1,734   

Over the counter

    0        713        0        713   
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0      $ 2,447      $ 0      $ 2,447   
 

 

 

   

 

 

   

 

 

   

 

 

 

Financial Derivative Instruments - Liabilities

  

 

Exchange-traded or centrally cleared

    0        (1,903     0        (1,903

Over the counter

    0        (1,854     0        (1,854
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0      $ (3,757   $ 0      $ (3,757
 

 

 

   

 

 

   

 

 

   

 

 

 

Totals

  $ 1,978      $ 317,828      $ 8,641      $ 328,447   
 

 

 

   

 

 

   

 

 

   

 

 

 
 

 

There were no significant transfers between Levels 1 and 2 during the period ended July 31, 2016.

 

The following is a reconciliation of the fair valuations using significant unobservable inputs (Level 3) for the Fund during the period ended July 31, 2016:

 

Category and Subcategory   Beginning
Balance
at 07/31/2015
    Net
Purchases
    Net
Sales
    Accrued
Discounts/
(Premiums)
    Realized
Gain/(Loss)
    Net Change in
Unrealized
Appreciation/
(Depreciation) (1)
    Transfers into
Level 3
    Transfers out
of Level 3
    Ending
Balance
at 07/31/2016
    Net Change in
Unrealized
Appreciation/
(Depreciation)
on Investments
Held  at
07/31/2016 (1)
 

Investments in Securities, at Value

  

                 

Corporate Bonds & Notes

                   

Banking & Finance

  $ 2,665      $ 0      $ (64   $ 0      $ 1      $ 54      $ 0      $ 0      $ 2,656      $ 62   

U.S. Government Agencies

    0        2,479        (34     20        14        (244     0        0        2,235        (244

Asset-Backed Securities

    0        3,684        0        0        0        8        0        0        3,692        8   

Common Stocks

                   

Financials

    96        0        0        0        0        (38     0        0        58        (38
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals

  $     2,761      $     6,163      $     (98   $     20      $     15      $     (220   $     0      $     0      $     8,641      $     (212
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

The following is a summary of significant unobservable inputs used in the fair valuations of assets and liabilities categorized within Level 3 of the fair value hierarchy:

 

Category and Subcategory   Ending
Balance
at 07/31/2016
     Valuation
Technique
    Unobservable
Inputs
   Input Value(s)
(% Unless
Noted
Otherwise)
 

Investments in Securities, at Value

  

Corporate Bonds & Notes

         

Banking & Finance

  $ 2,656         Proxy Pricing      Base Price      113.75   

U.S. Government Agencies

    2,235         Proxy Pricing      Base Price      53.65   

Asset-Backed Securities

    3,692         Proxy Pricing      Base Price      106,003.18-115,005.75   

Common Stocks

         

Financials

    58         Other Valuation Techniques  (2)           
 

 

 

         

Total

  $     8,641           
 

 

 

         

 

(1) 

Any difference between Net Change in Unrealized Appreciation/(Depreciation) and Net Change in Unrealized Appreciation/(Depreciation) on Investments Held at July 31, 2016 may be due to an investment no longer held or categorized as Level 3 at period end.

(2) 

Includes valuation techniques not defined in the Notes to Financial Statements as securities valued using such techniques are not considered significant to the Fund.

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2016   53


Schedule of Investments PIMCO Income Strategy Fund II

 

        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 
INVESTMENTS IN SECURITIES 124.8%   
BANK LOAN OBLIGATIONS 1.7%   

iHeartCommunications, Inc.

  

7.246% due 01/30/2019

  $     6,800      $     5,300   

Sequa Corp.

  

5.250% due 06/19/2017

      5,249          4,209   
       

 

 

 

Total Bank Loan Obligations (Cost $11,463)

  

        9,509   
       

 

 

 
CORPORATE BONDS & NOTES 56.7%   
BANKING & FINANCE 29.4%   

AGFC Capital Trust

  

6.000% due 01/15/2067

      1,800          990   

Ally Financial, Inc.

  

8.000% due 11/01/2031

      2,720          3,326   

Banco Bilbao Vizcaya Argentaria S.A.

  

6.750% due 02/18/2020 (h)

  EUR     1,000          1,020   

Banco do Brasil S.A.

  

6.250% due 04/15/2024 (h)

  $     3,700          2,274   

9.000% due 06/18/2024 (h)

      4,509          3,655   

Banco Espirito Santo S.A.

  

2.625% due 05/08/2017 ^

  EUR     3,000          956   

4.000% due 01/21/2019 ^

      8,100          2,581   

4.750% due 01/15/2018 ^

      2,300          733   

Banco Santander S.A.

  

6.250% due 09/11/2021 (h)

      1,600          1,600   

Barclays Bank PLC

  

7.625% due 11/21/2022

  $     4,400          4,927   

Barclays PLC

  

6.500% due 09/15/2019 (h)

  EUR     1,500          1,587   

7.875% due 09/15/2022 (h)

  GBP     415          531   

8.000% due 12/15/2020 (h)

  EUR     3,900          4,395   

Blackstone CQP Holdco LP

  

9.296% due 03/19/2019

  $     5,170          5,215   

BNP Paribas S.A.

  

7.375% due 08/19/2025 (h)

      6,600          6,740   

Cantor Fitzgerald LP

  

6.500% due 06/17/2022 (k)

      8,500          8,964   

Co-operative Group Holdings Ltd.

  

7.500% due 07/08/2026

  GBP     6,150          8,942   

Communications Sales & Leasing, Inc.

  

8.250% due 10/15/2023

  $     3,200          3,284   

Credit Agricole S.A.

  

7.500% due 06/23/2026 (h)

  GBP     3,600          4,584   

7.875% due 01/23/2024 (h)

  $     4,800          4,776   

Credit Suisse Group AG

  

7.500% due 12/11/2023 (h)

      7,863          8,167   

Flagstar Bancorp, Inc.

  

6.125% due 07/15/2021

      3,500          3,593   

GSPA Monetization Trust

  

6.422% due 10/09/2029 (k)

      4,822          5,517   

HSBC Holdings PLC

  

5.250% due 09/16/2022 (h)

  EUR     3,900          4,180   

6.000% due 09/29/2023 (h)

      3,930          4,488   

Jefferies Finance LLC

  

6.875% due 04/15/2022

  $     6,850          6,088   

7.375% due 04/01/2020

      200          188   

7.500% due 04/15/2021

      347          321   

Jefferies LoanCore LLC

  

6.875% due 06/01/2020

      200          180   

Lloyds Banking Group PLC

  

7.625% due 06/27/2023 (h)

  GBP     6,100          8,107   

7.875% due 06/27/2029 (h)

      1,200          1,588   

MPT Operating Partnership LP

  

5.250% due 08/01/2026

  $     1,292          1,361   

National Bank of Greece S.A.

  

3.875% due 10/07/2016

  EUR     1,750          1,957   

Nationwide Building Society

  

10.250% (h)

  GBP     13          2,098   

Navient Corp.

  

5.500% due 01/15/2019 (k)

  $     8,300          8,559   

5.625% due 08/01/2033

      150          117   
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Novo Banco S.A.

  

5.000% due 04/04/2019

  EUR     311      $     264   

5.000% due 04/23/2019

      653          555   

5.000% due 05/14/2019

      431          366   

5.000% due 05/21/2019

      241          205   

5.000% due 05/23/2019

      240          204   

Omega Healthcare Investors, Inc.

  

4.375% due 08/01/2023

  $     1,500          1,520   

OneMain Financial Holdings LLC

  

6.750% due 12/15/2019

      1,353          1,375   

PHH Corp.

  

6.375% due 08/15/2021

      170          158   

7.375% due 09/01/2019

      700          714   

Rio Oil Finance Trust

  

9.250% due 07/06/2024

      1,592          1,377   

Royal Bank of Scotland Group PLC

  

7.500% due 08/10/2020 (h)

      4,080          3,978   

8.000% due 08/10/2025 (h)

      4,990          4,971   

Santander UK Group Holdings PLC

  

7.375% due 06/24/2022 (h)

  GBP     1,300          1,705   

Springleaf Finance Corp.

  

5.250% due 12/15/2019

  $     675          657   

8.250% due 12/15/2020

      2,700          2,801   

Tesco Property Finance PLC

  

5.411% due 07/13/2044

  GBP     4,443          5,626   

6.052% due 10/13/2039

      2,648          3,705   

TIG FinCo PLC

  

8.500% due 03/02/2020

      687          927   

8.750% due 04/02/2020

      4,304          4,372   

Vnesheconombank Via VEB Finance PLC

  

6.902% due 07/09/2020

  $     600          644   
       

 

 

 
            163,713   
       

 

 

 
INDUSTRIALS 20.0%   

Altice Financing S.A.

  

7.500% due 05/15/2026

      3,600          3,645   

BMC Software Finance, Inc.

  

8.125% due 07/15/2021

      1,800          1,476   

Boxer Parent Co., Inc. (9.000% Cash or 9.750% PIK)

  

9.000% due 10/15/2019 (d)(k)

      4,650          3,952   

Caesars Entertainment Operating Co., Inc.

  

8.500% due 02/15/2020 ^

      1,500          1,451   

9.000% due 02/15/2020 ^

      2,300          2,225   

11.250% due 06/01/2017 ^

      9,820          9,452   

Chesapeake Energy Corp.

  

3.930% due 04/15/2019

      134          113   

8.000% due 12/15/2022

      100          91   

Diamond 1 Finance Corp.

  

5.450% due 06/15/2023

      129          137   

6.020% due 06/15/2026

      120          129   

DISH DBS Corp.

  

7.750% due 07/01/2026

      1,400          1,455   

Eagle Materials, Inc.

  

4.500% due 08/01/2026 (c)

      1,540          1,566   

FAGE International S.A.

  

5.625% due 08/15/2026 (c)

      800          819   

Forbes Energy Services Ltd.

  

9.000% due 06/15/2019 ^

      1,164          466   

Ford Motor Co.

  

7.700% due 05/15/2097 (k)

      10,460          13,550   

Fresh Market, Inc.

  

9.750% due 05/01/2023

      900          837   

Harvest Operations Corp.

  

2.330% due 04/14/2021

      3,917          3,905   

HCA, Inc.

  

7.500% due 11/15/2095

      1,200          1,229   

Hellenic Railways Organization S.A.

  

4.028% due 03/17/2017

  EUR     1,400          1,514   

iHeartCommunications, Inc.

  

9.000% due 09/15/2022

  $     3,450          2,549   

Intelsat Luxembourg S.A.

  

7.750% due 06/01/2021

      6,888          1,619   
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

8.125% due 06/01/2023

  $     1,135      $     270   

Intrepid Aviation Group Holdings LLC

  

6.875% due 02/15/2019

      7,420          6,734   

Kinder Morgan Energy Partners LP

  

6.375% due 03/01/2041

      400          423   

Kinder Morgan, Inc.

  

7.800% due 08/01/2031

      3,500          4,179   

NXP BV

  

4.125% due 06/01/2021

      2,850          2,957   

Post Holdings, Inc.

  

5.000% due 08/15/2026 (c)

      2,600          2,598   

Prime Security Services Borrower LLC

  

9.250% due 05/15/2023 (k)

      3,950          4,226   

Revlon Escrow Corp.

  

6.250% due 08/01/2024 (c)

      1,300          1,320   

Russian Railways via RZD Capital PLC

  

7.487% due 03/25/2031

  GBP     1,300          1,991   

Sabine Pass Liquefaction LLC

  

5.875% due 06/30/2026

  $     3,100          3,185   

Safeway, Inc.

  

7.250% due 02/01/2031

      120          118   

Scientific Games International, Inc.

  

10.000% due 12/01/2022

      3,300          2,949   

Sequa Corp.

  

7.000% due 12/15/2017

      7,918          1,346   

SFR Group S.A.

  

7.375% due 05/01/2026 (k)

      5,564          5,564   

Spanish Broadcasting System, Inc.

  

12.500% due 04/15/2017

      2,100          2,084   

Spirit Issuer PLC

  

6.582% due 12/28/2027

  GBP     1,000          1,383   

Tembec Industries, Inc.

  

9.000% due 12/15/2019

  $     2,400          1,890   

Transocean, Inc.

  

9.000% due 07/15/2023

      1,064          1,000   

UCP, Inc.

  

8.500% due 10/21/2017

      2,000          1,991   

Unique Pub Finance Co. PLC

  

5.659% due 06/30/2027

  GBP     4,028          5,393   

6.542% due 03/30/2021

      1,444          1,999   

Valvoline, Inc.

  

5.500% due 07/15/2024

  $     440          460   

Westmoreland Coal Co.

  

8.750% due 01/01/2022

      6,335          4,862   
       

 

 

 
            111,102   
       

 

 

 
UTILITIES 7.3%   

CenturyLink, Inc.

  

7.500% due 04/01/2024

      880          942   

Frontier Communications Corp.

  

10.500% due 09/15/2022

      720          778   

11.000% due 09/15/2025

      720          772   

Gazprom Neft OAO Via GPN Capital S.A.

  

6.000% due 11/27/2023 (k)

      13,900          14,647   

Illinois Power Generating Co.

  

6.300% due 04/01/2020

      3,035          1,214   

7.000% due 04/15/2018

      5,400          2,160   

7.950% due 06/01/2032

      700          280   

Northwestern Bell Telephone

  

7.750% due 05/01/2030

      12,625          13,681   

Odebrecht Drilling Norbe Ltd.

  

6.350% due 06/30/2022

      375          103   

Odebrecht Offshore Drilling Finance Ltd.

  

6.625% due 10/01/2023

      4,077          693   

6.750% due 10/01/2023

      4,428          753   

Petrobras Global Finance BV

  

3.536% due 03/17/2020

      270          250   

4.875% due 03/17/2020

      450          439   

5.750% due 01/20/2020

      220          220   

6.625% due 01/16/2034

  GBP     100          112   

6.750% due 01/27/2041

  $     2,400          1,980   
 

 

54   PIMCO CLOSED-END FUNDS        See Accompanying Notes   


 

July 31, 2016

 

        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

7.875% due 03/15/2019

  $     1,689      $     1,795   
       

 

 

 
          40,819   
       

 

 

 

Total Corporate Bonds & Notes (Cost $348,373)

            315,634   
       

 

 

 
MUNICIPAL BONDS & NOTES 8.8%   
CALIFORNIA 2.0%   

La Quinta Financing Authority, California Tax Allocation Bonds, Series 2011

   

8.070% due 09/01/2036

      3,000          3,432   

Riverside County, California Redevelopment Successor Agency Tax Allocation Bonds, Series 2010

   

7.500% due 10/01/2030

      1,200          1,351   

San Francisco, California City & County Redevelopment Agency Tax Allocation Bonds, Series 2009

   

8.406% due 08/01/2039

      1,650          2,324   

Stockton Public Financing Authority, California Revenue Bonds, (BABs), Series 2009

   

7.942% due 10/01/2038

      3,500          4,001   
       

 

 

 
          11,108   
       

 

 

 
ILLINOIS 0.1%   

Chicago, Illinois General Obligation Bonds, Series 2015

  

7.375% due 01/01/2033

      180          193   

7.750% due 01/01/2042

      330          344   
       

 

 

 
          537   
       

 

 

 
OHIO 4.4%   

Ohio State University Revenue Bonds, Series 2011

  

4.800% due 06/01/2111

    21,000          24,489   
       

 

 

 
VIRGINIA 0.1%   

Tobacco Settlement Financing Corp., Virginia Revenue Bonds, Series 2007

   

6.706% due 06/01/2046

      835          713   
       

 

 

 
WEST VIRGINIA 2.2%   

Tobacco Settlement Finance Authority, West Virginia Revenue Bonds, Series 2007

   

7.467% due 06/01/2047

      12,570          12,068   
       

 

 

 

Total Municipal Bonds & Notes (Cost $39,545)

   

      48,915   
       

 

 

 
U.S. GOVERNMENT AGENCIES 2.3%   

Fannie Mae

  

3.500% due 02/25/2042 (a)

      1,331          172   

4.500% due 11/25/2042 (a)

      3,499          604   

4.743% due 01/25/2029

      400          403   

5.762% due 01/25/2040 (a)

      504          101   

5.788% due 10/25/2028

      600          642   

Freddie Mac

  

3.000% due 02/15/2033 (a)

      2,846          324   

3.500% due 12/15/2032 (a)

      5,164          640   

6.175% due 11/25/2055

      8,828          4,736   

8.038% due 12/25/2027

      2,900          2,830   

10.756% due 09/15/2035

      1,188          1,536   

11.238% due 03/25/2025

      745          752   

Ginnie Mae

  

3.500% due 06/20/2042 - 10/20/2042 (a)

      1,117          108   

4.000% due 10/16/2042 - 10/20/2042 (a)

      637          91   
       

 

 

 

Total U.S. Government Agencies
(Cost $13,344)

   

      12,939   
       

 

 

 
NON-AGENCY MORTGAGE-BACKED SECURITIES 27.2%   

Banc of America Alternative Loan Trust

  

6.000% due 01/25/2036 ^

      155          133   

Banc of America Funding Corp.

  

6.000% due 01/25/2037

      9,244          7,088   
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Banc of America Funding Trust

  

3.165% due 01/20/2047 ^

  $     48      $     40   

BCAP LLC Trust

  

2.987% due 05/26/2036

      170          3   

3.163% due 08/26/2037

      14,175          8,890   

3.247% due 08/28/2037

      6,672          5,104   

3.333% due 07/26/2037

      14,308            12,391   

5.196% due 03/26/2037

      1,313          384   

5.825% due 12/26/2035

      5,192          4,276   

6.250% due 11/26/2036

      6,049          5,314   

8.647% due 05/26/2037

      2,042          655   

9.816% due 09/26/2036

      5,555          4,579   

11.881% due 06/26/2036

      631          234   

Bear Stearns ALT-A Trust

  

0.988% due 01/25/2036 ^

      1,854          1,509   

2.840% due 11/25/2036 ^

      589          434   

2.841% due 11/25/2035

      9,026          7,121   

2.864% due 09/25/2047 ^

      8,190          5,749   

3.379% due 09/25/2035 ^

      933          770   

Chase Mortgage Finance Trust

  

2.695% due 12/25/2035 ^

      14          13   

5.500% due 05/25/2036 ^

      57          48   

Chase Mortgage Trust

  

3.750% due 02/25/2044

      600          571   

Citicorp Mortgage Securities Trust

  

5.500% due 04/25/2037

      187          186   

6.000% due 09/25/2037

      1,801          1,872   

Countrywide Alternative Loan Resecuritization Trust

  

6.000% due 05/25/2036 ^

      3,661          3,118   

6.000% due 08/25/2037 ^

      1,608          1,274   

Countrywide Alternative Loan Trust

  

2.915% due 04/25/2036 ^

      1,754          1,229   

5.500% due 03/25/2035

      441          365   

5.500% due 01/25/2036

      1,070          925   

5.500% due 03/25/2036 ^

      174          131   

5.750% due 01/25/2035

      539          545   

5.750% due 02/25/2035

      594          586   

5.750% due 12/25/2036 ^

      1,048          758   

6.000% due 02/25/2035

      507          520   

6.000% due 04/25/2036

      766          606   

6.000% due 04/25/2037 ^

      2,523          1,798   

6.250% due 11/25/2036 ^

      1,119          997   

6.250% due 12/25/2036 ^

      762          572   

6.500% due 08/25/2036 ^

      677          473   

Countrywide Home Loan Mortgage Pass-Through Trust

  

1.068% due 03/25/2035 ^

      6,342          4,740   

6.000% due 07/25/2037

      2,573          2,107   

6.250% due 09/25/2036 ^

      937          812   

Credit Suisse First Boston Mortgage Securities Corp.

  

6.000% due 11/25/2035 ^

      653          529   

Credit Suisse Mortgage Capital Certificates

  

3.064% due 10/26/2036

      7,981          4,630   

Credit Suisse Mortgage Capital Mortgage-Backed Trust

  

5.750% due 04/25/2036 ^

      232          182   

Deco Pan Europe Ltd.

  

0.503% due 04/27/2018

  EUR     1,067          1,173   

Epic Drummond Ltd.

  

0.044% due 01/25/2022

      1,524          1,644   

First Horizon Alternative Mortgage Securities Trust

  

6.000% due 08/25/2036 ^

  $     1,784          1,506   

First Horizon Mortgage Pass-Through Trust

  

2.750% due 11/25/2035 ^

      948          775   

3.058% due 05/25/2037 ^

      590          472   

IndyMac Mortgage Loan Trust

  

6.500% due 07/25/2037 ^

      3,980          2,468   

JPMorgan Alternative Loan Trust

  

2.756% due 03/25/2037 ^

      1,795          1,531   

2.905% due 03/25/2036 ^

      2,974          2,329   

2.947% due 05/25/2036 ^

      2,716          2,088   

JPMorgan Mortgage Trust

  

2.789% due 10/25/2035

      425          415   

2.861% due 02/25/2036 ^

      654          577   

6.500% due 09/25/2035

      135          133   

LB-UBS Commercial Mortgage Trust

  

5.407% due 11/15/2038

      1,718          1,342   

5.562% due 02/15/2040

      1,891          1,425   
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Lehman Mortgage Trust

  

6.000% due 07/25/2036 ^

  $     1,286      $     965   

6.000% due 07/25/2037 ^

      1,689          1,525   

6.500% due 09/25/2037 ^

      3,841          2,972   

Lehman XS Trust

  

0.708% due 06/25/2047

      3,261          2,316   

MASTR Asset Securitization Trust

  

6.500% due 11/25/2037 ^

      688          551   

Merrill Lynch Mortgage Investors Trust

  

2.820% due 03/25/2036 ^

      2,452          1,632   

Nomura Asset Acceptance Corp. Alternative Loan Trust

  

4.976% due 05/25/2035 ^

      16          14   

RBSSP Resecuritization Trust

  

0.613% due 02/26/2047

      6,481          6,100   

Residential Accredit Loans, Inc. Trust

  

3.848% due 12/26/2034 ^

      1,700          1,388   

6.000% due 08/25/2036 ^

      508          424   

Residential Asset Securitization Trust

  

5.750% due 02/25/2036 ^

      1,518          1,193   

6.000% due 07/25/2037 ^

      1,880          1,337   

6.250% due 09/25/2037 ^

      3,122          2,201   

Residential Funding Mortgage Securities, Inc. Trust

  

3.289% due 09/25/2035

      2,546          2,228   

4.071% due 08/25/2036 ^

      2,316          2,045   

Structured Adjustable Rate Mortgage Loan Trust

  

2.795% due 11/25/2036 ^

      3,897          2,982   

2.857% due 01/25/2036 ^

      3,213          2,433   

2.924% due 07/25/2036 ^

      963          777   

Suntrust Adjustable Rate Mortgage Loan Trust

  

2.867% due 02/25/2037 ^

      466          411   

WaMu Mortgage Pass-Through Certificates Trust

  

4.179% due 02/25/2037 ^

      849          771   

4.303% due 05/25/2037 ^

      2,035          1,794   

4.412% due 07/25/2037 ^

      1,546          1,406   

6.002% due 10/25/2036 ^

      1,252          986   

Wells Fargo Mortgage-Backed Securities Trust

  

2.911% due 07/25/2036 ^

      527          497   

5.750% due 03/25/2037 ^

      467          456   
       

 

 

 

Total Non-Agency Mortgage-Backed Securities (Cost $146,798)

   

        151,543   
       

 

 

 
ASSET-BACKED SECURITIES 20.3%   

Apidos CLO

  

0.000% due 07/22/2026

      1,500          762   

Argent Securities Trust

  

0.678% due 03/25/2036

      4,260          2,223   

Bear Stearns Asset-Backed Securities Trust

  

0.628% due 10/25/2036 ^

      7,075          5,794   

6.500% due 10/25/2036 ^

      390          298   

CIFC Funding Ltd.

  

0.000% due 05/24/2026 (f)

      2,400          1,697   

0.000% due 07/22/2026

      1,500          917   

Citigroup Mortgage Loan Trust, Inc.

  

0.638% due 12/25/2036

      19,583          11,137   

0.648% due 12/25/2036

      5,310          3,506   

Countrywide Asset-Backed Certificates

  

0.628% due 12/25/2046

      17,910          13,066   

0.628% due 06/25/2047 ^

      2,026          1,454   

0.658% due 03/25/2037

      3,138          2,855   

0.688% due 06/25/2047

      12,581          8,562   

Countrywide Asset-Backed Certificates Trust

  

1.238% due 11/25/2035

      4,008          3,029   

Credit-Based Asset Servicing and Securitization LLC

  

0.598% due 11/25/2036

      898          562   

Fremont Home Loan Trust

  

0.638% due 01/25/2037

      16,549          8,650   

HSI Asset Securitization Corp. Trust

  

0.000% due 10/25/2036 (b)(f)

      3,688          1,633   

IndyMac Home Equity Mortgage Loan Asset-Backed Trust

   

0.648% due 07/25/2037

      3,643          2,245   

JPMorgan Mortgage Acquisition Corp.

  

0.778% due 01/25/2036

      845          784   
 

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2016   55


Schedule of Investments PIMCO Income Strategy Fund II (Cont.)

 

        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Lehman XS Trust

  

6.290% due 06/24/2046

  $     4,576      $     4,280   

Long Beach Mortgage Loan Trust

  

0.788% due 01/25/2036

      5,000          3,024   

MASTR Asset-Backed Securities Trust

  

5.233% due 11/25/2035

      253          254   

Merrill Lynch Mortgage Investors Trust

  

0.648% due 04/25/2037

      600          324   

Morgan Stanley Mortgage Loan Trust

  

6.250% due 07/25/2047 ^

      879          615   

SLM Student Loan Trust

  

0.000% due 10/28/2029 (f)

      1          1,662   

0.000% due 01/25/2042 (f)

      4          4,255   

South Coast Funding Ltd.

  

1.230% due 08/10/2038

      13,107          2,763   

Specialty Underwriting & Residential Finance Trust

  

0.988% due 09/25/2036

      14,080          9,915   

Taberna Preferred Funding Ltd.

  

0.993% due 12/05/2036

      6,621          4,634   

1.013% due 08/05/2036

      514          360   

1.013% due 08/05/2036 ^

      10,161          7,113   

1.123% due 07/05/2035

      6,692          4,885   
       

 

 

 

Total Asset-Backed Securities
(Cost $115,046)

   

        113,258   
       

 

 

 
SOVEREIGN ISSUES 1.8%   

Autonomous Community of Catalonia

  

4.300% due 11/15/2016

  EUR     2,850          3,207   

4.900% due 09/15/2021

      1,500          1,726   
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Autonomous Community of Valencia

  

2.115% due 09/03/2017

  EUR     2,500      $     2,828   

Republic of Greece Government International Bond

  

3.800% due 08/08/2017

  JPY     204,000          1,907   

4.750% due 04/17/2019

  EUR     300          303   
       

 

 

 

Total Sovereign Issues (Cost $9,940)

  

      9,971   
       

 

 

 
        SHARES            
COMMON STOCKS 0.1%   
FINANCIALS 0.1%   

TIG FinCo PLC (i)

      496,900          316   
       

 

 

 

Total Common Stocks (Cost $737)

  

      316   
       

 

 

 
PREFERRED SECURITIES 2.7%   
BANKING & FINANCE 2.7%   

Farm Credit Bank of Texas

  

10.000% due 12/15/2020 (h)

      12,400          14,911   
       

 

 

 

Total Preferred Securities (Cost $14,556)

  

        14,911   
       

 

 

 
SHORT-TERM INSTRUMENTS 3.2%   
REPURCHASE AGREEMENTS (j) 2.0%   
            10,863   
       

 

 

 
       
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 
SHORT-TERM NOTES 0.2%   

Federal Home Loan Bank

  

0.304% due 08/15/2016 (f)(g)

  $     500      $     500   

0.330% due 09/14/2016 (f)(g)

      300          300   

0.335% due 08/30/2016 (f)(g)

      700          700   
       

 

 

 
          1,500   
       

 

 

 
U.S. TREASURY BILLS 1.0%   

0.298% due 10/06/2016 - 11/03/2016 (e)(f)(m)(o)

      5,624          5,621   
       

 

 

 

Total Short-Term Instruments
(Cost $17,984)

   

      17,984   
       

 

 

 
       
Total Investments in Securities
(Cost $717,786)
          694,980   
       
Total Investments 124.8%
(Cost $717,786)
      $     694,980   

Preferred Shares (16.6)%

        (92,450

Financial Derivative
Instruments (l)(n) (0.6)%

(Cost or Premiums, net $(1,663))

   

  

      (3,146
Other Assets and Liabilities, net (7.6)%          (42,544
       

 

 

 
Net Assets Applicable to Common Shareholders 100.0%       $       556,840   
       

 

 

 
 

NOTES TO SCHEDULE OF INVESTMENTS (AMOUNTS IN THOUSANDS*):

 

* A zero balance may reflect actual amounts rounding to less than one thousand.
^ Security is in default.
(a) Interest only security.
(b) Principal only security.
(c) When-issued security.
(d) Payment in-kind security.
(e) Coupon represents a weighted average yield to maturity.
(f) Zero coupon security.
(g) Coupon represents a yield to maturity.
(h) Perpetual maturity; date shown, if applicable, represents next contractual call date.

 

(i)  RESTRICTED SECURITIES:

 

Issuer Description              Acquisition
Date
  Cost     Market
Value
    Market Value
as Percentage
of Net Assets
 

TIG FinCo PLC

       04/02/2015   $     737      $     316        0.06%   
        

 

 

   

 

 

   

 

 

 

 

BORROWINGS AND OTHER FINANCING TRANSACTIONS

 

(j)  REPURCHASE AGREEMENTS:

 

Counterparty   Lending
Rate
    Settlement
Date
    Maturity
Date
    Principal
Amount
    Collateralized By   Collateral
(Received)
    Repurchase
Agreements,
at Value
    Repurchase
Agreement
Proceeds
to be
Received (1)
 
MBC     0.550     07/29/2016        08/01/2016      $     5,800      U.S. Treasury Notes 1.375% due 03/31/2020   $ (6,005   $ 5,800      $ 5,800   
SSB     0.010        07/29/2016        08/01/2016        5,063      U.S. Treasury Notes 1.000% due 05/15/2018     (5,164     5,063        5,063   
           

 

 

   

 

 

   

 

 

 

Total Repurchase Agreements

  

      $     (11,169   $     10,863      $     10,863   
           

 

 

   

 

 

   

 

 

 

 

(1) 

Includes accrued interest.

 

56   PIMCO CLOSED-END FUNDS        See Accompanying Notes   


 

July 31, 2016

 

 

REVERSE REPURCHASE AGREEMENTS:

 

Counterparty   Borrowing
Rate  (3)
    Borrowing
Date
    Maturity
Date
    Amount
Borrowed  (3)
    Payable for
Reverse
Repurchase
Agreements
 

BCY

    (0.250 )%      02/18/2016        TBD  (2)    $ (430   $ (430

BPS

    1.450        07/08/2016        10/07/2016            (7,505     (7,512

JML

    1.300        08/02/2016        08/16/2016        (8,513     (8,513

MSC

    1.000        05/02/2016        08/02/2016        (4,940     (4,953
    1.150        08/02/2016        11/02/2016        (4,948     (4,948

RBC

    1.350        07/19/2016        10/07/2016        (4,998     (5,000
    1.570        07/08/2016        12/16/2016        (3,632     (3,636

RDR

    (1.000     01/22/2016        TBD  (2)      (187     (186
    (0.750     05/25/2016        05/25/2017        (1,910     (1,907
    1.030        05/23/2016        08/17/2016        (8,630     (8,647

UBS

    0.900        07/11/2016        10/06/2016        (8,412     (8,416
         

 

 

 

Total Reverse Repurchase Agreements

          $     (54,148
         

 

 

 

 

(2) 

Open maturity reverse repurchase agreement.

(3) 

The average amount of borrowings outstanding during the period ended July 31, 2016 was $(41,370) at a weighted average interest rate of 0.850%.

 

BORROWINGS AND OTHER FINANCING TRANSACTIONS SUMMARY

 

The following is a summary by counterparty of the market value of Borrowings and Other Financing Transactions and collateral (received)/pledged as of July 31, 2016:

 

(k) Securities with an aggregate market value of $56,133 have been pledged as collateral under the terms of the following master agreements as of July 31, 2016.

 

Counterparty   Repurchase
Agreement
Proceeds
to be
Received
    Payable for
Reverse
Repurchase
Agreements
    Payable for
Sale-Buyback
Transactions
     Total
Borrowings and
Other Financing
Transactions
    Collateral
(Received)/Pledged
    Net Exposure  (4)  

Global/Master Repurchase Agreement

            

BCY

  $ 0      $ (430   $ 0       $ (430   $ 566      $ 136   

BPS

    0        (7,512     0         (7,512     8,559        1,047   

JML

    0        (8,513     0         (8,513     10,538        2,025   

MBC

    5,800        0        0         5,800        (6,005     (205

MSC

    0        (9,901     0         (9,901     5,517            (4,384

RBC

    0        (8,636     0         (8,636     9,451        815   

RDR

    0        (10,740     0             (10,740         11,231        491   

SSB

    5,063        0        0         5,063        (5,164     (101

UBS

    0        (8,416     0         (8,416     8,860        444   
 

 

 

   

 

 

   

 

 

        

Total Borrowings and Other Financing Transactions

  $     10,863      $     (54,148   $     0          
 

 

 

   

 

 

   

 

 

        

 

(4) 

Net Exposure represents the net receivable/(payable) that would be due from/to the counterparty in the event of default. Exposure from borrowings and other financing transactions can only be netted across transactions governed under the same master agreement with the same legal entity. See Note 7, Principal Risks, in the Notes to Financial Statements for more information regarding master netting arrangements.

 

CERTAIN TRANSFERS ACCOUNTED FOR AS SECURED BORROWINGS

 

Remaining Contractual Maturity of the Agreements

 

     Overnight and
Continuous
    Up to 30 days     31-90 days     Greater Than 90 days     Total  

Reverse Repurchase Agreements

         

Corporate Bonds & Notes

  $ 0      $ (13,600   $ (20,928   $ (6,159   $ (40,687
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Borrowings

  $     0      $     (13,600   $     (20,928   $     (6,159   $ (40,687
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross amount of recognized liabilities for reverse repurchase agreements (5)

  

        $     (40,687
         

 

 

 

 

(5) 

Unsettled reverse repurchase agreements liability of $(13,461) is outstanding at period end.

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2016   57


Schedule of Investments PIMCO Income Strategy Fund II (Cont.)

 

 

(l)  FINANCIAL DERIVATIVE INSTRUMENTS: EXCHANGE-TRADED OR CENTRALLY CLEARED

 

SWAP AGREEMENTS:

 

CREDIT DEFAULT SWAPS ON CREDIT INDICES - SELL PROTECTION (1)

 

Index/Tranches   Fixed
Receive Rate
    Maturity
Date
    Notional
Amount  (2)
    Market
Value  (3)
    Unrealized
Appreciation/
(Depreciation)
    Variation Margin  
            Asset     Liability  

CDX.HY-24 5-Year Index

    5.000     06/20/2020      $ 8,918      $ 631      $ (56   $ 31      $ 0   

CDX.HY-25 5-Year Index

    5.000        12/20/2020            10,593        581        525        41        0   

CDX.HY-26 5-Year Index

    5.000        06/20/2021        1,600        80        20        6        0   
       

 

 

   

 

 

   

 

 

   

 

 

 
        $     1,292      $     489      $     78      $     0   
       

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

If the Fund is a seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) pay to the buyer of protection an amount equal to the notional amount of the swap and take delivery of the referenced obligation or underlying securities comprising the referenced index or (ii) pay a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index.

(2)

The maximum potential amount the Fund could be required to pay as a seller of credit protection or receive as a buyer of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.

(3)

The prices and resulting values for credit default swap agreements on credit indices serve as an indicator of the current status of the payment/performance risk and represent the likelihood of an expected liability (or profit) for the credit derivative should the notional amount of the swap agreement be closed/sold as of the period end. Increasing market values, in absolute terms when compared to the notional amount of the swap, represent a deterioration of the referenced indices’ credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.

 

INTEREST RATE SWAPS

 

Pay/Receive
Floating Rate
  Floating Rate Index   Fixed Rate     Maturity
Date
   

Notional
Amount

    Market
Value
    Unrealized
Appreciation/
(Depreciation)
    Variation Margin  
              Asset      Liability  

Pay

 

3-Month USD-LIBOR

    2.750     06/17/2025        $        149,020      $ 18,709      $ 9,618      $ 754       $ 0   

Pay

 

3-Month USD-LIBOR

    2.250        06/15/2026          26,800        2,292        1,025        144         0   

Pay

 

3-Month USD-LIBOR

    3.500        06/19/2044              201,500        83,597        90,171        3,006         0   

Receive

 

3-Month USD-LIBOR *

    2.250        12/21/2046          321,860        (37,543     (9,903     0         (4,549

Pay

 

6-Month AUD-BBR-BBSW

    3.000        12/17/2019        AUD        12,900        363        169        16         0   

Pay

 

6-Month AUD-BBR-BBSW

    3.500        06/17/2025          8,100        741        540        45         0   
           

 

 

   

 

 

   

 

 

    

 

 

 
            $ 68,159      $ 91,620      $ 3,965       $ (4,549
           

 

 

   

 

 

   

 

 

    

 

 

 

Total Swap Agreements

            $     69,451      $     92,109      $     4,043       $     (4,549
           

 

 

   

 

 

   

 

 

    

 

 

 

 

* This security has a forward starting effective date. See Note 2(a) in the Notes to Financial Statements for further information.

 

FINANCIAL DERIVATIVE INSTRUMENTS: EXCHANGE-TRADED OR CENTRALLY CLEARED SUMMARY

 

The following is a summary of the market value and variation margin of Exchange-Traded or Centrally Cleared Financial Derivative Instruments as of July 31, 2016:

 

(m) Securities with an aggregate market value of $2,273 and cash of $10,474 have been pledged as collateral for exchange-traded and centrally cleared financial derivative instruments as of July 31, 2016. See Note 7, Principal Risks, in the Notes to Financial Statements for more information regarding master netting arrangements.

 

    Financial Derivative Assets           Financial Derivative Liabilities  
    Market Value     Variation Margin
Asset
                Market Value     Variation Margin
Liability
       
     Purchased
Options
    Futures     Swap
Agreements
    Total           Written
Options
    Futures     Swap
Agreements
    Total  

Total Exchange-Traded or Centrally Cleared

  $     0      $     0      $     4,043      $     4,043        $     0      $     0      $     (4,549)      $     (4,549)   
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

 

(n)  FINANCIAL DERIVATIVE INSTRUMENTS: OVER THE COUNTER

 

FORWARD FOREIGN CURRENCY CONTRACTS:

 

Counterparty    Settlement
Month
    Currency to
be Delivered
    Currency to
be Received
    Unrealized Appreciation/
(Depreciation)
 
         Asset     Liability  

AZD

     08/2016      AUD     74      $     54      $ 0      $ (2
     08/2016      EUR     447          495        0        (5
     09/2016          150          168        0        0   

BOA

     08/2016          34,090          37,607        0            (505
     08/2016      GBP     38,440          51,158        284        0   
     08/2016      $     36,823      EUR     33,476            603        0   
     09/2016      EUR     33,476      $     36,869        0        (601

 

58   PIMCO CLOSED-END FUNDS        See Accompanying Notes   


 

July 31, 2016

 

Counterparty    Settlement
Month
    Currency to
be Delivered
    Currency to
be Received
    Unrealized Appreciation/
(Depreciation)
 
         Asset     Liability  

BPS

     08/2016      BRL     884      $     273      $ 0      $ 0   
     08/2016      $     270      BRL     884        3        0   
     09/2016      BRL     884      $     267        0        (2

CBK

     08/2016      AUD     737          539        0        (21
     08/2016      EUR     201          222        0        (3
     08/2016      GBP     666          882        3        (3
     08/2016      $     1,557      EUR     1,414        24        0   
     09/2016      GBP     85      $     112        0        0   

GLM

     08/2016      EUR     51          56        0        (1
     08/2016      GBP     339          445        0        (3
     08/2016      $     600      GBP     461        10        0   
     09/2016      GBP     128      $     168        0        (1

JPM

     08/2016      AUD     217          164        0        (1
     08/2016      GBP     353          466        0        (1
     08/2016      $     780      GBP     587        0        (3
     09/2016      EUR     303      $     337        0        (3

MSB

     08/2016      BRL     884          274        1        0   
     08/2016      GBP     158          209        0        0   
     08/2016      JPY     5,803          55        0        (2
     08/2016      $     273      BRL     884        0        0   

NAB

     08/2016          1,879      JPY     198,275        64        0   
     09/2016      JPY     198,275      $     1,882        0        (64

SCX

     08/2016      EUR     152          167        0        (3
     08/2016      JPY     192,472          1,891        5        0   
     08/2016      $     51,719      GBP     39,417        447        0   
     09/2016      GBP     39,417      $     51,743        0        (449

TOR

     08/2016          594          767        0        (19
            

 

 

   

 

 

 

Total Forward Foreign Currency Contracts

  

          $     1,444      $     (1,692
            

 

 

   

 

 

 

 

SWAP AGREEMENTS:

 

CREDIT DEFAULT SWAPS ON CORPORATE ISSUES - SELL PROTECTION (1)

 

Counterparty   Reference Entity   Fixed
Receive Rate
    Maturity
Date
    Implied
Credit Spread at
July 31, 2016 (2)
    Notional
Amount  (3)
    Premiums
(Received)
    Unrealized
Appreciation/
(Depreciation)
    Swap Agreements,
at Value
 
                Asset     Liability  
BPS  

Petrobras Global Finance BV

    1.000     12/20/2024        6.275     $    1,000      $ (195   $ (121   $ 0      $ (316
GST  

Petrobras Global Finance BV

    1.000        09/20/2020        5.476        10        (1     (1     0        (2
 

Petrobras Global Finance BV

    1.000        12/20/2024        6.275        1,400        (278     (165     0        (443
HUS  

Petrobras Global Finance BV

    1.000        12/20/2019        4.923        300        (25     (11     0        (36
 

Petrobras Global Finance BV

    1.000        09/20/2020        5.476        40        (6     0        0        (6
 

Petrobras Global Finance BV

    1.000        12/20/2024        6.275        1,700        (353     (185     0        (538
MYC  

Petrobras Global Finance BV

    1.000        12/20/2019        4.923            8,700        (805     (246     0        (1,051
           

 

 

   

 

 

   

 

 

   

 

 

 
            $ (1,663   $ (729   $ 0      $ (2,392
           

 

 

   

 

 

   

 

 

   

 

 

 

Total Swap Agreements

          $     (1,663   $     (729   $     0      $     (2,392
           

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

If the Fund is a seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, the Fund will either (i) pay to the buyer of protection an amount equal to the notional amount of the swap and take delivery of the referenced obligation or underlying securities comprising the referenced index or (ii) pay a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index.

(2)

Implied credit spreads, represented in absolute terms, utilized in determining the market value of credit default swap agreements on corporate issues as of period end serve as an indicator of the current status of the payment/performance risk and represent the likelihood or risk of default for the credit derivative. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection and may include upfront payments required to be made to enter into the agreement. Wider credit spreads represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.

(3)

The maximum potential amount the Fund could be required to pay as a seller of credit protection or receive as a buyer of credit protection if a credit event occurs as defined under the terms of that particular swap agreement.

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2016   59


Schedule of Investments PIMCO Income Strategy Fund II (Cont.)

 

 

FINANCIAL DERIVATIVE INSTRUMENTS: OVER THE COUNTER SUMMARY

 

The following is a summary by counterparty of the market value of OTC financial derivative instruments and collateral (received)/pledged as of July 31, 2016:

 

(o) Securities with an aggregate market value of $2,755 have been pledged as collateral for financial derivative instruments as governed by International Swaps and Derivatives Association, Inc. master agreements as of July 31, 2016.

 

    Financial Derivative Assets           Financial Derivative Liabilities                    
Counterparty   Forward
Foreign
Currency
Contracts
     Purchased
Options
     Swap
Agreements
     Total
Over the
Counter
           Forward
Foreign
Currency
Contracts
    Written
Options
     Swap
Agreements
    Total
Over the
Counter
    Net Market
Value of OTC
Derivatives
    Collateral
(Received)/
Pledged
    Net
Exposure  (4)
 

AZD

  $ 0       $ 0       $ 0       $ 0        $ (7   $ 0       $ 0      $ (7   $ (7   $ 0      $ (7

BOA

    887         0         0         887          (1,106     0         0        (1,106     (219     (540         (759

BPS

    3         0         0         3          (2     0         (316     (318     (315     416        101   

CBK

    27         0         0         27          (27     0         0        (27     0        0        0   

GLM

    10         0         0         10          (5     0         0        (5     5        0        5   

GST

    0         0         0         0          0        0         (445     (445     (445     542        97   

HUS

    0         0         0         0          0        0         (580     (580     (580     619        39   

JPM

    0         0         0         0          (8     0         0        (8     (8     0        (8

MSB

    1         0         0         1          (2     0         0        (2     (1     0        (1

MYC

    0         0         0         0          0        0         (1,051     (1,051         (1,051         1,009        (42

NAB

    64         0         0         64          (64     0         0        (64     0        (20     (20

SCX

    452         0         0         452          (452     0         0        (452     0        0        0   

TOR

    0         0         0         0          (19     0         0        (19     (19     0        (19
 

 

 

    

 

 

    

 

 

    

 

 

     

 

 

   

 

 

    

 

 

   

 

 

       

Total Over the Counter

  $     1,444       $     0       $     0       $     1,444        $     (1,692   $     0       $     (2,392   $     (4,084      
 

 

 

    

 

 

    

 

 

    

 

 

     

 

 

   

 

 

    

 

 

   

 

 

       

 

(4) 

Net Exposure represents the net receivable/(payable) that would be due from/to the counterparty in the event of default. Exposure from OTC financial derivative instruments can only be netted across transactions governed under the same master agreement with the same legal entity. See Note 7, Principal Risks, in the Notes to Financial Statements for more information regarding master netting arrangements.

 

FAIR VALUE OF FINANCIAL DERIVATIVE INSTRUMENTS

 

The following is a summary of the fair valuation of the Fund’s derivative instruments categorized by risk exposure. See Note 7, Principal Risks, in the Notes to Financial Statements on risks of the Fund.

 

Fair Values of Financial Derivative Instruments on the Statements of Assets and Liabilities as of July 31, 2016:

 

    Derivatives not accounted for as hedging instruments  
     Commodity
Contracts
    Credit
Contracts
    Equity
Contracts
    Foreign
Exchange
Contracts
    Interest
Rate Contracts
    Total  

Financial Derivative Instruments - Assets

           

Exchange-traded or centrally cleared

           

Swap Agreements

  $ 0      $ 78      $ 0      $ 0      $ 3,965      $ 4,043   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

           

Forward Foreign Currency Contracts

  $ 0      $ 0      $ 0      $ 1,444      $ 0      $ 1,444   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0      $ 78      $ 0      $ 1,444      $ 3,965      $ 5,487   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial Derivative Instruments - Liabilities

           

Exchange-traded or centrally cleared

           

Swap Agreements

  $ 0      $ 0      $ 0      $ 0      $ 4,549      $ 4,549   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

           

Forward Foreign Currency Contracts

  $ 0      $ 0      $ 0      $ 1,692      $ 0      $ 1,692   

Swap Agreements

    0        2,392        0        0        0        2,392   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0      $ 2,392      $ 0      $ 1,692      $ 0      $ 4,084   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $     0      $     2,392      $     0      $     1,692      $     4,549      $     8,633   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

60   PIMCO CLOSED-END FUNDS        See Accompanying Notes   


 

July 31, 2016

 

 

The effect of Financial Derivative Instruments on the Statements of Operations for the period ended July 31, 2016:

 

    Derivatives not accounted for as hedging instruments  
     Commodity
Contracts
    Credit
Contracts
    Equity
Contracts
    Foreign
Exchange
Contracts
    Interest
Rate Contracts
    Total  

Net Realized Gain (Loss) on Financial Derivative Instruments

  

Exchange-traded or centrally cleared

           

Swap Agreements

  $ 0      $ 241      $ 0      $ 0      $ (74,389   $ (74,148
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

           

Forward Foreign Currency Contracts

  $ 0      $ 0      $ 0      $ 10,334      $ 0      $ 10,334   

Swap Agreements

    0        12        0        0        (5,078     (5,066
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0      $ 12      $ 0      $     10,334      $ (5,078   $ 5,268   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0      $ 253      $ 0      $ 10,334      $     (79,467   $     (68,880
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net Change in Unrealized Appreciation (Depreciation) on Financial Derivative Instruments

  

Exchange-traded or centrally cleared

           

Swap Agreements

  $ 0      $ 727      $ 0      $ 0      $ 65,474      $ 66,201   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

           

Forward Foreign Currency Contracts

  $ 0      $ 0      $ 0      $ (1,855   $ 0      $ (1,855

Swap Agreements

    0        63        0        0        435        498   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0      $ 63      $ 0      $ (1,855   $ 435      $ (1,357
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $     0      $     790      $     0      $ (1,855   $ 65,909      $ 64,844   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

FAIR VALUE MEASUREMENTS

 

The following is a summary of the fair valuations according to the inputs used as of July 31, 2016 in valuing the Fund’s assets and liabilities:

 

Category and Subcategory   Level 1     Level 2     Level 3     Fair
Value at
07/31/2016
 

Bank Loan Obligations

  $     0      $ 9,509      $ 0      $ 9,509   

Corporate Bonds & Notes

       

Banking & Finance

    0        158,196        5,517        163,713   

Industrials

    0        109,111        1,991        111,102   

Utilities

    0        40,819        0        40,819   

Municipal Bonds & Notes

       

California

    0        11,108        0        11,108   

Illinois

    0        537        0        537   

Ohio

    0        24,489        0        24,489   

Virginia

    0        713        0        713   

West Virginia

    0        12,068        0        12,068   

U.S. Government Agencies

    0        8,203        4,736        12,939   

Non-Agency Mortgage-Backed Securities

    0            151,543        0        151,543   

Asset-Backed Securities

    0        107,341            5,917            113,258   

Sovereign Issues

    0        9,971        0        9,971   

Common Stocks

       

Financials

    0        0        316        316   

Preferred Securities

       

Banking & Finance

    0        14,911        0        14,911   

Short-Term Instruments

       

Repurchase Agreements

    0        10,863        0        10,863   
Category and Subcategory   Level 1     Level 2     Level 3     Fair
Value at
07/31/2016
 

Short-Term Notes

  $ 0      $ 1,500      $ 0      $ 1,500   

U.S. Treasury Bills

    0        5,621        0        5,621   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Investments

  $     0      $     676,503      $     18,477      $     694,980   
 

 

 

   

 

 

   

 

 

   

 

 

 

Financial Derivative Instruments - Assets

  

 

Exchange-traded or centrally cleared

    0        4,043        0        4,043   

Over the counter

    0        1,444        0        1,444   
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0      $ 5,487      $ 0      $ 5,487   
 

 

 

   

 

 

   

 

 

   

 

 

 

Financial Derivative Instruments - Liabilities

  

Exchange-traded or centrally cleared

    0        (4,549     0        (4,549

Over the counter

    0        (4,084     0        (4,084
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0      $ (8,633   $ 0      $ (8,633
 

 

 

   

 

 

   

 

 

   

 

 

 

Totals

  $ 0      $ 673,357      $ 18,477      $ 691,834   
 

 

 

   

 

 

   

 

 

   

 

 

 
 

 

There were no significant transfers between Levels 1 and 2 during the period ended July 31, 2016.

 

The following is a reconciliation of the fair valuations using significant unobservable inputs (Level 3) for the Fund during the period ended July 31, 2016:

 

Category and Subcategory   Beginning
Balance
at 07/31/2015
    Net
Purchases
    Net
Sales
    Accrued
Discounts/
(Premiums)
    Realized
Gain/(Loss)
    Net Change in
Unrealized
Appreciation/
(Depreciation) (1)
    Transfers into
Level 3
    Transfers out
of Level 3
    Ending
Balance
at 07/31/2016
    Net Change in
Unrealized
Appreciation/
(Depreciation)
on Investments
Held at
07/31/2016 (1)
 

Investments in Securities, at Value

  

Corporate Bonds & Notes

                   

Banking & Finance

  $ 5,535      $ 0      $     (134   $ 2      $ 1      $ 113      $ 0      $ 0      $ 5,517      $ 130   

Industrials

        2,007        0        0        3        0        (19     0        0        1,991        (19

U.S. Government Agencies

    0            5,254        (72         48            29            (523         0            0            4,736            (523

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2016   61


Schedule of Investments PIMCO Income Strategy Fund II (Cont.)

 

July 31, 2016

 

Category and Subcategory   Beginning
Balance
at 07/31/2015
    Net
Purchases
    Net
Sales
    Accrued
Discounts/
(Premiums)
    Realized
Gain/(Loss)
    Net Change in
Unrealized
Appreciation/
(Depreciation) (1)
    Transfers into
Level 3
    Transfers out
of Level 3
    Ending
Balance
at 07/31/2016
    Net Change in
Unrealized
Appreciation/
(Depreciation)
on Investments
Held at
07/31/2016 (1)
 

Asset-Backed Securities

  $ 0      $ 5,902      $ 0      $ 0      $ 0      $ 15      $ 0      $ 0      $ 5,917      $ 15   

Common Stocks

                   

Financials

    520        0        0        0        0        (204     0        0        316        (204
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals

  $     8,062      $     11,156      $     (206   $     53      $     30      $     (618   $     0      $     0      $     18,477      $     (601
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

The following is a summary of significant unobservable inputs used in the fair valuations of assets and liabilities categorized within Level 3 of the fair value hierarchy:

 

Category and Subcategory   Ending
Balance
at 07/31/2016
     Valuation
Technique
     Unobservable
Inputs
     Input Value(s)
(% Unless
Noted
Otherwise)
 

Investments in Securities, at Value

          

Corporate Bonds & Notes

          

Banking & Finance

  $ 5,517         Proxy Pricing         Base Price         113.75   

Industrials

    1,991         Proxy Pricing         Base Price         99.50   

U.S. Government Agencies

    4,736         Proxy Pricing         Base Price         53.65   

Asset-Backed Securities

    5,917         Proxy Pricing         Base Price         106,003.18-115,005.75   

Common Stocks

          

Financials

    316         Other Valuation Techniques (2)                   
 

 

 

          

Total

  $     18,477            
 

 

 

          

 

(1)

Any difference between Net Change in Unrealized Appreciation/(Depreciation) and Net Change in Unrealized Appreciation/(Depreciation) on Investments Held at July 31, 2016 may be due to an investment no longer held or categorized as Level 3 at period end.

(2)

Includes valuation techniques not defined in the Notes to Financial Statements as securities valued using such techniques are not considered significant to the Fund.

 

62   PIMCO CLOSED-END FUNDS        See Accompanying Notes   


Notes to Financial Statements

 

July 31, 2016

 

1. ORGANIZATION

 

PIMCO Corporate & Income Opportunity Fund, PIMCO Corporate & Income Strategy Fund, PIMCO High Income Fund, PIMCO Income Strategy Fund and PIMCO Income Strategy Fund II (each a “Fund” and collectively the “Funds”) are organized as closed-end management investment companies registered under the Investment Company Act of 1940, as amended, and the rules and regulations thereunder (the “Act”). Each Fund was organized as a Massachusetts business trust on the dates shown in the table below. Pacific Investment Management Company LLC (“PIMCO” or the “Manager”) serves as the Funds’ investment manager.

 

Fund Name         Formation Date  

PIMCO Corporate & Income Opportunity Fund

      September 13, 2002   

PIMCO Corporate & Income Strategy Fund

      October 17, 2001   

PIMCO High Income Fund

      February 18, 2003   

PIMCO Income Strategy Fund

      June 19, 2003   

PIMCO Income Strategy Fund II

      June 30, 2004   

 

Each Fund has authorized an unlimited number of Common Shares at a par value of $0.00001 per share.

 

2. SIGNIFICANT ACCOUNTING POLICIES

 

The following is a summary of significant accounting policies consistently followed by each Fund in the preparation of its financial statements in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Each Fund is treated as an investment company under the reporting requirements of U.S. GAAP. The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.

 

(a) Securities Transactions and Investment Income  Securities transactions are recorded as of the trade date for financial reporting purposes. Securities purchased or sold on a when-issued or delayed-delivery basis may be settled 15 days or more after the trade date. Realized gains (losses) from securities sold are recorded on the identified cost basis. Dividend income is recorded on the ex-dividend date, except certain dividends from foreign securities where the ex-dividend date may have passed, which are recorded as soon as a Fund is informed of the ex-dividend date. Interest income, adjusted for the accretion of discounts and amortization of premiums, is recorded on the accrual basis from settlement date, with the exception of securities with a forward starting effective date, where interest income is recorded on the accrual basis from effective date. For convertible securities, premiums attributable to the conversion feature are not

amortized. Estimated tax liabilities on certain foreign securities are recorded on an accrual basis and are reflected as components of interest income or net change in unrealized appreciation (depreciation) on investments on the Statements of Operations, as appropriate. Tax liabilities realized as a result of such security sales are reflected as a component of net realized gain (loss) on investments on the Statements of Operations. Paydown gains (losses) on mortgage-related and other asset-backed securities are recorded as components of interest income on the Statements of Operations. Income or short-term capital gain distributions received from underlying funds are recorded as dividend income. Long-term capital gain distributions received from underlying funds are recorded as realized gains.

 

Debt obligations may be placed on non-accrual status and related interest income may be reduced by ceasing current accruals and writing off interest receivable when the collection of all or a portion of interest has become doubtful based on consistently applied procedures. A debt obligation is removed from non-accrual status when the issuer resumes interest payments or when collectability of interest is probable.

 

(b) Cash and Foreign Currency  The functional and reporting currency for the Funds is the U.S. dollar. The market values of foreign securities, currency holdings and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the current exchange rates each business day. Purchases and sales of securities and income and expense items denominated in foreign currencies, if any, are translated into U.S. dollars at the exchange rate in effect on the transaction date. The Funds do not separately report the effects of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and net changes in unrealized appreciation (depreciation) from investments on the Statements of Operations. The Funds may invest in foreign currency-denominated securities and may engage in foreign currency transactions either on a spot (cash) basis at the rate prevailing in the currency exchange market at the time or through a forward foreign currency contract (see Note 6, Financial Derivative Instruments). Realized foreign exchange gains (losses) arising from sales of spot foreign currencies, currency gains (losses) realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest, and foreign withholding taxes and the U.S. dollar equivalent of the amounts actually received or paid are included in net realized gain (loss) on foreign currency transactions on the Statements of Operations. Net unrealized foreign exchange gains (losses) arising from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period are included in net change in unrealized appreciation or depreciation on foreign currency assets and liabilities on the Statements of Operations.

 

 

  ANNUAL REPORT   JULY 31, 2016   63


Notes to Financial Statements (Cont.)

 

 

(c) Distributions — Common Shares  The Funds intend to declare distributions from net investment income and gains from the sale of portfolio securities and other sources to common shareholders monthly. Net realized capital gains earned by each Fund, if any, will be distributed no less frequently than once each year. A Fund may engage in investment strategies, including the use of derivatives, to, among other things, generate current, distributable income even if such strategies could potentially result in declines in the Fund’s net asset value. A Fund’s income and gain-generating strategies, including certain derivatives strategies, may generate current income and gains taxable as ordinary income sufficient to support monthly distributions even in situations when the Fund has experienced a decline in net assets due to, for example, adverse changes in the broad U.S. or non- U.S. equity markets or the Fund’s debt investments, or arising from its use of derivatives. A Fund may enter into opposite sides of interest rate swap and other derivatives for the principal purpose of generating distributable gains on the one side (characterized as ordinary income for tax purposes) that are not part of the Fund’s duration or yield curve management strategies (“paired swap transactions”), and with a substantial possibility that the Fund will experience a corresponding capital loss and decline in net asset value with respect to the opposite side transaction (to the extent it does not have corresponding offsetting capital gains). Consequently, common shareholders may receive distributions and owe tax at a time when their investment in a Fund has declined in value, which tax may be at ordinary income rates, and which may be economically similar to a taxable return of capital. The tax treatment of certain derivatives may be open to different interpretations. Any recharacterization of payments made or received by a Fund pursuant to derivatives potentially could affect the amount, timing or character of Fund distributions. In addition, the tax treatment of such investment strategies may be changed by regulation or otherwise.

 

Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from U.S. GAAP. Differences between tax regulations and U.S. GAAP may cause timing differences between income and capital gain recognition. Examples of events that give rise to timing differences include wash sales, straddles and capital loss carryforwards. Further, the character of investment income and capital gains may be different for certain transactions under the two methods of accounting. Examples of characterization differences include the treatment of paydowns on mortgage-backed securities, swaps, foreign currency transactions and contingent debt instruments. As a result, income distributions and capital gain distributions declared during a fiscal period may differ significantly from the net investment income (loss) and realized gains (losses) reported on each Fund’s annual financial statements presented under U.S. GAAP.

If a Fund estimates that a portion of one of its dividend distributions may be comprised of amounts from sources other than net investment income, the Fund will notify shareholders of record of the estimated composition of such distribution through a Section 19 Notice. To determine the sources of a Fund’s distributions during the reporting period, the Fund references its internal accounting records at the time the distribution is paid and generally bases its projections of the final tax character of those distributions on the tax characteristics of the distribution reflected in its internal accounting records at the time of such payment. If, based on such records, a particular distribution does not include capital gains or paid-in surplus or other capital sources, a Section 19 Notice generally would not be issued. It is important to note that differences exist between a Fund’s daily internal accounting records, the Fund’s financial statements presented in accordance with U.S. GAAP, and recordkeeping practices under income tax regulations. Examples of such differences may include, among others, the treatment of paydowns on mortgage-backed securities purchased at a discount and periodic payments under interest rate swap contracts. Notwithstanding a Fund’s estimates and projections, it is possible that a Fund may not issue a Section 19 Notice in situations where the Fund’s financial statements prepared later and in accordance with U.S. GAAP or the final tax character of those distributions might later report that the sources of those distributions included capital gains and/or a return of capital. Additionally, given differences in tax and U.S. GAAP treatment of certain distributions, a Fund may not issue a Section 19 Notice in situations where the Fund’s financial statements prepared later and in accordance with U.S. GAAP might report that the sources of these distributions included capital gains and/or a return of capital. Please visit www.pimco.com for the most recent Section 19 Notice, if applicable, for additional information regarding the composition of distributions. Final determination of a distribution’s tax character will be reported on Form 1099 DIV sent to shareholders each January.

 

Distributions classified as a tax basis return of capital, if any, are reflected on the Statements of Changes in Net Assets and have been recorded to paid in capital. In addition, other amounts have been reclassified between undistributed (overdistributed) net investment income (loss), accumulated undistributed (overdistributed) net realized gains (losses) and/or paid in capital to more appropriately conform financial accounting to tax characterizations of distributions.

 

(d) New Accounting Pronouncements  In June 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-11 that expanded secured borrowing accounting for certain repurchase agreements. The ASU also sets forth additional disclosure requirements for certain transactions accounted for as sales in order to provide financial statement users with information to compare to similar transactions accounted for as secured borrowings.

 

 

64   PIMCO CLOSED-END FUNDS     


 

July 31, 2016

 

The ASU became effective prospectively for annual periods beginning after December 15, 2014, and interim periods beginning after March 15, 2015. The Funds have adopted the ASU. The financial statements have been modified to provide enhanced disclosures surrounding secured borrowing transactions. See the Notes to Schedule of Investments for additional details.

 

In August 2014, the FASB issued ASU 2014-15 requiring management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern. The ASU is effective prospectively for annual periods ending after December 15, 2016, and interim periods thereafter. At this time, management is evaluating the implications of these changes on the financial statements.

 

In May 2015, the FASB issued ASU 2015-07 which removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The ASU also removes the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. The ASU is effective for annual periods beginning after December 15, 2015 and interim periods within those annual periods. At this time, management is evaluating the implications of these changes on the financial statements.

 

3. INVESTMENT VALUATION AND FAIR VALUE MEASUREMENTS

 

(a) Investment Valuation Policies  The net asset value (“NAV”) of a Fund’s shares is determined by dividing the total value of portfolio investments and other assets attributable to that Fund, less any liabilities, by the total number of shares outstanding of that Fund.

 

On each day that the New York Stock Exchange (“NYSE”) is open, Fund shares are ordinarily valued as of the close of regular trading (“NYSE Close”). Information that becomes known to the Funds or their agents after the time as of which NAV has been calculated on a particular day will not generally be used to retroactively adjust the price of a security or the NAV determined earlier that day. Each Fund reserves the right to change the time as of which its respective NAV is calculated if the Fund closes earlier, or as permitted by the U.S. Securities and Exchange Commission (the “SEC”).

 

For purposes of calculating NAV, portfolio securities and other assets for which market quotes are readily available are valued at market value. Market value is generally determined on the basis of official closing prices or the last reported sales prices, or if no sales are reported, based on quotes obtained from established market makers or prices (including evaluated prices) supplied by the Funds’ approved

pricing services, quotation reporting systems and other third-party sources (together, “Pricing Services”). The Funds will normally use pricing data for domestic equity securities received shortly after the NYSE Close and do not normally take into account trading, clearances or settlements that take place after the NYSE Close. A foreign (non-U.S.) equity security traded on a foreign exchange or on more than one exchange is typically valued using pricing information from the exchange considered by PIMCO to be the primary exchange. A foreign (non-U.S.) equity security will be valued as of the close of trading on the foreign exchange, or the NYSE Close, if the NYSE Close occurs before the end of trading on the foreign exchange. Domestic and foreign (non-U.S.) fixed income securities, non-exchange traded derivatives, and equity options are normally valued on the basis of quotes obtained from brokers and dealers or Pricing Services using data reflecting the earlier closing of the principal markets for those securities. Prices obtained from Pricing Services may be based on, among other things, information provided by market makers or estimates of market values obtained from yield data relating to investments or securities with similar characteristics. Certain fixed income securities purchased on a delayed-delivery basis are marked to market daily until settlement at the forward settlement date. Exchange-traded options, except equity options, futures and options on futures are valued at the settlement price determined by the relevant exchange. Swap agreements are valued on the basis of bid quotes obtained from brokers and dealers or market-based prices supplied by Pricing Services or other pricing sources. With respect to any portion of a Fund’s assets that are invested in one or more open-end management investment companies (other than exchange-traded funds (“ETFs”)), a Fund’s NAV will be calculated based upon the NAVs of such investments.

 

If a foreign (non-U.S.) equity security’s value has materially changed after the close of the security’s primary exchange or principal market but before the NYSE Close, the security may be valued at fair value based on procedures established and approved by the Board of Trustees (the “Board”). Foreign (non-U.S.) equity securities that do not trade when the NYSE is open are also valued at fair value. With respect to foreign (non-U.S.) equity securities, a Fund may determine the fair value of investments based on information provided by Pricing Services and other third-party vendors, which may recommend fair value or adjustments with reference to other securities, indices or assets. In considering whether fair valuation is required and in determining fair values, a Fund may, among other things, consider significant events (which may be considered to include changes in the value of U.S. securities or securities indices) that occur after the close of the relevant market and before the NYSE Close. A Fund may utilize modeling tools provided by third-party vendors to determine fair values of non-U.S. securities. Foreign (non-U.S.) exchanges may permit trading in foreign

 

 

  ANNUAL REPORT   JULY 31, 2016   65


Notes to Financial Statements (Cont.)

 

(non-U.S.) equity securities on days when a Fund is not open for business, which may result in a Fund’s portfolio investments being affected when shareholders are unable to buy or sell shares.

 

Senior secured floating rate loans for which an active secondary market exists to a reliable degree will be valued at the mean of the last available bid/ask prices in the market for such loans, as provided by a Pricing Service. Senior secured floating rate loans for which an active secondary market does not exist to a reliable degree will be valued at fair value, which is intended to approximate market value. In valuing a senior secured floating rate loan at fair value, the factors considered may include, but are not limited to, the following: (a) the creditworthiness of the borrower and any intermediate participants, (b) the terms of the loan, (c) recent prices in the market for similar loans, if any, and (d) recent prices in the market for instruments of similar quality, rate, period until next interest rate reset and maturity.

 

Investments valued in currencies other than the U.S. dollar are converted to the U.S. dollar using exchange rates obtained from Pricing Services. As a result, the value of such investments and, in turn, the NAV of a Fund’s shares may be affected by changes in the value of currencies in relation to the U.S. dollar. The value of investments traded in markets outside the United States or denominated in currencies other than the U.S. dollar may be affected significantly on a day that a Fund is not open for business. As a result, to the extent that a Fund holds foreign (non-U.S.) investments, the value of those investments may change at times when shareholders are unable to buy or sell shares and the value of such investments will be reflected in the Fund’s next calculated NAV.

 

Investments for which market quotes or market-based valuations are not readily available are valued at fair value as determined in good faith by the Board or persons acting at their direction. The Board has adopted methods for valuing securities and other assets in circumstances where market quotes are not readily available, and has delegated to PIMCO the responsibility for applying the fair valuation methods. In the event that market quotes or market-based valuations are not readily available, and the security or asset cannot be valued pursuant to a Board approved valuation method, the value of the security or asset will be determined in good faith by the Valuation Oversight Committee of the Board (“Valuation Oversight Committee”), generally based on recommendations provided by the Manager. Market quotes are considered not readily available in circumstances where there is an absence of current or reliable market-based data (e.g., trade information, bid/ask information, indicative market quotations (“Broker Quotes”), Pricing Services’ prices), including where events occur after the close of the relevant market, but prior to the NYSE Close, that materially affect the values of a Fund’s securities or assets. In addition, market quotes are considered not readily available when, due to

extraordinary circumstances, the exchanges or markets on which the securities trade do not open for trading for the entire day and no other market prices are available. The Board has delegated to the Manager the responsibility for monitoring significant events that may materially affect the values of a Fund’s securities or assets and for determining whether the value of the applicable securities or assets should be reevaluated in light of such significant events.

 

When a Fund uses fair valuation to determine the value of a portfolio security or other asset for purposes of calculating its NAV, such investments will not be priced on the basis of quotes from the primary market in which they are traded, but rather may be priced by another method that the Board or persons acting at their direction believe reflects fair value. Fair valuation may require subjective determinations about the value of a security. While the Funds’ policy is intended to result in a calculation of a Fund’s NAV that fairly reflects security values as of the time of pricing, the Funds cannot ensure that fair values determined by the Board or persons acting at their direction would accurately reflect the price that a Fund could obtain for a security if it were to dispose of that security as of the time of pricing (for instance, in a forced or distressed sale). The prices used by a Fund may differ from the value that would be realized if the securities were sold.

 

(b) Fair Value Hierarchy  U.S. GAAP describes fair value as the price that a Fund would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. It establishes a fair value hierarchy that prioritizes inputs to valuation methods and requires disclosure of the fair value hierarchy, separately for each major category of assets and liabilities, that segregates fair value measurements into levels (Level 1, 2, or 3). The inputs or methodology used for valuing securities are not necessarily an indication of the risks associated with investing in those securities. Levels 1, 2, and 3 of the fair value hierarchy are defined as follows:

 

n   

Level 1 — Inputs using (unadjusted) quoted prices in active markets or exchanges for identical assets and liabilities.

 

n   

Level 2 — Significant other observable inputs, which may include, but are not limited to, quoted prices for similar assets or liabilities in markets that are active, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the assets or liabilities (such as interest rates, yield curves, volatilities, prepayment speeds, loss severities, credit risks and default rates) or other market corroborated inputs.

 

n   

Level 3 — Significant unobservable inputs based on the best information available in the circumstances, to the extent observable inputs are not available, which may include assumptions made by the Board or persons acting at their direction that are used in determining the fair value of investments.

 

 

66   PIMCO CLOSED-END FUNDS     


 

July 31, 2016

 

 

Assets or liabilities categorized as Level 2 or 3 as of period end have been transferred between Levels 2 and 3 since the prior period due to changes in the method utilized in valuing the investments. Transfers from Level 3 to Level 2 are a result of the availability of current and reliable market-based data provided by Pricing Services or other valuation techniques which utilize significant observable inputs. In accordance with the requirements of U.S. GAAP, the amounts of transfers between Levels 1 and 2 and transfers into and out of Level 3, if material, are disclosed in the Notes to Schedule of Investments of each respective Fund.

 

For fair valuations using significant unobservable inputs, U.S. GAAP requires a reconciliation of the beginning to ending balances for reported fair values that presents changes attributable to realized gain (loss), unrealized appreciation (depreciation), purchases and sales, accrued discounts (premiums), and transfers into and out of the Level 3 category during the period. The end of period timing recognition is used for the transfers between Levels of a Fund’s assets and liabilities. Additionally, U.S. GAAP requires quantitative information regarding the significant unobservable inputs used in the determination of fair value of assets or liabilities categorized as Level 3 in the fair value hierarchy. In accordance with the requirements of U.S. GAAP, a fair value hierarchy, and if material, a Level 3 reconciliation and details of significant unobservable inputs, have been included in the Notes to Schedules of Investments for each respective Fund.

 

(c) Valuation Techniques and the Fair Value Hierarchy

Level 1 and Level 2 trading assets and trading liabilities, at fair value  The valuation methods (or “techniques”) and significant inputs used in determining the fair values of portfolio securities or other assets and liabilities categorized as Level 1 and Level 2 of the fair value hierarchy are as follows:

 

Fixed income securities including corporate, convertible and municipal bonds and notes, U.S. government agencies, U.S. treasury obligations, sovereign issues, bank loans, convertible preferred securities and non-U.S. bonds are normally valued on the basis of quotes obtained from brokers and dealers or Pricing Services that use broker-dealer quotations, reported trades or valuation estimates from their internal pricing models. The Pricing Services’ internal models use inputs that are observable such as issuer details, interest rates, yield curves, prepayment speeds, credit risks/spreads, default rates and quoted prices for similar assets. Securities that use similar valuation techniques and inputs as described above are categorized as Level 2 of the fair value hierarchy.

 

Fixed income securities purchased on a delayed-delivery basis or as a repurchase commitment in a sale-buyback transaction are marked to market daily until settlement at the forward settlement date and are categorized as Level 2 of the fair value hierarchy.

Mortgage-related and asset-backed securities are usually issued as separate tranches, or classes, of securities within each deal. These securities are also normally valued by Pricing Services that use broker-dealer quotations, reported trades or valuation estimates from their internal pricing models. The pricing models for these securities usually consider tranche-level attributes, current market data, estimated cash flows and market-based yield spreads for each tranche, and incorporate deal collateral performance, as available. Mortgage-related and asset-backed securities that use similar valuation techniques and inputs as described above are categorized as Level 2 of the fair value hierarchy.

 

Common stocks, ETFs, exchange-traded notes and financial derivative instruments, such as futures contracts, rights and warrants, or options on futures that are traded on a national securities exchange, are stated at the last reported sale or settlement price on the day of valuation. To the extent these securities are actively traded and valuation adjustments are not applied, they are categorized as Level 1 of the fair value hierarchy.

 

Investments valued (denominated) in currencies other than the U.S. dollar are converted to the U.S. dollar using exchange rates (currency spot and forward rates) obtained from Pricing Services. As a result, the NAV of a Fund’s shares may be affected by changes in the value of currencies in relation to the U.S. dollar. The value of securities traded in markets outside the United States or denominated in currencies other than the U.S. dollar may be affected significantly on a day that a Fund is not open for business. Valuation adjustments may be applied to certain securities that are solely traded on a foreign exchange to account for the market movement between the close of the foreign market and the NYSE Close. These securities are valued using Pricing Services that consider the correlation of the trading patterns of the foreign security to the intraday trading in the U.S. markets for investments. Securities using these valuation adjustments are categorized as Level 2 of the fair value hierarchy. Preferred securities and other equities traded on inactive markets or valued by reference to similar instruments are also categorized as Level 2 of the fair value hierarchy.

 

Short-term debt instruments (such as commercial paper) having a remaining maturity of 60 days or less may be valued at amortized cost, so long as the amortized cost of such short-term debt instrument is approximately the same as the fair value of the instrument as determined without the use of amortized cost valuation. Prior to July 31, 2015, short-term debt investments having a maturity of 60 days or less and repurchase agreements were generally valued at amortized cost which approximates fair value. Short-term debt instruments having a remaining maturity of 60 days or less are categorized as Level 2 of the fair value hierarchy.

 

 

  ANNUAL REPORT   JULY 31, 2016   67


Notes to Financial Statements (Cont.)

 

 

Equity exchange-traded options and over the counter financial derivative instruments, such as forward foreign currency contracts, options contracts, or swap agreements, derive their value from underlying asset prices, indices, reference rates, and other inputs or a combination of these factors. Other than swap agreements, which are valued using a broker-dealer bid quotation or on market-based prices provided by Pricing Services or other pricing sources, these contracts are normally valued on the basis of quotes obtained from a quotation reporting system, established market makers or Pricing Services (normally determined as of the NYSE Close). Depending on the product and the terms of the transaction, financial derivative instruments can be valued by Pricing Services using a series of techniques, including simulation pricing models. The pricing models use inputs that are observed from actively quoted markets such as quoted prices, issuer details, indices, bid/ask spreads, interest rates, implied volatilities, yield curves, dividends and exchange rates. Financial derivative instruments that use similar valuation techniques and inputs as described above are categorized as Level 2 of the fair value hierarchy.

 

Centrally cleared swaps listed or traded on a multilateral or trade facility platform, such as a registered exchange, are valued at the daily settlement price determined by the respective exchange (if available). For centrally cleared credit default swaps, the clearing facility requires its members to provide actionable price levels across complete term structures. These levels, along with external third-party prices, are used to produce daily settlement prices. These securities are categorized as Level 2 of the fair value hierarchy. Centrally cleared interest rate swaps are valued using a pricing model that references the underlying rates including the overnight index swap rate and London Interbank Offered Rate (“LIBOR”) forward rate to produce the daily settlement price. These securities are categorized as Level 2 of the fair value hierarchy.

 

Level 3 trading assets and trading liabilities, at fair value  When a fair valuation method is applied by PIMCO that uses significant unobservable inputs, investments will be priced by a method that the Board or persons acting at their direction believe reflects fair value and are categorized as Level 3 of the fair value hierarchy. The valuation techniques and significant inputs used in determining the fair values of portfolio assets and liabilities categorized as Level 3 of the fair value hierarchy are as follows:

 

Proxy pricing procedures set the base price of a fixed income security and subsequently adjust the price proportionally to market value changes of a pre-determined security deemed to be comparable in duration, generally a U.S. Treasury or sovereign note based on country of issuance. The base price may be a broker-dealer quote, transaction price, or an internal value as derived by analysis of market data. The base price of the security may be reset on a periodic basis based on the availability of market data and procedures approved by the Valuation

Oversight Committee. Significant changes in the unobservable inputs of the proxy pricing process (the base price) would result in direct and proportional changes in the fair value of the security. These securities are categorized as Level 3 of the fair value hierarchy.

 

If third-party evaluated vendor pricing is not available or not deemed to be indicative of fair value, the Manager may elect to obtain Broker Quotes directly from the broker-dealer or passed through from a third-party vendor. In the event that fair value is based upon a single sourced Broker Quote, these securities are categorized as Level 3 of the fair value hierarchy. Broker Quotes are typically received from established market participants. Although independently received, the Manager does not have the transparency to view the underlying inputs which support the market quotation. Significant changes in the Broker Quote would have direct and proportional changes in the fair value of the security.

 

The validity of the fair value is reviewed by the Manager on a periodic basis and may be amended in accordance with a Fund’s valuation procedures.

 

4. SECURITIES AND OTHER INVESTMENTS

 

(a) Investments in Securities

Loan Participations, Assignments and Originations  Certain Funds may invest in direct debt instruments which are interests in amounts owed to lenders or lending syndicates by corporate, governmental, or other borrowers. A Fund’s investments in loans may be in the form of direct investments, participations in loans or assignments of all or a portion of loans from third parties or exposure to investments in or originations of loans through investments in a mutual fund or other pooled investment vehicle. A loan is often administered by a bank or other financial institution (the “agent”) that acts as agent for all holders. The agent administers the terms of the loan, as specified in the loan agreement. A Fund may invest in multiple series or tranches of a loan, which may have varying terms and carry different associated risks. A Fund generally has no right to enforce compliance with the terms of the loan agreement with the borrower. As a result, a Fund may be subject to the credit risk of both the borrower and the agent that is selling the loan agreement.

 

In the event of the insolvency of the agent selling a participation, a Fund may be treated as a general creditor of the agent and may not benefit from any set-off between the agent and the borrower. When a Fund purchases assignments from agents it acquires direct rights against the borrowers of the loans. These loans may include participations in bridge loans, which are loans taken out by borrowers for a short period (typically less than one year) pending arrangement of more permanent financing through, for example, the issuance of bonds, frequently high yield bonds issued for the purpose of acquisitions.

 

 

68   PIMCO CLOSED-END FUNDS     


 

July 31, 2016

 

 

Investments in loans are generally subject to risks similar to those of investments in other types of debt obligations, including, among others, credit risk, interest rate risk, variable and floating rate securities risk, and risks associated with mortgage-related securities. In addition, in many cases loans are subject to the risks associated with below-investment grade securities. The Funds may be subject to heightened or additional risks and potential liabilities and costs by investing in mezzanine and other subordinated loans or acting as an originator of loans, including those arising under bankruptcy, fraudulent conveyance, equitable subordination, lender liability, environmental and other laws and regulations, and risks and costs associated with debt servicing and taking foreclosure actions associated with the loans. To the extent that a Fund originates a loan, it may be responsible for all or a substantial portion of the expenses associated with initiating the loan. This may include significant legal and due diligence expenses, which will be indirectly borne by a Fund and its shareholders. A Fund may pay fees and expenses associated with originating a loan, including significant legal and due diligence expenses, irrespective of whether the loan transaction is ultimately consummated or closed.

 

Additionally, because loans are not ordinarily registered with the SEC or any state securities commission or listed on any securities exchange, there is usually less publicly available information about such instruments. In addition, loans may not be considered “securities” for purposes of the anti-fraud provisions under the federal securities laws and, as a result, as a purchaser of these instruments, a Fund may not be entitled to the anti-fraud protections of the federal securities laws. In the course of investing in such instruments, a Fund may come into possession of material nonpublic information and, because of prohibitions on trading in securities of issuers while in possession of such information, the Fund may be unable to enter into a transaction in a publicly-traded security of that issuer when it would otherwise be advantageous for the Fund to do so. Alternatively, a Fund may choose not to receive material nonpublic information about an issuer of such loans, with the result that the Fund may have less information about such issuers than other investors who transact in such assets.

 

The types of loans and related investments in which the Funds may invest include, among others, senior loans, subordinated loans (including second lien loans, B-Notes and mezzanine loans), whole loans, commercial real estate and other commercial loans and structured loans. The Funds may originate loans or acquire direct interests in loans through primary loan distributions and/or in private transactions. In the case of subordinated loans, there may be significant indebtedness ranking ahead of the borrower’s obligation to the holder of such a loan, including in the event of the borrower’s insolvency. Mezzanine loans are typically secured by a pledge of an equity interest in the mortgage borrower that owns the real estate rather than an interest in a mortgage.

Investments in loans may include unfunded loan commitments, which are contractual obligations for future funding. Unfunded loan commitments may include revolving credit facilities, which may obligate a Fund to supply additional cash to the borrower on demand. Unfunded loan commitments represent a future obligation in full, even though a percentage of the committed amount may not be utilized by the borrower. When investing in a loan participation, a Fund has the right to receive payments of principal, interest and any fees to which it is entitled only from the agent selling the loan agreement and only upon receipt of payments by the agent from the borrower. Because investing in unfunded loan commitments creates a future obligation for a Fund to provide funding to a borrower upon demand in exchange for a fee, the Fund will segregate or earmark liquid assets with the Fund’s custodian in amounts sufficient to satisfy any such future obligations. A Fund may receive a commitment fee based on the undrawn portion of the underlying line of credit portion of a loan. In certain circumstances, a Fund may receive a penalty fee upon the prepayment of a loan by a borrower. Fees earned or paid are recorded as a component of interest income or interest expense, respectively, on the Statements of Operations. As of July 31, 2016, the Funds had no unfunded loan commitments outstanding.

 

Mortgage-Related and Other Asset-Backed Securities  Certain Funds may invest in mortgage-related and other asset-backed securities that directly or indirectly represent a participation in, or are secured by and payable from, loans on real property. Mortgage-related securities are created from pools of residential or commercial mortgage loans, including mortgage loans made by savings and loan institutions, mortgage bankers, commercial banks and others. These securities typically provide a monthly payment which consists of both principal and interest. Interest may be determined by fixed or adjustable rates. In times of declining interest rates, there is a greater likelihood that a Fund’s higher yielding securities will be pre-paid with the Fund being unable to reinvest the proceeds in an investment with as great a yield. The rate of prepayments on underlying mortgages will affect the price and volatility of a mortgage-related security, and may have the effect of shortening or extending the effective duration of the security relative to what was anticipated at the time of purchase. Interest-only and principal-only securities are especially sensitive to interest rate changes, which can affect not only their prices but can also change the income flows and repayment assumptions about those investments. The timely payment of principal and interest of certain mortgage-related securities is guaranteed with the full faith and credit of the U.S. Government. Pools created and guaranteed by non-governmental issuers, including government-sponsored corporations, may be supported by various forms of insurance or guarantees, but there can be no assurance that private insurers or guarantors can meet their obligations under the insurance policies or guarantee arrangements. Many of the risks of

 

 

  ANNUAL REPORT   JULY 31, 2016   69


Notes to Financial Statements (Cont.)

 

investing in mortgage-related securities secured by commercial mortgage loans (“CMBS”) reflect the effects of local and other economic conditions on real estate markets, the ability of tenants to make lease payments, and the ability of a property to attract and retain tenants. These securities may be less liquid and may exhibit greater price volatility than other types of mortgage-related or other asset-backed securities. Other asset-backed securities are created from many types of assets, including without limitation, auto loans, credit card receivables, home equity loans, and student loans.

 

Collateralized Debt Obligations  (“CDOs”) include Collateralized Bond Obligations (“CBOs”), Collateralized Loan Obligations (“CLOs”) and other similarly structured securities. CBOs and CLOs are types of asset-backed securities. A CBO is a trust which is typically backed by a diversified pool of high risk, below investment grade fixed income securities. A CLO is a trust typically collateralized by a pool of loans, which may include, among others, domestic and foreign senior secured loans, senior unsecured loans, and subordinate corporate loans, including loans that may be rated below investment grade or equivalent unrated loans. For both CBOs and CLOs, the cash flows from the trust are split into two or more portions, called tranches, varying in risk and yield. The riskiest portion is the “equity” tranche which bears the bulk of defaults from the bonds or loans in the trust and serves to protect the other, more senior tranches from default in all but the most severe circumstances. Since it is partially protected from defaults, a senior tranche from a CBO trust or CLO trust typically has higher ratings and lower yields than the underlying securities, and can be rated investment grade. Despite the protection from the equity tranche, CBO or CLO tranches can experience substantial losses due to actual defaults, increased sensitivity to defaults due to collateral default and disappearance of protecting tranches, market anticipation of defaults and aversion to CBO or CLO securities as a class. The risks of an investment in a CDO depend largely on the type of the collateral securities and the class of the CDO in which a Fund invests. CDOs carry additional risks including, but not limited to, (i) the possibility that distributions from collateral securities will not be adequate to make interest or other payments, (ii) the collateral may decline in value or default, (iii) a Fund may invest in CDOs that are subordinate to other classes, and (iv) the complex structure of the security may not be fully understood at the time of investment and may produce disputes with the issuer or unexpected investment results.

 

Collateralized Mortgage Obligations  (“CMOs”) are debt obligations of a legal entity that are collateralized by whole mortgage loans or private mortgage bonds and divided into classes. CMOs are structured into multiple classes, often referred to as “tranches,” with each class bearing a different stated maturity and entitled to a different schedule for payments of principal and interest, including prepayments. CMOs

may be less liquid and may exhibit greater price volatility than other types of mortgage-related or asset-backed securities.

 

As CMOs have evolved, some classes of CMO bonds have become more common. For example, a Fund may invest in parallel-pay and planned amortization class (“PAC”) CMOs and multi-class pass-through certificates. Parallel-pay CMOs and multi-class pass-through certificates are structured to provide payments of principal on each payment date to more than one class. These simultaneous payments are taken into account in calculating the stated maturity date or final distribution date of each class, which, as with other CMO and multi-class pass-through structures, must be retired by its stated maturity date or final distribution date but may be retired earlier. PACs generally require payments of a specified amount of principal on each payment date. PACs are parallel-pay CMOs with the required principal amount on such securities having the highest priority after interest has been paid to all classes. Any CMO or multi-class pass-through structure that includes PAC securities must also have support tranches — known as support bonds, companion bonds or non-PAC bonds — which lend or absorb principal cash flows to allow the PAC securities to maintain their stated maturities and final distribution dates within a range of actual prepayment experience. These support tranches are subject to a higher level of maturity risk compared to other mortgage-related securities, and usually provide a higher yield to compensate investors. If principal cash flows are received in amounts outside a pre-determined range such that the support bonds cannot lend or absorb sufficient cash flows to the PAC securities as intended, the PAC securities are subject to heightened maturity risk. A Fund may invest in various tranches of CMO bonds, including support bonds and equity or “first loss” tranches (see “Collateralized Debt Obligations” above).

 

Stripped Mortgage-Backed Securities  (“SMBS”) are derivative multi-class mortgage securities. SMBS are usually structured with two classes that receive different proportions of the interest and principal distributions on a pool of mortgage assets. An SMBS will have one class that will receive all of the interest (the interest-only or “IO” class), while the other class will receive the entire principal (the principal-only or “PO” class). IOs and POs can be extremely volatile in response to changes in interest rates. As interest rates rise and fall, the value of IOs tends to move in the same direction as interest rates. POs perform best when prepayments on the underlying mortgages rise since this increases the rate at which the principal is returned and the yield to maturity on the PO. When payments on mortgages underlying a PO are slower than anticipated, the life of the PO is lengthened and the yield to maturity is reduced. The yield to maturity on an IO class is extremely sensitive to the rate of principal payments (including prepayments) on the related underlying mortgage assets, and a rapid rate of principal payments may have a material adverse effect on a Fund’s yield to

 

 

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July 31, 2016

 

maturity from these securities. If the underlying mortgage assets experience greater than anticipated prepayments of principal, the Funds may fail to recoup some or all of its initial investment in these securities even if the security is in one of the highest rating categories.

 

Payments received for IOs are included in interest income on the Statements of Operations. Because no principal will be received at the maturity of an IO, adjustments are made to the cost of the security on a monthly basis until maturity. These adjustments are included in interest income on the Statements of Operations. Payments received for POs are treated as reductions to the cost and par value of the securities.

 

Payment In-Kind Securities  Certain Funds may invest in payment in-kind securities (“PIKs”). PIKs may give the issuer the option at each interest payment date of making interest payments in either cash or additional debt securities. Those additional debt securities usually have the same terms, including maturity dates and interest rates, and associated risks as the original bonds. The daily market quotations of the original bonds may include the accrued interest (referred to as a dirty price) and require a pro rata adjustment from the unrealized appreciation or depreciation on investments to interest receivable on the Statements of Assets and Liabilities.

 

Restricted Securities  Certain Funds may invest in securities that are subject to legal or contractual restrictions on resale. These securities may generally be sold privately, but are required to be registered or exempted from such registration before being sold to the public. Private placement securities are generally considered to be restricted except for those securities traded between qualified institutional investors under the provisions of Rule 144A of the Securities Act of 1933. Disposal of restricted securities may involve time-consuming negotiations and expenses, and prompt sale at an acceptable price may be difficult to achieve. Restricted securities held by the Funds at July 31, 2016 are disclosed in the Notes to Schedules of Investments.

 

U.S. Government Agencies or Government-Sponsored Enterprises  Certain Funds may invest in securities of U.S. Government agencies or government-sponsored enterprises. U.S. Government securities are obligations of and, in certain cases, guaranteed by, the U.S. Government, its agencies or instrumentalities. Some U.S. Government securities, such as Treasury bills, notes and bonds, and securities guaranteed by the Government National Mortgage Association (“GNMA” or “Ginnie Mae”), are supported by the full faith and credit of the U.S. Government; others, such as those of the Federal Home Loan Banks, are supported by the right of the issuer to borrow from the U.S. Department of the Treasury (the “U.S. Treasury”); and others, such as those of the Federal National Mortgage Association (“FNMA” or “Fannie Mae”), are supported by the discretionary authority of the U.S. Government to purchase the agency’s obligations.

U.S. Government securities may include zero coupon securities. Zero coupon securities do not distribute interest on a current basis and tend to be subject to a greater risk than interest-paying securities. Government-related guarantors (i.e., not backed by the full faith and credit of the U.S. Government) include FNMA and the Federal Home Loan Mortgage Corporation (“FHLMC” or “Freddie Mac”). FNMA is a government-sponsored corporation. FNMA purchases conventional (i.e., not insured or guaranteed by any government agency) residential mortgages from a list of approved seller/servicers which include state and federally chartered savings and loan associations, mutual savings banks, commercial banks and credit unions and mortgage bankers. Pass-through securities issued by FNMA are guaranteed as to timely payment of principal and interest by FNMA, but are not backed by the full faith and credit of the U.S. Government. FHLMC issues Participation Certificates (“PCs”), which are pass-through securities, each representing an undivided interest in a pool of residential mortgages. FHLMC guarantees the timely payment of interest and ultimate collection of principal, but PCs are not backed by the full faith and credit of the U.S. Government.

 

When-Issued Transactions  Certain Funds may purchase or sell securities on a when-issued basis. These transactions are made conditionally because a security, although authorized, has not yet been issued in the market. Transactions to purchase or sell securities on a when-issued basis involve a commitment by a Fund to purchase or sell these securities for a predetermined price or yield, with payment and delivery taking place beyond the customary settlement period. A Fund may sell when-issued securities before they are delivered, which may result in a realized gain (loss).

 

5. BORROWINGS AND OTHER FINANCING TRANSACTIONS

 

The following disclosures contain information on a Fund’s ability to lend or borrow cash or securities to the extent permitted under the Act, which may be viewed as borrowing or financing transactions by a Fund. The location of these instruments in each Fund’s financial statements is described below. For a detailed description of credit and counterparty risks that can be associated with borrowings and other financing transactions, please see Note 7, Principal Risks.

 

(a) Repurchase Agreements  Certain Funds may engage in repurchase agreements. Under the terms of a typical repurchase agreement, a Fund purchases an underlying debt obligation (collateral) subject to an obligation of the seller to repurchase, and a Fund to resell, the obligation at an agreed-upon price and time. The underlying securities for all repurchase agreements are held by a Fund’s custodian or designated subcustodians under tri-party repurchase agreements. The market value of the collateral must be equal to or exceed the total

 

 

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Notes to Financial Statements (Cont.)

 

amount of the repurchase obligations, including interest. Repurchase agreements, if any, including accrued interest, are included on the Statements of Assets and Liabilities. Interest earned is recorded as a component of interest income on the Statements of Operations. In periods of increased demand for collateral, a Fund may pay a fee for the receipt of collateral, which may result in interest expense to the Fund.

 

(b) Reverse Repurchase Agreements  Certain Funds may enter into reverse repurchase agreements. In a reverse repurchase agreement, a Fund delivers a security in exchange for cash to a financial institution, the counterparty, with a simultaneous agreement to repurchase the same or substantially the same security at an agreed upon price and date. In an open maturity reverse repurchase agreement, there is no pre-determined repurchase date and the agreement can be terminated by the Fund or counterparty at any time. A Fund is entitled to receive principal and interest payments, if any, made on the security delivered to the counterparty during the term of the agreement. Cash received in exchange for securities delivered plus accrued interest payments to be made by a Fund to counterparties are reflected as a liability on the Statements of Assets and Liabilities. Interest payments made by a Fund to counterparties are recorded as a component of interest expense on the Statements of Operations. In periods of increased demand for the security, a Fund may receive a fee for use of the security by the counterparty, which may result in interest income to the Fund. In the event the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, a Fund’s use of the proceeds of the agreement may be restricted pending a determination by the other party, or its trustee or receiver, whether to enforce the Fund’s obligation to repurchase the securities. Reverse repurchase agreements involve leverage risk and also the risk that the market value of the securities to be repurchased may decline below the repurchase price (see Note 7, Principal Risks).

 

6. FINANCIAL DERIVATIVE INSTRUMENTS

 

The following disclosures contain information on how and why the Funds may use financial derivative instruments, the credit-risk-related contingent features in certain financial derivative instruments, and how financial derivative instruments affect the Funds’ financial position, results of operations and cash flows. The location and fair value amounts of these instruments on the Statements of Assets and Liabilities and of the realized appreciation (depreciation) and changes in unrealized appreciation (depreciation) related to such instruments on the Statements of Operations, each categorized by type of financial derivative contract and related risk exposure, are included in a table in the Notes to Schedules of Investments. The financial derivative instruments outstanding as of period end and the amounts of realized and changes in unrealized appreciation (depreciation) on financial derivative instruments during the period, as disclosed in the Notes to

Schedules of Investments, serve as indicators of the volume of financial derivative activity for the Funds.

 

PIMCO Corporate & Income Opportunity Fund is subject to regulation as a commodity pool under the Commodity Exchange Act pursuant to recent rule changes by the Commodity Futures Trading Commission (the “CFTC”). The Manager has registered with the CFTC as a Commodity Pool Operator and a Commodity Trading Adviser with respect to the Fund, and is a member of the National Futures Association. As a result, additional CFTC-mandated disclosure, reporting and recordkeeping obligations apply to PIMCO Corporate & Income Opportunity Fund. Compliance with the CFTC’s regulatory requirements could increase PIMCO Corporate & Income Opportunity Fund’s expenses, adversely affecting its total return.

 

(a) Forward Foreign Currency Contracts  Certain Funds may enter into forward foreign currency contracts in connection with settling planned purchases or sales of securities, to hedge the currency exposure associated with some or all of a Fund’s securities or as a part of an investment strategy. A forward foreign currency contract is an agreement between two parties to buy and sell a currency at a set price on a future date. The market value of a forward foreign currency contract fluctuates with changes in foreign currency exchange rates. Forward foreign currency contracts are marked to market daily, and the change in value is recorded by a Fund as an unrealized gain (loss).

 

Realized gains (losses) are equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed and are recorded upon delivery or receipt of the currency. The contractual obligations of a buyer or seller of a forward foreign currency contract may generally be satisfied by taking or making physical delivery of the underlying currency, establishing an opposite position in the contract and recognizing the profit or loss on both positions simultaneously on the delivery date or, in some instances, paying a cash settlement before the designated date of delivery. These contracts may involve market risk in excess of the unrealized gain (loss) reflected on the Statements of Assets and Liabilities. Although forwards may be intended to minimize the risk of loss due to a decline in the value of the hedged currencies, at the same time, they tend to limit any potential gain which might result should the value of such currencies increase. In addition, a Fund could be exposed to risk if the counterparties are unable to meet the terms of the contracts or if the value of the currency changes unfavorably to the U.S. dollar. To mitigate such risk, cash or securities may be exchanged as collateral pursuant to the terms of the underlying contracts.

 

(b) Options Contracts  Certain Funds may write call and put options on securities and financial derivative instruments they own or in which they may invest. An option on an instrument (or an index) is a contract

 

 

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July 31, 2016

 

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 instrument underlying the option (or the cash value of the index) at a specified exercise price at any time during the term of the option. Writing put options tends to increase a Fund’s exposure to the underlying instrument. Writing call options tends to decrease a Fund’s exposure to the underlying instrument. When a Fund writes a call or put, an amount equal to the premium received is recorded as a liability and subsequently marked to market to reflect the current value of the option written. These liabilities are included on the Statements of Assets and Liabilities. Premiums received from writing options which expire are treated as realized gains. Premiums received from writing options which are exercised or closed are added to the proceeds or offset against amounts paid on the underlying futures, swap, security or currency transaction to determine the realized gain (loss). Certain options may be written with premiums to be determined on a future date. The premiums for these options are based upon implied volatility parameters at specified terms. A Fund as a writer of an option has no control over whether the underlying instrument may be sold (“call”) or purchased (“put”) and as a result bears the market risk of an unfavorable change in the price of the instrument underlying the written option. There is the risk a Fund may not be able to enter into a closing transaction because of an illiquid market.

 

Certain Funds may also purchase put and call options. Purchasing call options tends to increase a Fund’s exposure to the underlying instrument. Purchasing put options tends to decrease a Fund’s exposure to the underlying instrument. A Fund pays a premium which is included as an asset on the Statements of Assets and Liabilities and subsequently marked to market to reflect the current value of the option. Premiums paid for purchasing options which expire are treated as realized losses. Certain options may be purchased with premiums to be determined on a future date. The premiums for these options are based upon implied volatility parameters at specified terms. The risk associated with purchasing put and call options is limited to the premium paid. Premiums paid for purchasing options which are exercised or closed are added to the amounts paid or offset against the proceeds on the underlying investment transaction to determine the realized gain (loss) when the underlying transaction is executed.

 

Interest Rate Swaptions  Certain Funds may write or purchase interest rate swaptions which are options to enter into a pre-defined swap agreement by some specified date in the future. The writer of the swaption becomes the counterparty to the swap if the buyer exercises. The interest rate swaption agreement will specify whether the buyer of the swaption will be a fixed-rate receiver or a fixed-rate payer upon exercise.

(c) Swap Agreements  Certain Funds may invest in swap agreements. Swap agreements are bilaterally negotiated agreements between a Fund and a counterparty to exchange or swap investment cash flows, assets, foreign currencies or market-linked returns at specified, future intervals. Swap agreements may be privately negotiated in the over the counter market (“OTC swaps”) or may be cleared through a third party, known as a central counterparty or derivatives clearing organization (“Centrally Cleared Swaps”). A Fund may enter into asset, credit default, cross-currency, interest rate, total return, variance and other forms of swap agreements to manage its exposure to credit, currency, interest rate, commodity, equity and inflation risk. In connection with these agreements, securities or cash may be identified as collateral or margin in accordance with the terms of the respective swap agreements to provide assets of value and recourse in the event of default or bankruptcy/insolvency.

 

Centrally Cleared Swaps are marked to market daily based upon valuations as determined from the underlying contract or in accordance with the requirements of the central counterparty or derivatives clearing organization. Changes in market value, if any, are reflected as a component of net change in unrealized appreciation (depreciation) on the Statements of Operations. Daily changes in valuation of centrally cleared swaps, if any, are recorded as a variation margin on the Statements of Assets and Liabilities. OTC swap payments received or paid at the beginning of the measurement period are included on the Statements of Assets and Liabilities and represent premiums paid or received upon entering into the swap agreement to compensate for differences between the stated terms of the swap agreement and prevailing market conditions (credit spreads, currency exchange rates, interest rates, and other relevant factors). Upfront premiums received (paid) are initially recorded as liabilities (assets) and subsequently marked to market to reflect the current value of the swap. These upfront premiums are recorded as realized gains (losses) on the Statements of Operations upon termination or maturity of the swap. A liquidation payment received or made at the termination of the swap is recorded as realized gain (loss) on the Statements of Operations. Net periodic payments received or paid by a Fund are included as part of realized gains (losses) on the Statements of Operations.

 

For purposes of applying a Fund’s investment policies and restrictions, swap agreements are generally valued by a Fund at market value. In the case of a credit default swap (see below), however, in applying certain of a Fund’s investment policies and restrictions, the Funds will value the credit default swap at its notional value or its full exposure value (i.e., the sum of the notional amount for the contract plus the market value), but may value the credit default swap at market value for purposes of applying certain of a Fund’s other investment policies and restrictions. For example, a Fund may value credit default swaps at

 

 

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Notes to Financial Statements (Cont.)

 

full exposure value for purposes of a Fund’s credit quality guidelines (if any) because such value reflects a Fund’s actual economic exposure during the term of the credit default swap agreement. In this context, both the notional amount and the market value may be positive or negative depending on whether a Fund is selling or buying protection through the credit default swap. The manner in which certain securities or other instruments are valued by a Fund for purposes of applying investment policies and restrictions may differ from the manner in which those investments are valued by other types of investors.

 

Entering into swap agreements involves, to varying degrees, elements of interest, credit, market and documentation risk in excess of the amounts recognized on the Statements of Assets and Liabilities. Such risks involve the possibility that there will be no liquid market for these agreements, that the counterparty to the agreements may default on its obligation to perform or disagree as to the meaning of contractual terms in the agreements and that there may be unfavorable changes in interest rates or asset upon which the swap is based.

 

A Fund’s maximum risk of loss from counterparty credit risk is the discounted net value of the cash flows to be received from the counterparty over the contract’s remaining life, to the extent that amount is positive. The risk may be mitigated by having a master netting arrangement between a Fund and the counterparty and by the posting of collateral to a Fund to cover a Fund’s exposure to the counterparty.

 

To the extent a Fund has a policy to limit the net amount owed to or to be received from a single counterparty under existing swap agreements, such limitation only applies to counterparties to OTC swaps and does not apply to Centrally Cleared Swaps where the counterparty is a central counterparty or derivatives clearing organization.

 

Credit Default Swap Agreements  A Fund may use credit default swaps on corporate, loan, sovereign, U.S. municipal or U.S. Treasury issues to provide a measure of protection against defaults of the issuers (i.e., to reduce risk where a Fund owns or has exposure to the referenced obligation) or to take an active long or short position with respect to the likelihood of a particular issuer’s default. Credit default swap agreements involve one party making a stream of payments (referred to as the buyer of protection) to another party (the seller of protection) in exchange for the right to receive a specified return in the event that the referenced entity, obligation or index, as specified in the agreement, undergoes a certain credit event. As a seller of protection on credit default swap agreements, a Fund will generally receive from the buyer of protection a fixed rate of income throughout the term of the swap provided that there is no credit event. As the seller, a Fund would effectively add leverage to its portfolio because, in addition to its total net assets, a Fund would be subject to investment exposure on the notional amount of the swap.

If a Fund is a seller of protection and a credit event occurs, as defined under the terms of that particular swap agreement, a Fund will either (i) pay to the buyer of protection an amount equal to the notional amount of the swap and take delivery of the referenced obligation, other deliverable obligations or underlying securities comprising the referenced index or (ii) pay a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index. If a Fund is a buyer of protection and a credit event occurs, as defined under the terms of that particular swap agreement, a Fund will either (i) receive from the seller of protection an amount equal to the notional amount of the swap and deliver the referenced obligation, other deliverable obligations or underlying securities comprising the referenced index or (ii) receive a net settlement amount in the form of cash or securities equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index. Recovery values are estimated by market makers considering either industry standard recovery rates or entity specific factors and considerations until a credit event occurs. If a credit event has occurred, the recovery value is determined by a facilitated auction whereby a minimum number of allowable broker bids, together with a specified valuation method, are used to calculate the settlement value. The ability to deliver other obligations may result in a cheapest-to-deliver option (the buyer of protection’s right to choose the deliverable obligation with the lowest value following a credit event).

 

Credit default swap agreements on corporate or sovereign issues involve one party making a stream of payments to another party in exchange for the right to receive a specified return in the event of a default or other credit event. If a credit event occurs and cash settlement is not elected, a variety of other deliverable obligations may be delivered in lieu of the specific referenced obligation. The ability to deliver other obligations may result in a cheapest-to-deliver option (the buyer of protection’s right to choose the deliverable obligation with the lowest value following a credit event).

 

Credit default swap agreements on credit indices involve one party making a stream of payments to another party in exchange for the right to receive a specified return in the event of a write-down, principal shortfall, interest shortfall or default of all or part of the referenced entities comprising the credit index. A credit index is a basket of credit instruments or exposures designed to be representative of some part of the credit market as a whole. These indices are made up of reference credits that are judged by a poll of dealers to be the most liquid entities in the credit default swap market based on the sector of the index. Components of the indices may include, but are not limited to, investment grade securities, high yield securities, asset-backed securities, emerging markets, and/or various credit ratings within each

 

 

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sector. Credit indices are traded using credit default swaps with standardized terms including a fixed spread and standard maturity dates. An index credit default swap references all the names in the index, and if there is a default, the credit event is settled based on that name’s weight in the index. The composition of the indices changes periodically, usually every six months, and for most indices, each name has an equal weight in the index. Credit default swaps on credit indices may be used to hedge a portfolio of credit default swaps or bonds, which is less expensive than it would be to buy many credit default swaps to achieve a similar effect or to take an active long or short position with respect to the likelihood of a particular referenced obligation’s default. Credit default swaps on indices are instruments often used to attempt to protect investors owning bonds against default, but may also be used for speculative purposes.

 

Implied credit spreads, represented in absolute terms, utilized in determining the market value of credit default swap agreements on corporate, sovereign or U.S. municipal issues as of period end are disclosed in the Notes to Schedules of Investments. They serve as an indicator of the current status of payment/performance risk and represent the likelihood or risk of default for the reference entity. The implied credit spread of a particular referenced entity reflects the cost of buying/selling protection and may include upfront payments required to be made to enter into the agreement. Wider credit spreads represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement. For credit default swap agreements on asset-backed securities and credit indices, the quoted market prices and resulting values serve as the indicator of the current status of the payment/ performance risk. Increasing market values, in absolute terms when compared to the notional amount of the swap, represent a deterioration of the referenced entity’s credit soundness and a greater likelihood or risk of default or other credit event occurring as defined under the terms of the agreement.

 

The maximum potential amount of future payments (undiscounted) that a Fund as a seller of protection could be required to make under a credit default swap agreement equals the notional amount of the agreement. Notional amounts of each individual credit default swap agreement outstanding as of period end for which a Fund is the seller of protection are disclosed in the Notes to Schedules of Investments. These potential amounts would be partially offset by any recovery values of the respective referenced obligations, upfront payments received upon entering into the agreement, or net amounts received from the settlement of buy protection credit default swap agreements entered into by a Fund for the same referenced entity or entities.

 

Interest Rate Swap Agreements  Certain Funds are subject to interest rate risk exposure in the normal course of pursuing their investment

objectives. If a Fund holds fixed rate bonds, the value of these bonds may decrease if interest rates rise. To help hedge against this risk and to maintain its ability to generate income at prevailing market rates, a Fund may enter into interest rate swap agreements. Interest rate swap agreements involve the exchange by a Fund with another party for their respective commitment to pay or receive interest on the notional amount of principal. Certain forms of interest rate swap agreements may include: (i) 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”, (ii) 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 rate, or “floor”, (iii) 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, (iv) callable interest rate swaps, under which the buyer pays an upfront fee in consideration for the right to early terminate the swap transaction in whole, at zero cost and at a predetermined date and time prior to the maturity date, (v) spreadlocks, which allow the interest rate swap users to lock in the forward differential (or spread) between the interest rate swap rate and a specified benchmark, or (vi) basis swaps, under which two parties can exchange variable interest rates based on different segments of money markets.

 

Asset Segregation  Certain of the transactions described above can be viewed as constituting a form of borrowing or financing transaction by the Fund. In such event, a Fund may, but is not required to cover its commitment under such transactions by segregating or “earmarking” assets in accordance with procedures adopted by the Board, in which case such transactions will not be considered “senior securities” by the Fund. With respect to forwards, futures contracts, options and swaps that are contractually permitted or required to cash settle (i.e., where physical delivery of the underlying reference asset is not required), a Fund is permitted to segregate or earmark liquid assets equal to the Fund’s daily marked-to-market net obligation under the derivative instrument, if any, rather than the derivative’s full notional value. By segregating or earmarking liquid assets equal to only its net marked-to market obligation under derivatives that are required to cash settle, a Fund will have the ability to employ leverage to a greater extent than if a Fund were to segregate or earmark liquid assets equal to the full notional value of the derivative.

 

7. PRINCIPAL RISKS

 

In the normal course of business, the Funds trade financial instruments and enter into financial transactions where risk of potential loss exists due to such things as changes in the market (market risk) or failure or inability of the other party to a transaction to perform (credit and counterparty risk). See below for a detailed description of select principal

 

 

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Notes to Financial Statements (Cont.)

 

risks. For a more comprehensive list of potential risks the Funds may be subject to, please see the Important Information About the Funds.

 

Market Risks  A Fund’s investments in financial derivatives and other financial instruments expose the Fund to various risks such as, but not limited to, interest rate, foreign currency, equity and commodity risks.

 

Interest rate risk is the risk that fixed income securities and other instruments held by a Fund will decline in value because of changes in interest rates. As nominal interest rates rise, the value of certain fixed income securities held by a Fund is likely to decrease. A nominal interest rate can be described as the sum of a real interest rate and an expected inflation rate. Interest rate changes can be sudden and unpredictable, and a Fund may lose money if these changes are not anticipated by Fund management. A Fund may not be able to hedge against changes in interest rates or may choose not to do so for cost or other reasons. In addition, any hedges may not work as intended.

 

Fixed income securities with longer durations tend to be more sensitive to changes in interest rates, usually making them more volatile than securities with shorter durations. Duration is a measure used to determine the sensitivity of a security’s price to changes in interest rates that incorporates a security’s yield, coupon, final maturity and call features, among other characteristics. Duration is useful primarily as a measure of the sensitivity of a fixed income security’s market price to interest rate (i.e. yield) movements. All other things remaining equal, for each one percentage point increase in interest rates, the value of a portfolio of fixed income investments would generally be expected to decline by one percent for every year of the portfolio’s average duration above zero. For example, the value of a portfolio of fixed income securities with an average duration of three years would generally be expected to decline by approximately 3% if interest rates rose by one percentage point. Convexity is an additional measure used to understand a security’s interest rate sensitivity. Convexity measures the rate of change of duration in response to changes in interest rates and may be positive or negative Securities with negative convexity may experience greater losses during periods of rising interest rates, and accordingly Funds holding such securities may be subject to a greater risk of losses in periods of rising interest rates. A wide variety of factors can cause interest rates to rise (e.g., central bank monetary policies, inflation rates, general economic conditions). At present, the U.S. is experiencing historically low interest rates. This, combined with recent economic recovery, the Federal Reserve Board’s conclusion of its quantitative easing program, and recent increases in the interest rates for the first time since 2006, could potentially increase the probability of an upward interest rate environment in the near future. During periods of very low or negative interest rates, a Fund may be unable to maintain positive returns. Changing interest rates, including rates that fall below zero, may have unpredictable effects on markets, may result in heightened market volatility and may detract from Fund performance

to the extent a Fund is exposed to such interest rates. Rising interest rates may result in a decline in value of a Fund’s fixed-income investments and in periods of volatility. Further, while U.S. bond markets have steadily grown over the past three decades, dealer “market making” ability has remained relatively stagnant. As a result, dealer inventories of certain types of bonds and similar instruments, which provide a core indication of the ability of financial intermediaries to “make markets,” are at or near historic lows in relation to market size. Because market makers provide stability to a market through their intermediary services, the significant reduction in dealer inventories could potentially lead to decreased liquidity and increased volatility in the fixed income markets. Such issues may be exacerbated during periods of economic uncertainty. All of these factors, collectively and/or individually, could cause a Fund to lose value.

 

Foreign (non-U.S.) securities in this report are classified by the country of incorporation of a holding. In certain instances, a security’s country of incorporation may be different from its country of economic exposure. If a Fund invests directly in foreign (non-U.S.) currencies or in securities that trade in, and receive revenues in, foreign (non-U.S.) currencies, or in financial derivatives that provide exposure to foreign (non-U.S.) currencies, it will be subject to the risk that those currencies will decline in value relative to the base currency of the Fund, or, in the case of hedging positions, that the Fund’s base currency will decline in value relative to the currency being hedged. Currency rates in foreign countries may fluctuate significantly over short periods of time for a number of reasons, including changes in interest rates, intervention (or the failure to intervene) by U.S. or foreign governments, central banks or supranational entities such as the International Monetary Fund, or by the imposition of currency controls or other political developments in the United States or abroad. As a result, a Fund’s investments in foreign currency denominated securities may reduce the Fund’s returns.

 

The market values of a Fund’s investments may decline due to general market conditions which are not specifically related to a particular company or issuer, such as real or perceived adverse economic conditions, changes in the general outlook for corporate earnings, changes in interest or currency rates or adverse investor sentiment. They may also decline due to factors which affect a particular industry or industries, such as labor shortages or increased production costs and competitive conditions within an industry. Equity securities and equity related investments generally have greater market price volatility than fixed income securities, although under certain market conditions fixed income securities may have comparable or greater price volatility. Credit ratings downgrades may also negatively affect securities held by a Fund. Even when markets perform well, there is no assurance that the investments held by a Fund will increase in value along with the broader market. In addition, market risk includes the risk that geopolitical events will disrupt the economy on a national or global level.

 

 

76   PIMCO CLOSED-END FUNDS     


 

July 31, 2016

 

 

A Fund’s investments in commodity-linked financial derivative instruments may subject the Fund to greater market price volatility than investments in traditional securities. The value of commodity-linked financial derivative instruments may be affected by changes in overall market movements, commodity index volatility, changes in interest rates, or factors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs and international economic, political and regulatory developments.

 

Credit and Counterparty Risks  A Fund will be exposed to credit risk to parties with whom it trades and will also bear the risk of settlement default. A Fund seeks to minimize concentrations of credit risk by undertaking transactions with a large number of counterparties on recognized and reputable exchanges, where applicable. Over the counter (“OTC”) derivative transactions are subject to the risk that a counterparty to the transaction will not fulfill its contractual obligations to the other party, as many of the protections afforded to centrally cleared derivative transactions might not be available for OTC derivative transactions. A Fund could lose money if the issuer or guarantor of a fixed income security, or the counterparty to a financial derivatives contract, repurchase agreement or a loan of portfolio securities, is unable or unwilling to make timely principal and/or interest payments, or to otherwise honor its obligations. Securities are subject to varying degrees of credit risk, which are often reflected in credit ratings.

 

Similar to credit risk, a Fund may be exposed to counterparty risk, or the risk that an institution or other entity with which a Fund has unsettled or open transactions will default. PIMCO, as Manager, seeks to minimize counterparty risks to a Fund in a number of ways. Prior to entering into transactions with a new counterparty, the PIMCO Counterparty Risk Committee conducts an extensive credit review of such counterparty and must approve the use of such counterparty. Furthermore, pursuant to the terms of the underlying contract, to the extent that unpaid amounts owed to a Fund exceed a predetermined threshold, such counterparty is required to advance collateral to a Fund in the form of cash or securities equal in value to the unpaid amount owed to the Fund. A Fund may invest such collateral in securities or other instruments and will typically pay interest to the counterparty on the collateral received. If the unpaid amount owed to a Fund subsequently decreases, the Fund would be required to return to the counterparty all or a portion of the collateral previously advanced to the Fund. PIMCO’s attempts to minimize counterparty risk may, however, be unsuccessful.

 

All transactions in listed securities are settled/paid for upon delivery using approved counterparties. The risk of default is considered minimal, as delivery of securities sold is only made once a Fund has received payment. Payment is made on a purchase once the securities have been delivered by the counterparty. The trade will fail if either party fails to meet its obligation.

Master Netting Arrangements  The Funds may be subject to various netting arrangements with select counterparties (“Master Agreements”). Master Agreements govern the terms of certain transactions, and are intended to reduce the counterparty risk associated with relevant transactions by specifying credit protection mechanisms and providing standardization that is intended to improve legal certainty. Each type of Master Agreement governs certain types of transactions. Different types of transactions may be traded out of different legal entities or affiliates of a particular organization, resulting in the need for multiple agreements with a single counterparty. As the Master Agreements are specific to unique operations of different asset types, they allow a Fund to close out and net its total exposure to a counterparty in the event of a default with respect to all the transactions governed under a single Master Agreement with a counterparty. For financial reporting purposes the Statements of Assets and Liabilities generally present derivative assets and liabilities on a gross basis, which reflects the full risks and exposures prior to netting.

 

Master Agreements can also help limit counterparty risk by specifying collateral posting arrangements at pre-arranged exposure levels. Under the Master Agreements, collateral is routinely transferred if the total net exposure to certain transactions (net of existing collateral already in place) governed under the relevant Master Agreement with a counterparty in a given account exceeds a specified threshold, which typically ranges from zero to $250,000 depending on the counterparty and the type of Master Agreement. United States Treasury Bills and U.S. dollar cash are generally the preferred forms of collateral, although other forms of AAA rated paper or sovereign securities may be used. Securities and cash pledged as collateral are reflected as assets on the Statements of Assets and Liabilities as either a component of Investments at value (securities) or Deposits with counterparty (cash). Cash collateral received is typically not held in a segregated account and as such is reflected as a liability on the Statements of Assets and Liabilities as Deposits from counterparty. The market value of any securities received as collateral is not reflected as a component of NAV. A Fund’s overall exposure to counterparty risk can change substantially within a short period, as it is affected by each transaction subject to the relevant Master Agreement.

 

Master Repurchase Agreements and Global Master Repurchase Agreements (individually and collectively “Master Repo Agreements”) govern repurchase, reverse repurchase, and sale-buyback transactions between the Funds and select counterparties. Master Repo Agreements maintain provisions for, among other things, transaction initiation, income payments, events of default, and maintenance of collateral. The market value of transactions under the Master Repo Agreement, collateral pledged or received, and the net exposure by counterparty as of period end are disclosed in the Notes to Schedules of Investments.

 

Master Securities Forward Transaction Agreements (“Master Forward Agreements”) govern the considerations and factors surrounding the

 

 

  ANNUAL REPORT   JULY 31, 2016   77


Notes to Financial Statements (Cont.)

 

settlement of certain forward settling transactions, such as To-Be-Announced securities, delayed-delivery or sale-buyback transactions by and between a Fund and select counterparties. The Master Forward Agreements maintain provisions for, among other things, transaction initiation and confirmation, payment and transfer, events of default, termination, and maintenance of collateral. The market value of forward settling transactions, collateral pledged or received, and the net exposure by counterparty as of period end is disclosed in the Notes to Schedules of Investments.

 

Customer Account Agreements and related addenda govern cleared derivatives transactions such as futures, options on futures, and cleared OTC derivatives. Cleared derivatives transactions require posting of initial margin as determined by each relevant clearing agency which is segregated at a broker account registered with the CFTC, or the applicable regulator. In the United States, counterparty risk may be reduced as creditors of a futures broker do not have a claim to Fund assets in the segregated account. Portability of exposure reduces risk to the Funds. Variation margin, or changes in market value, are exchanged daily, but may not be netted between futures and cleared OTC derivatives unless the parties have agreed to a separate arrangement in respect of portfolio margining. The market value or accumulated unrealized appreciation (depreciation), initial margin posted, and any unsettled variation margin as of period end is disclosed in the Notes to Schedule of Investments.

 

International Swaps and Derivatives Association, Inc. Master Agreements and Credit Support Annexes (“ISDA Master Agreements”) govern OTC financial derivative transactions entered into by a Fund and select counterparties. ISDA Master Agreements maintain provisions for general obligations, representations, agreements, collateral posting and events of default or termination. Events of termination include conditions that may entitle counterparties to elect to terminate early and cause settlement of all outstanding transactions under the applicable ISDA Master Agreement. Any election to terminate early could be material to the financial statements. In limited circumstances, the ISDA Master Agreement may contain additional provisions that add counterparty protection beyond coverage of existing daily exposure if the counterparty has a decline in credit quality below a predefined level. These amounts, if any, may be segregated with a third-party custodian. The market value of OTC financial derivative instruments, collateral received or pledged, and net exposure by counterparty as of period end are disclosed in the Notes to Schedules of Investments.

 

8. FEES AND EXPENSES

 

(a) Management Fee  Pursuant to the Investment Management Agreement with PIMCO (the “Agreement”), and subject to the supervision of the Board, PIMCO is responsible for providing to each Fund investment guidance and policy direction in connection with the management of the Fund, including oral and written research, analysis,

advice, and statistical and economic data and information. In addition, pursuant to the Agreement and subject to the general supervision of the Board, PIMCO, at its expense, provides or causes to be furnished most other supervisory and administrative services the Funds require, including but not limited to, expenses of most third-party service providers (e.g., audit, custodial, legal, transfer agency, printing) and other expenses, such as those associated with insurance, proxy solicitations and mailings for shareholder meetings, New York Stock Exchange listing and related fees, tax services, valuation services and other services the Funds require for their daily operations.

 

Pursuant to the Agreement, PIMCO receives an annual fee, payable monthly, at the annual rates shown in the table below:

 

Fund Name         Annual
Rate
 

PIMCO Corporate & Income Opportunity Fund

      0.65% (1) 

PIMCO Corporate & Income Strategy Fund

      0.81% (1) 

PIMCO High Income Fund

      0.76% (1) 

PIMCO Income Strategy Fund

      0.86% (2) 

PIMCO Income Strategy Fund II

      0.83% (2) 

 

(1)

Management fees calculated based on the Fund’s average daily net asset value (including daily net assets attributable to any preferred shares of the Fund that may be outstanding).

(2)

Management fees calculated based on the Fund’s average weekly “total managed assets”. Total managed assets includes total assets of each Fund (including any assets attributable to any preferred shares or other forms of leverage that may be outstanding) minus accrued liabilities (other than liabilities representing leverage).

 

(b) Fund Expenses  Each Fund bears other expenses, which may vary and affect the total level of expenses paid by shareholders, such as (i) salaries and other compensation or expenses, including travel expenses of any of the Fund’s executive officers and employees, if any, who are not officers, directors, shareholders, members, partners or employees of PIMCO or its subsidiaries or affiliates; (ii) taxes and governmental fees, if any, levied against the Fund; (iii) brokerage fees and commissions and other portfolio transaction expenses incurred by or for the Fund (including, without limitation, fees and expenses of outside legal counsel or third-party consultants retained in connection with reviewing, negotiating and structuring specialized loan and other investments made by the Fund, subject to specific or general authorization by the Fund’s Board); (iv) expenses of the Fund’s securities lending (if any), including any securities lending agent fees, as governed by a separate securities lending agreement; (v) costs, including interest expense, of borrowing money or engaging in other types of leverage financing, including, without limitation, through the use by the Fund of reverse repurchase agreements, tender option bonds, bank borrowings and credit facilities; (vi) costs, including dividend and/or interest expenses and other costs (including, without limitation, offering and related legal costs, fees to brokers, fees to auction agents, fees to transfer agents, fees to ratings agencies and fees to auditors associated with satisfying ratings agency requirements for preferred shares or other securities issued by the Fund and other

 

 

78   PIMCO CLOSED-END FUNDS     


 

July 31, 2016

 

related requirements in the Fund’s organizational documents) associated with the Fund’s issuance, offering, redemption and maintenance of preferred shares, commercial paper or other senior securities for the purpose of incurring leverage; (vii) fees and expenses of any underlying funds or other pooled investment vehicles in which the Fund invests; (viii) dividend and interest expenses on short positions taken by the Fund; (ix) fees and expenses, including travel expenses, and fees and expenses of legal counsel retained for their benefit, of Trustees who are not officers, employees, partners, shareholders or members of PIMCO or its subsidiaries or affiliates; (x) extraordinary expenses, including extraordinary legal expenses, that may arise, including expenses incurred in connection with litigation, proceedings, other claims, and the legal obligations of the Fund to indemnify its Trustees, officers, employees, shareholders, distributors, and agents with respect thereto; (xi) organizational and offering expenses of the Fund, including with respect to share offerings, such as rights offerings and shelf offerings, following the Fund’s initial offering, and expenses associated with tender offers and other share repurchases and redemptions; and (xii) expenses of the Fund which are capitalized in accordance with U.S. GAAP.

 

Each of the Trustees of the Funds who is not an “interested person” under Section 2(a)(19) of the Act, (the “Independent Trustees”) also serves as a trustee of a number of other closed-end funds for which PIMCO serves as investment manager (together with the Funds, the “PIMCO Closed-End Funds”), as well as PIMCO Managed Accounts Trust, an open-end investment company with multiple series for which PIMCO serves as investment adviser and administrator (“PMAT” and, together with the PIMCO Closed-End Funds, the “PIMCO-Managed Funds”). In addition, each of the Independent Trustees also serves as a trustee of certain investment companies (together, the “Allianz-Managed Funds”), for which Allianz Global Investors Fund Management (“AGIFM”), an affiliate of PIMCO that served as the investment manager of the PIMCO Managed Funds prior to the close of business on September 5, 2014, serves as investment adviser.

 

Each Independent Trustee currently receives annual compensation of $225,000 for his or her service on the Boards of the PIMCO-Managed Funds, payable quarterly. The Independent Chairman of the Boards receives an additional $75,000 per year, payable quarterly. The Audit Oversight Committee Chairman receives an additional $50,000 annually, payable quarterly. Trustees are also reimbursed for meeting-related expenses.

Each Trustee’s compensation for his or her service as a Trustee on the Boards of the PIMCO Managed Funds and other costs in connection with joint meetings of such Funds are allocated among the PIMCO-Managed Funds, as applicable, on the basis of fixed percentages between PMAT and the PIMCO Closed-End Funds. Trustee compensation and other costs will then be further allocated pro rata among the individual PIMCO-Managed Funds within each grouping based on each such PIMCO-Managed Fund’s relative net assets.

 

9. RELATED PARTY TRANSACTIONS

 

The Manager is a related party. Fees payable to this party are disclosed in Note 8 and the accrued related party fee amounts are disclosed on the Statements of Assets and Liabilities.

 

Certain Funds are permitted to purchase or sell securities from or to certain related affiliated funds under specified conditions outlined in procedures adopted by the Board. The procedures have been designed to ensure that any purchase or sale of securities by the Funds from or to another fund or portfolio that are, or could be, considered an affiliate by virtue of having a common investment adviser (or affiliated investment advisers), common Trustees and/or common officers complies with Rule 17a-7 of the Act. Further, as defined under the procedures, each transaction is effected at the current market price. During the period ended July 31, 2016, as indicated below, the Funds below engaged in purchases and sales of securities pursuant to Rule 17a-7 of the Act (amounts in thousands):

 

          Purchases     Sales  

PIMCO Corporate & Income Opportunity Fund

    $     49,790      $     112,303   

PIMCO Corporate & Income Strategy Fund

      43,630        72,254   

PIMCO High Income Fund

      49,957        185,183   

PIMCO Income Strategy Fund

      9,879        25,563   

PIMCO Income Strategy Fund II

      23,019        44,148   

 

10. GUARANTEES AND INDEMNIFICATIONS

 

Under each Fund’s organizational documents, each Trustee and officer is indemnified, to the extent permitted by the Act, against certain liabilities that may arise out of performance of their duties to the Funds. Additionally, in the normal course of business, the Funds enter into contracts that contain a variety of indemnification clauses. The Funds’ maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Funds that have not yet occurred. However, the Funds have not had prior claims or losses pursuant to these contracts.

 

 

11. PURCHASES AND SALES OF SECURITIES

 

The length of time a Fund has held a particular security is not generally a consideration in investment decisions. A change in the securities held by a Fund is known as “portfolio turnover.” Each Fund may engage in frequent and active trading of portfolio securities to achieve its investment objective, particularly during periods of volatile market movements. High portfolio turnover involves correspondingly greater transaction costs to a Fund, including brokerage commissions or dealer mark-ups and other transaction costs on the sale of securities and reinvestments in other

 

  ANNUAL REPORT   JULY 31, 2016   79


Notes to Financial Statements (Cont.)

 

securities. Such sales may also result in realization of taxable capital gains, including short-term capital gains (which are generally taxed at ordinary income tax rates). The transaction costs and tax effects associated with portfolio turnover may adversely affect a Fund’s performance. The portfolio turnover rates are reported in the Financial Highlights.

 

Purchases and sales of securities (excluding short-term investments) for the period ended July 31, 2016, as indicated below, were as follows (amounts in thousands):

 

          U.S. Government/Agency     All Other  
Fund Name         Purchases     Sales     Purchases     Sales  

PIMCO Corporate & Income Opportunity Fund

    $   57,454      $   60,734      $   502,323      $   458,064   

PIMCO Corporate & Income Strategy Fund

      11,259        6,302        370,850        262,098   

PIMCO High Income Fund

      22,482        15,155        422,775        476,563   

PIMCO Income Strategy Fund

      7,174        4,696        137,336        116,623   

PIMCO Income Strategy Fund II

      24,758        19,509        288,512        234,615   
         

 

12. AUCTION-RATE PREFERRED SHARES

 

Each series of Auction-Rate Preferred Shares (“ARPS”) outstanding of each Fund has a liquidation preference of $25,000 per share plus any accumulated, unpaid dividends. Dividends are accumulated daily at an annual rate that is typically re-set every seven days through auction procedures (or through default procedures in the event of failed auctions). Distributions of net realized capital gains, if any, are paid annually.

 

For the reporting period ended July 31, 2016, the annualized dividend rates on the ARPS ranged from:

 

Fund Name         Shares
Issued and
Outstanding
    High     Low     As of
July 31, 2016
 

PIMCO Corporate & Income Opportunity Fund

         

Series M

      1,884        0.822%        0.160%        0.762%   

Series T

      1,770        0.842%        0.160%        0.762%   

Series W

      1,847        0.842%        0.140%        0.762%   

Series TH

      2,033        0.842%        0.120%        0.842%   

Series F

      1,984        0.822%        0.160%        0.722%   

PIMCO Corporate & Income Strategy Fund

         

Series M

      406        0.617%        0.120%        0.572%   

Series T

      449        0.632%        0.120%        0.572%   

Series W

      473        0.632%        0.105%        0.572%   

Series TH

      434        0.632%        0.090%        0.632%   

Series F

      459        0.617%        0.120%        0.542%   

PIMCO High Income Fund

         

Series M

      688        0.658%        0.128%        0.610%   

Series T

      958        0.674%        0.128%        0.610%   

Series W

      738        0.674%        0.112%        0.610%   

Series TH

      757        0.674%        0.096%        0.674%   

Series F

      938        0.658%        0.128%        0.578%   

PIMCO Income Strategy Fund

         

Series T

      766        1.689%        1.400%        1.689%   

Series W

      699        1.689%        1.400%        1.689%   

Series TH

      586        1.690%        1.399%        1.689%   

PIMCO Income Strategy Fund II

         

Series M

      721        1.690%        1.399%        1.687%   

Series T

      881        1.689%        1.400%        1.689%   

Series W

      671        1.689%        1.400%        1.689%   

Series TH

      753        1.690%        1.399%        1.689%   

Series F

      672        1.696%        1.401%        1.696%   

 

80   PIMCO CLOSED-END FUNDS     


 

July 31, 2016

 

 

Each Fund is subject to certain limitations and restrictions while ARPS are outstanding. Failure to comply with these limitations and restrictions could preclude a Fund from declaring or paying any dividends or distributions to common shareholders or repurchasing common shares and/or could trigger the mandatory redemption of ARPS at their liquidation preference plus any accumulated, unpaid dividends.

 

Preferred shareholders of each Fund, who are entitled to one vote per share, generally vote together with the common shareholders of the Fund but vote separately as a class to elect two Trustees of the Fund and on certain matters adversely affecting the rights of the ARPS.

 

Since mid-February 2008, holders of ARPS issued by the Funds have been directly impacted by a lack of liquidity, which has similarly affected ARPS holders in many of the nation’s closed-end funds. Since then, regularly scheduled auctions for ARPS issued by the Funds have consistently “failed” because of insufficient demand (bids to buy shares) to meet the supply (shares offered for sale) at each auction. In a failed auction, ARPS holders cannot sell all, and may not be able to sell any, of their shares tendered for sale. While repeated auction failures have affected the liquidity for ARPS, they do not constitute a default or automatically alter the credit quality of the ARPS, and ARPS holders have continued to receive dividends at the defined “maximum rate,” as defined in the table below:

 

Fund Name              Applicable %              Reference Rate            Maximum Rate  

PIMCO Corporate & Income Opportunity Fund

           200%         x       7-day “AA” Financial Composite
Commercial Paper Rates
     =         Maximum Rate for PTY   

PIMCO Corporate & Income Strategy Fund

           150%         x       7-day “AA” Financial Composite
Commercial Paper Rates
     =         Maximum Rate for PCN   

PIMCO High Income Fund

           160%         x       7-day “AA” Financial Composite
Commercial Paper Rates
     =         Maximum Rate for PHK   

PIMCO Income Strategy Fund (1)

 

The higher of

      

 

150%

 

1.25%

  

  

    

 

x

 

+

  

  

   7-Day USD LIBOR

OR

7-Day USD LIBOR

    

 

=

 

=

  

  

     Maximum Rate for PFL   

PIMCO Income Strategy Fund II (1)

 

The higher of

      

 

150%

 

1.25%

  

  

    

 

x

 

+

  

  

   7-Day USD LIBOR

OR

7-Day USD LIBOR

    

 

=

 

=

  

  

     Maximum Rate for PFN   

 

(1) 

The Maximum Rate is the higher of a) the product of the Applicable % and Reference Rate or b) 1.25% plus the Reference Rate.

 

The maximum rate is a function of short-term interest rates and is typically higher than the rate that would have otherwise been set through a successful auction. If the Funds’ ARPS auctions continue to fail and the “maximum rate” payable on the ARPS rises as a result of changes in short-term interest rates, returns for the Fund’s common shareholders could be adversely affected.

 

On October 16, 2015, PIMCO Corporate & Income Strategy Fund and PIMCO High Income Fund each commenced a voluntary tender offer for up to 100% of its outstanding ARPS at a price equal to a percentage of the ARPS’ per share liquidation preference and any unpaid dividends accrued through the expiration of the tender offers (each, a “Tender Offer” and, together, the “Tender Offers”). The price and per share liquidation preference for PIMCO Corporate & Income Strategy Fund and PIMCO High Income Fund can be found in the table below.

 

On November 20, 2015 PIMCO Corporate & Income Strategy Fund and PIMCO High Income Fund, announced the expiration and results of the Tender Offers. PIMCO Corporate & Income Strategy Fund and PIMCO High Income Fund accepted for payment 4,539 and 7,601 ARPS, respectively, which represented approximately 67% and 65%, respectively, of their outstanding ARPS. The ARPS of PIMCO Corporate & Income Strategy Fund and PIMCO High Income Fund that were not tendered remain outstanding.

 

Details of the ARPS tendered and not withdrawn per series for the period ended July 31, 2016 are provided in the table below:

 

Fund Name         Liquidation
Preference
Per Share
    Tender Offer
Price
Per Share
    Price
Percentage
    Cash
Exchanged for
ARPS
Tendered
    ARPS
Outstanding
as of 07/31/2015
    ARPS
Tendered
    ARPS
Outstanding
after Tender Offer
as of 07/31/2016
 

PIMCO Corporate & Income Strategy Fund

               

Series M

    $     25,000      $     20,625        82.5   $     19,511,250        1,352        946        406   

Series T

      25,000        20,625        82.5        18,624,375        1,352        903        449   

Series W

      25,000        20,625        82.5        18,129,375        1,352        879        473   

Series TH

      25,000        20,625        82.5        18,933,750        1,352        918        434   

Series F

      25,000        20,625        82.5        18,418,125        1,352        893        459   
                                93,616,875        6,760        4,539        2,221   

 

  ANNUAL REPORT   JULY 31, 2016   81


Notes to Financial Statements (Cont.)

 

Fund Name         Liquidation
Preference
Per Share
    Tender Offer
Price
Per Share
    Price
Percentage
    Cash
Exchanged for
ARPS
Tendered
    ARPS
Outstanding
as of 07/31/2015
    ARPS
Tendered
    ARPS
Outstanding
after Tender Offer
as of 07/31/2016
 

PIMCO High Income Fund

               

Series M

    $     25,000      $     20,750        83.0   $ 34,196,000        2,336        1,648        688   

Series T

      25,000        20,750        83.0        28,593,500        2,336        1,378        958   

Series W

      25,000        20,750        83.0        33,158,500        2,336        1,598        738   

Series TH

      25,000        20,750        83.0        32,764,250        2,336        1,579        757   

Series F

      25,000        20,750        83.0        29,008,500        2,336        1,398        938   
                                    157,720,750        11,680        7,601        4,079   

 

13. REGULATORY AND LITIGATION MATTERS

 

The Funds are not named as defendants in any material litigation or arbitration proceedings and are not aware of any material litigation or claim pending or threatened against them.

 

PIMCO has received a Wells Notice from the staff of the SEC that relates to the PIMCO Total Return Active Exchange-Traded Fund (“BOND”), a series of PIMCO ETF Trust. The notice indicates the staff’s preliminary determination to recommend that the SEC commence a civil action against PIMCO stemming from a non-public investigation relating to BOND. A Wells Notice is neither a formal allegation of wrongdoing nor a finding that any law was violated.

 

This matter principally pertains to the valuation of smaller sized positions in non-agency mortgage-backed securities purchased by BOND between its inception on February 29, 2012 and June 30, 2012, BOND’s performance disclosures for that period, and PIMCO’s compliance policies and procedures related to these matters.

 

The Wells process provides PIMCO with the opportunity to demonstrate to the SEC staff why it believes its conduct was appropriate, in keeping with industry standards, and that no action should be taken. PIMCO believes that this matter is unlikely to have a material adverse effect on any Fund or on PIMCO’s ability to provide investment management services to any Fund.

 

The foregoing speaks only as of the date of this report.

14. FEDERAL INCOME TAX MATTERS

 

Each Fund intends to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code (the “Code”) and distribute all of its taxable income and net realized gains, if applicable, to shareholders. Accordingly, no provision for federal income taxes has been made.

 

The Funds may be subject to local withholding taxes, including those imposed on realized capital gains. Any applicable foreign capital gains tax is accrued daily based upon net unrealized gains, and may be payable following the sale of any applicable investments.

 

In accordance with U.S. GAAP, the Manager has reviewed the Funds’ tax positions for all open tax years. As of July 31, 2016, the Funds have recorded no liability for net unrecognized tax benefits relating to uncertain income tax positions they have taken or expect to take in future tax returns.

 

Each Fund files U.S. tax returns. While the statute of limitations remains open to examine the Funds’ U.S. tax returns filed for the fiscal years from 2013-2015, no examinations are in progress or anticipated at this time. The Funds are not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly change in the next twelve months.

 

 

As of July 31, 2016, the components of distributable taxable earnings are as follows (amounts in thousands):

 

          Undistributed
Ordinary
Income  (1)
    Undistributed
Long-Term
Capital Gains
    Net Tax Basis
Unrealized
Appreciation/
(Depreciation) (2)
    Other
Book-to-Tax
Accounting
Differences (3)
    Accumulated
Capital
Losses  (4)
    Qualified
Late-Year Loss
Deferral —
Capital (5)
    Qualified
Late-Year Loss
Deferral —
Ordinary (6)
 

PIMCO Corporate & Income Opportunity Fund

    $   24,543      $   0      $   119,380      $   (10,520   $   (221,288   $   0      $   0   

PIMCO Corporate & Income
Strategy Fund

      14,760        0        53,142        (4,832     (80,651     0        0   

PIMCO High Income Fund

      0        0        23,889        (13,727     (663,292     0        0   

PIMCO Income Strategy Fund

      4,449        0        27,397        (2,656     (182,321     0        0   

PIMCO Income Strategy Fund II

      12,919        0        67,218        (5,129     (468,842     0        0   

 

 

A zero balance may reflect actual amounts rounding to less than one thousand.

(1) 

Includes undistributed short-term capital gains, if any.

(2) 

Adjusted for open wash sale loss deferrals and accelerated recognition of unrealized gain or loss on certain forward contracts for federal income tax purposes. Also adjusted for differences between book and tax realized and unrealized gain/loss on swap contracts, market discount and premium amortization, paydown adjustments, convertible preferred securities and Lehman securities.

 

82   PIMCO CLOSED-END FUNDS     


July 31, 2016

 

(3) 

Represents differences in income tax regulations and financial accounting principles generally accepted in the United States of America, mainly for straddle loss deferrals and distributions payable at fiscal year-end.

(4) 

Capital losses available to offset future net capital gains expire in varying amounts in the years shown below.

(5) 

Capital losses realized during the period November 1, 2015 through July 31, 2016 which the Funds elected to defer to the following taxable year pursuant to income tax regulations.

(6) 

Specified losses realized during the period November 1, 2015 through July 31, 2016 and Ordinary losses realized during the period January 1, 2016 through July 31, 2016, which the Funds elected to defer to the following taxable year pursuant to income tax regulations.

 

The Funds will resume capital gain distributions in the future to the extent gains are realized in excess of accumulated capital losses.

As of July 31, 2016, the Funds had accumulated capital losses expiring in the following years (amounts in thousands):

 

          Expiration of Accumulated Capital Losses  
          7/31/2017     7/31/2018     7/31/2019  

PIMCO Corporate & Income Opportunity Fund

    $ 0      $ 0      $   0   

PIMCO Corporate & Income Strategy Fund

      0        0        0   

PIMCO High Income Fund

        488,807        0        0   

PIMCO Income Strategy Fund

      21,867          106,315        0   

PIMCO Income Strategy Fund II

      67,542        277,492        0   

 

 

A zero balance may reflect actual amounts rounding to less than one thousand.

 

Under the Regulated Investment Company Modernization Act of 2010, a fund is permitted to carry forward any new capital losses for an unlimited period. Additionally, such capital losses that are carried forward will retain their character as either short-term or long-term capital losses rather than being considered all short-term under previous law.

 

As of July 31, 2016, the Funds had the following post-effective capital losses with no expiration (amounts in thousands):

 

          Short-Term     Long-Term  

PIMCO Corporate & Income Opportunity Fund

    $   221,288      $   0   

PIMCO Corporate & Income Strategy Fund

      80,651        0   

PIMCO High Income Fund

      174,485        0   

PIMCO Income Strategy Fund

      54,139        0   

PIMCO Income Strategy Fund II

      123,808        0   

 

 

A zero balance may reflect actual amounts rounding to less than one thousand.

 

As of July 31, 2016, the aggregate cost and the net unrealized appreciation/(depreciation) of investments for federal income tax purposes are as follows (amounts in thousands):

 

          Federal Tax
Cost
    Unrealized
Appreciation
    Unrealized
(Depreciation)
    Net Unrealized
Appreciation/
(Depreciation) (7)
 

PIMCO Corporate & Income Opportunity Fund

    $   1,283,624      $   57,194      $ (69,572   $ (12,378

PIMCO Corporate & Income Strategy Fund

      709,393        24,843          (46,470       (21,627

PIMCO High Income Fund

      1,115,439        67,663        (98,477     (30,814

PIMCO Income Strategy Fund

      340,226        13,469        (23,938     (10,469

PIMCO Income Strategy Fund II

      718,063        32,464        (55,547     (23,083

 

(7) 

Primary differences, if any, between book and tax net unrealized appreciation/(depreciation) on investments are attributable to open wash sale loss deferrals, market discount and premium amortization, convertible preferred securities, paydown adjustments and Lehman securities for federal income tax purposes.

 

  ANNUAL REPORT   JULY 31, 2016   83


Notes to Financial Statements (Cont.)

 

July 31, 2016

 

 

For the fiscal year ended July 31, 2016 and each Fund’s respective previous fiscal year ends, the Funds made the following tax basis distributions (amounts in thousands):

 

          Year Ended July 31, 2016          

Period from December 1, 2014

to July 31, 2015

          Year Ended November 30, 2014  
          Ordinary
Income
Distributions (8)
    Long-Term
Capital Gain
Distributions
    Return of
Capital (9)
          Ordinary
Income
Distributions (8)
    Long-Term
Capital Gain
Distributions
    Return of
Capital (9)
          Ordinary
Income
Distributions (8)
    Long-Term
Capital Gain
Distributions
    Return of
Capital (9)
 

PIMCO Corporate & Income Opportunity Fund

    $   114,208      $   0      $ 0        $   119,345      $   0      $ 0        $   109,212      $   127,651      $   0   
          Year Ended July 31, 2016          

Period from November 1, 2014

to July 31, 2015

          Year Ended October 31, 2014  
          Ordinary
Income
Distributions (8)
    Long-Term
Capital Gain
Distributions
    Return of
Capital (9)
          Ordinary
Income
Distributions (8)
    Long-Term
Capital Gain
Distributions
    Return of
Capital (9)
          Ordinary
Income
Distributions (8)
    Long-Term
Capital Gain
Distributions
    Return of
Capital (9)
 

PIMCO Corporate & Income Strategy Fund

    $ 53,284      $ 0      $ 0        $ 52,804      $ 0      $ 0        $ 51,814      $ 36,417      $ 0   
          Year Ended July 31, 2016          

Period from April 1, 2015

to July 31, 2015

          Year Ended March 31, 2015  
          Ordinary
Income
Distributions (8)
    Long-Term
Capital Gain
Distributions
    Return of
Capital (9)
          Ordinary
Income
Distributions (8)
    Long-Term
Capital Gain
Distributions
    Return of
Capital (9)
          Ordinary
Income
Distributions (8)
    Long-Term
Capital Gain
Distributions
    Return of
Capital (9)
 

PIMCO High Income Fund

    $ 150,015      $ 0      $   9,562        $ 41,802      $ 0      $   19,452        $ 182,636      $ 0      $ 0   
          Year Ended July 31, 2016           Year Ended July 31, 2015              
          Ordinary
Income
Distributions (8)
    Long-Term
Capital Gain
Distributions
    Return of
Capital (9)
          Ordinary
Income
Distributions (8)
    Long-Term
Capital Gain
Distributions
    Return of
Capital (9)
                         

PIMCO Income Strategy Fund

    $ 28,121      $ 0      $ 0              $ 31,650      $ 0      $ 0           

PIMCO Income Strategy Fund II

      62,313        0        0          67,376        0        0           

 

 

A zero balance may reflect actual amounts rounding to less than one thousand.

(8) 

Includes short-term capital gains distributed, if any.

(9) 

A portion of the distributions made represents a tax return of capital. Return of capital distributions have been reclassified from undistributed net investment income to paid-in capital to more appropriately conform financial accounting to tax accounting.

 

15. SUBSEQUENT EVENTS

 

In preparing these financial statements, the Funds’ management has evaluated events and transactions for potential recognition or disclosure through the date the financial statements were issued.

 

On August 1, 2016, the following distributions were declared to common shareholders payable September 1, 2016 to shareholders of record on August 11, 2016:

 

PIMCO Corporate & Income Opportunity Fund

    $   0.13000 per common share   

PIMCO Corporate & Income Strategy Fund

    $ 0.11250 per common share   

PIMCO High Income Fund

    $ 0.10346 per common share   

PIMCO Income Strategy Fund

    $ 0.09000 per common share   

PIMCO Income Strategy Fund II

    $ 0.08000 per common share   

On September 1, 2016, the following distributions were declared to common shareholders payable October 3, 2016 to shareholders of record on September 12, 2016:

 

PIMCO Corporate & Income Opportunity Fund

    $   0.13000 per common share   

PIMCO Corporate & Income Strategy Fund

    $ 0.11250 per common share   

PIMCO High Income Fund

    $ 0.10346 per common share   

PIMCO Income Strategy Fund

    $ 0.09000 per common share   

PIMCO Income Strategy Fund II

    $ 0.08000 per common share   

 

There were no other subsequent events identified that require recognition or disclosure.

 

 

84   PIMCO CLOSED-END FUNDS     


Report of Independent Registered Public Accounting Firm

 

 

To the Shareholders and Board of Trustees of PIMCO Corporate & Income Opportunity Fund, PIMCO Corporate & Income Strategy Fund, PIMCO High Income Fund, PIMCO Income Strategy Fund, and PIMCO Income Strategy Fund II

 

In our opinion, the accompanying statements of assets and liabilities, including the schedules of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of PIMCO Corporate & Income Opportunity Fund, PIMCO Corporate & Income Strategy Fund, PIMCO High Income Fund, PIMCO Income Strategy Fund and PIMCO Income Strategy Fund II (hereafter referred to as the “Funds”) at July 31, 2016, the results of each of their operations, the changes in each of their net assets, and the financial highlights of the Funds for each of the periods presented, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as “financial statements”) are the responsibility of the Funds’ management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at July 31, 2016 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion.

 

PricewaterhouseCoopers LLP

Kansas City, Missouri

 

September 23, 2016

 

  ANNUAL REPORT   JULY 31, 2016   85


Glossary: (abbreviations that may be used in the preceding statements)

 

(Unaudited)

 

Counterparty Abbreviations:

AZD  

Australia and New Zealand Banking Group

  GST  

Goldman Sachs International

  NAB  

National Australia Bank Ltd.

BCY  

Barclays Capital, Inc.

  HUS  

HSBC Bank USA N.A.

  RBC  

Royal Bank of Canada

BOA  

Bank of America N.A.

  JML  

JPMorgan Securities PLC

  RDR  

RBC Capital Markets

BOS  

Banc of America Securities LLC

  JPM  

JPMorgan Chase Bank N.A.

  SAL  

Citigroup Global Markets, Inc.

BPS  

BNP Paribas S.A.

  JPS  

JPMorgan Securities, Inc.

  SCX  

Standard Chartered Bank

BRC  

Barclays Bank PLC

  MBC  

HSBC Bank PLC

  SSB  

State Street Bank and Trust Co.

CBK  

Citibank N.A.

  MEI  

Merrill Lynch International

  TOR  

Toronto Dominion Bank

DEU  

Deutsche Bank Securities, Inc.

  MSB  

Morgan Stanley Bank N.A.

  UAG  

UBS AG Stamford

DUB  

Deutsche Bank AG

  MSC  

Morgan Stanley & Co., Inc.

  UBS  

UBS Securities LLC

GLM  

Goldman Sachs Bank USA

  MYC  

Morgan Stanley Capital Services, Inc.

   

Currency Abbreviations:

AUD  

Australian Dollar

  GBP  

British Pound

  MXN  

Mexican Peso

BRL  

Brazilian Real

  JPY  

Japanese Yen

  USD (or $)  

United States Dollar

EUR  

Euro

       

Index/Spread Abbreviations:

ABX.HE  

Asset-Backed Securities Index - Home Equity

  CDX.HY  

Credit Derivatives Index - High Yield

  CDX.IG  

Credit Derivatives Index - Investment Grade

Municipal Bond or Agency Abbreviations:

AGM  

Assured Guaranty Municipal

  NPFGC  

National Public Finance Guarantee Corp.

   

Other Abbreviations:

ABS  

Asset-Backed Security

  BBSW  

Bank Bill Swap Reference Rate

  CLO  

Collateralized Loan Obligation

ALT  

Alternate Loan Trust

  CBO  

Collateralized Bond Obligation

  LIBOR  

London Interbank Offered Rate

BABs  

Build America Bonds

  CDI  

Brazil Interbank Deposit Rate

  PIK  

Payment-in-Kind

BBR  

Bank Bill Rate

  CDO  

Collateralized Debt Obligation

   

 

86   PIMCO CLOSED-END FUNDS     


Federal Income Tax Information

 

(Unaudited)

 

As required by the Internal Revenue Code (the "Code") and Treasury Regulations, if applicable, shareholders must be notified within 60 days of the Funds' fiscal year end regarding the status of qualified dividend income and the dividend received deduction.

 

Dividend Received Deduction.  Corporate shareholders are generally entitled to take the dividend received deduction on the portion of a Fund's dividend distribution that qualifies under tax law. The percentage of the following Funds' fiscal 2016 ordinary income dividend that qualifies for the corporate dividend received deduction is set forth in the table below.

 

Qualified Dividend Income.  Under the Jobs and Growth Tax Relief Reconciliation Act of 2003 (the "Act"), the percentage of ordinary dividends paid during the calendar year designated as "qualified dividend income", as defined in the Act, subject to reduced tax rates in 2016 is set forth for each Fund in the table below.

 

Qualified Interest Income and Qualified Short-Term Capital Gain (for non-U.S. resident shareholders only).  Under the American Jobs Creation Act of 2004, the amounts of ordinary dividends paid during the fiscal year ended July 31, 2016 considered to be derived from “qualified interest income,” as defined in Section 871(k)(1)(E) of the Code, and therefore designated as interest-related dividends, as defined in Section 871(k)(1)(C) of the Code are set forth in the table below. Further, the amounts of ordinary dividends paid during the fiscal year ended July 31, 2016 considered to be derived from “qualified short-term capital gain,” as defined in Section 871(k)(2)(D) of the Code, and therefore designated as qualified short-term gain dividends, as defined by Section 871(k)(2)(C) of the Code.

 

            Dividend
Received
Deduction
%
     Qualified
Dividend
Income
%
     Qualified
Interest
Income
(000s†)
     Qualified
Short-Term
Capital Gain
(000s†)
 

PIMCO Corporate & Income Opportunity Fund

        0.00%         2.26%       $     62,181       $     0   

PIMCO Corporate & Income Strategy Fund

        0.00%         3.22%         35,859         0   

PIMCO High Income Fund

        0.00%         0.73%         71,775         0   

PIMCO Income Strategy Fund

        0.00%         3.43%         14,539         0   

PIMCO Income Strategy Fund II

        0.00%         3.31%         31,473         0   

 

A zero balance may reflect actual amounts rounding to less than one thousand.

 

Shareholders are advised to consult their own tax advisor with respect to the tax consequences of their investment in the Trust. In January 2017, you will be advised on IRS Form 1099-DIV as to the federal tax status of the dividends and distributions received by you in calendar year 2016.

 

  ANNUAL REPORT   JULY 31, 2016   87


Shareholder Meeting Results

 

(Unaudited)

 

Annual Shareholder Meeting Results

 

PIMCO Corporate & Income Opportunity Fund and PIMCO Corporate & Income Strategy Fund held their annual meetings of shareholders on April 29, 2016. Shareholders voted as indicated below:

 

PIMCO Corporate & Income Opportunity Fund         Affirmative     Withheld
Authority
 

Re-election of Hans W. Kertess — Class I to serve until the annual meeting held during the 2018-2019 fiscal year

      60,870,664        2,369,151   

Re-election of William B. Ogden, IV — Class I to serve until the annual Meeting held during the 2018-2019 fiscal year

      60,842,399        2,397,416   

Re-election of Alan Rappaport* — Class I to serve until the annual Meeting held during the 2018-2019 fiscal year

      4,274        35   

 

The other members of the Board of Trustees at the time of the meeting, namely, Ms. Deborah A. DeCotis and Messrs. Bradford K. Gallagher, James A. Jacobson, Craig A. Dawson and John C. Maney continued to serve as Trustees of the Fund.

 

* Preferred Shares Trustee

 

PIMCO Corporate & Income Strategy Fund         Affirmative     Withheld
Authority
 

Re-election of Deborah A. DeCotis — Class II to serve until the annual Meeting for the 2018-2019 fiscal year

      32,574,343        1,195,760   

Re-election of James A. Jacobson* — Class II to serve until the annual Meeting held during the 2018-2019 fiscal year

      1,839        32   

 

The other members of the Board of Trustees at the time of the meeting, namely, Messrs. Hans W. Kertess, Bradford K. Gallagher, Alan Rappaport, William B. Ogden, IV, Craig A. Dawson and John C. Maney continued to serve as Trustees of the Fund.

 

* Preferred Shares Trustee

 

PIMCO Income Strategy Fund, PIMCO Income Strategy Fund II and PIMCO High Income Fund held their annual meetings of shareholders on June 30, 2016. Shareholders voted as indicated below.

 

PIMCO Income Strategy Fund         Affirmative     Withheld
Authority
 

Re-election of Craig A. Dawson† — Class III to serve until the annual Meeting held during the 2018-2019 fiscal year

      22,177,896        551,387   

Re-election of John C. Maney† — Class III to serve until the annual Meeting held during the 2018-2019 fiscal year

      22,179,762        549,521   

Re-election of Bradford K. Gallagher — Class III to serve until the annual Meeting held during the 2018-2019 fiscal year

      22,156,490        572,793   

 

The other members of the Board of Trustees at the time of the meeting, namely, Ms. Deborah A. DeCotis and Messrs. Hans W. Kertess, James A. Jacobson, William B. Ogden, IV and Alan Rappaport continued to serve as Trustees of the Fund.

 

Interested Trustee

 

PIMCO High Income Fund         Affirmative     Withheld
Authority
 

Re-election of Hans W. Kertess — Class I to serve until the annual Meeting held during the 2018-2019 fiscal year

      103,879,389        4,609,922   

Re-election of William B. Ogden, IV — Class I to serve until the annual Meeting held during the 2018-2019 fiscal year

      103,941,144        4,548,167   

Re-election of Alan Rappaport* — Class I to serve until the annual Meeting held during the 2018-2019 fiscal year

      2,307        61   

 

The other members of the Board of Trustees at the time of the meeting, namely, Ms. Deborah A. DeCotis and Messrs. Bradford K. Gallagher, James A. Jacobson, John C. Maney and Craig A. Dawson continued to serve as Trustees of the Fund.

 

* Preferred Shares Trustee

 

PIMCO Income Strategy Fund II         Affirmative     Withheld
Authority
 

Re-election of Deborah A. DeCotis — Class II to serve until the annual Meeting held during the 2018-2019 fiscal year

      50,931,767        1,622,684   

Re-election of Bradford K. Gallagher* — Class II to serve until the annual Meeting held during the 2018-2019 fiscal year

      3,502        31   

 

The other members of the Board of Trustees at the time of the meeting, namely, Messrs. Hans W. Kertess, James A. Jacobson, William B. Ogden, IV, Alan Rappaport, Craig A. Dawson and John C. Maney continued to serve as Trustees of the Fund.

 

* Preferred Shares Trustee

 

88   PIMCO CLOSED-END FUNDS     


Investment Strategy Updates

 

(Unaudited)

 

Effective October 6, 2015, each Fund adopted the following non-fundamental investment policy:

 

The staff of the SEC has taken the position that purchased OTC options and the assets used as cover for written OTC options should generally be treated as illiquid. However, the staff of the SEC has also taken the position that the determination of whether a particular instrument is liquid should be made under guidelines and standards established by a fund’s board of trustees/directors. The SEC staff has provided examples of factors that may be taken into account in determining whether a

particular instrument should be treated as liquid. Pursuant to policies adopted by the Fund’s Board of Trustees, purchased OTC options and the assets used as cover for OTC options written by a Fund may be treated as liquid under certain circumstances, such as when PIMCO has the contractual right to terminate or close out the OTC option on behalf of a Fund within seven days. These policies are not fundamental policies of the Funds and may be changed or modified by the Board of Trustees without the approval of shareholders, provided that any such change or modification will be consistent with applicable positions of the SEC staff.

 

 

  ANNUAL REPORT   JULY 31, 2016   89


Dividend Reinvestment Plan

 

Each Fund has adopted a Dividend Reinvestment Plan (the “Plan”) which allows common shareholders to reinvest Fund distributions in additional common shares of the Fund. American Stock Transfer & Trust Company, LLC (the “Plan Agent”) serves as agent for common shareholders in administering the Plan. It is important to note that participation in the Plan and automatic reinvestment of Fund distributions does not ensure a profit, nor does it protect against losses in a declining market.

 

Automatic enrollment/voluntary participation  Under the Plan, common shareholders whose shares are registered with the Plan Agent (“registered shareholders”) are automatically enrolled as participants in the Plan and will have all Fund distributions of income, capital gains and returns of capital (together, “distributions”) reinvested by the Plan Agent in additional common shares of a Fund, unless the shareholder elects to receive cash. Registered shareholders who elect not to participate in the Plan will receive all distributions in cash paid by check and mailed directly to the shareholder of record (or if the shares are held in street or other nominee name, to the nominee) by the Plan Agent. Participation in the Plan is voluntary. Participants may terminate or resume their enrollment in the Plan at any time without penalty by notifying the Plan Agent online at www.amstock.com, by calling (844) 33PIMCO (844-337-4626), by writing to the Plan Agent, American Stock Transfer & Trust Company, LLC, at P.O. Box 922, Wall Street Station, New York, NY 10269-0560, or, as applicable, by completing and returning the transaction form attached to a Plan statement. A proper notification will be effective immediately and apply to each Fund’s next distribution if received by the Plan Agent at least three (3) days prior to the record date for the distribution; otherwise, a notification will be effective shortly following the Fund’s next distribution and will apply to the Fund’s next succeeding distribution thereafter. If you withdraw from the Plan and so request, the Plan Agent will arrange for the sale of your shares and send you the proceeds, minus a transaction fee and brokerage commissions.

 

How shares are purchased under the Plan  For each Fund distribution, the Plan Agent will acquire common shares for participants either (i) through receipt of newly issued common shares from each Fund (“newly issued shares”) or (ii) by purchasing common shares of the Fund on the open market (“open market purchases”). If, on a distribution payment date, the net asset value per common shares of each Fund (“NAV”) is equal to or less than the market price per common shares plus estimated brokerage commissions (often referred to as a “market premium”), the Plan Agent will invest the distribution amount on behalf of participants in newly issued shares at a price equal to the greater of (i) NAV or (ii) 95% of the market price per common share on the payment date. If the NAV is greater than the

market price per common shares plus estimated brokerage commissions (often referred to as a “market discount”) on a distribution payment date, the Plan agent will instead attempt to invest the distribution amount through open market purchases. If the Plan Agent is unable to invest the full distribution amount in open market purchases, or if the market discount shifts to a market premium during the purchase period, the Plan Agent will invest any un-invested portion of the distribution in newly issued shares at a price equal to the greater of (i) NAV or (ii) 95% of the market price per share as of the last business day immediately prior to the purchase date (which, in either case, may be a price greater or lesser than the NAV per common shares on the distribution payment date). No interest will be paid on distributions awaiting reinvestment. Under the Plan, the market price of common shares on a particular date is the last sales price on the exchange where the shares are listed on that date or, if there is no sale on the exchange on that date, the mean between the closing bid and asked quotations for the shares on the exchange on that date.

 

The NAV per common share on a particular date is the amount calculated on that date (normally at the close of regular trading on the New York Stock Exchange) in accordance with each Fund’s then current policies.

 

Fees and expenses  No brokerage charges are imposed on reinvestments in newly issued shares under the Plan. However, all participants will pay a pro rata share of brokerage commissions incurred by the Plan Agent when it makes open market purchases. There are currently no direct service charges imposed on participants in the Plan, although each Fund reserves the right to amend the Plan to include such charges. The Plan Agent imposes a transaction fee (in addition to brokerage commissions that are incurred) if it arranges for the sale of your common shares held under the Plan.

 

Shares held through nominees  In the case of a registered shareholder such as a broker, bank or other nominee (together, a “nominee”) that holds common shares for others who are the beneficial owners, the Plan Agent will administer the Plan on the basis of the number of common shares certified by the nominee/record shareholder as representing the total amount registered in such shareholder’s name and held for the account of beneficial owners who are to participate in the Plan. If your common shares are held through a nominee and are not registered with the Plan Agent, neither you nor the nominee will be participants in or have distributions reinvested under the Plan. If you are a beneficial owner of common shares and wish to participate in the Plan, and your nominee is unable or unwilling to become a registered shareholder and a Plan participant on your behalf, you may request that your nominee arrange to have all or a portion of your shares re-registered with the Plan Agent in your

 

 

90   PIMCO CLOSED-END FUNDS     


Dividend Reinvestment Plan (Cont.)

 

(Unaudited)

 

name so that you may be enrolled as a participant in the Plan. Please contact your nominee for details or for other possible alternatives. Participants whose shares are registered with the Plan Agent in the name of one nominee firm may not be able to transfer the shares to another firm and continue to participate in the Plan.

 

Tax consequences  Automatically reinvested dividends and distributions are taxed in the same manner as cash dividends and distributions — i.e., automatic reinvestment in additional shares does not relieve shareholders of, or defer the need to pay, any income tax that may be payable (or that is required to be withheld) on Fund dividends and distributions. The Funds and the Plan Agent reserve the right to amend or terminate the Plan. Additional information about the Plan, as well as a copy of the full Plan itself, may be obtained from the Plan Agent, American Stock Transfer & Trust Company, LLC, at P.O. Box 922, Wall Street Station, New York, NY 10269-0560; telephone number: (844) 33-PIMCO (844-337-4626); website: www.amstock.com.

 

  ANNUAL REPORT   JULY 31, 2016   91


Management of the Funds

 

The chart below identifies Trustees and Officers of the Funds. Unless otherwise indicated, the address of all persons below is c/o Pacific Investment Management Company LLC, 1633 Broadway, New York, New York 10019.

 

Trustees

 

Name And
Year of Birth
  Position(s)
Held
with the
Funds
  Term of
Office and
Length of
Time Served
 

Principal Occupation(s)

During the Past 5 Years

  Number
of Portfolios
in Fund
Complex*
Overseen by
Trustee
   Other
Directorships
Held by
Trustee/Director
During the
Past 5 Years
Independent Trustees

Hans W. Kertess

1939

 

Chairman of the

Board, Trustee

  Trustee of PHK, PTY and PFL since 2003, Trustee of PCN since 2002 and Trustee of PFN since 2004, expected to stand for re-election at the annual meeting of shareholders held during the 2016- 2017 fiscal year for PFL and PFN, the 2017-2018 fiscal year for PCN and the 2018-2019 fiscal year for PTY and PHK.   President, H. Kertess & Co., a financial advisory company; and Senior Adviser (formerly Managing Director), Royal Bank of Canada Capital Markets (since 2004).   89    None

Deborah A. DeCotis

1952

  Trustee   Trustee of each Fund since 2011, expected to stand for re-election at the annual meeting of shareholders held during the 2017-2018 fiscal year for PHK, PTY and PFL and the 2018-2019 fiscal year for PFN and PCN.   Advisory Director, Morgan Stanley & Co., Inc. (since 1996); Member, Circle Financial Group (since 2009); and Member, Council on Foreign Relations (since 2013). Formerly, Co-Chair Special Projects Committee, Memorial Sloan Kettering (2005-2015); Trustee, Stanford University (2010-2015); Principal, LaLoop LLC, a retail accessories company (1999-2014); Director, Helena Rubenstein Foundation (1997-2010); and Director, Armor Holdings (2002-2010).   89    None

Bradford K. Gallagher

1944

  Trustee   Trustee of each Fund since 2010, expected to stand for re-election at the annual meeting of shareholders for the 2016-2017 fiscal year for PHK, PTY and PCN and the 2018-2019 fiscal year for PFL and PFN.   Retired. Founder, Spyglass Investments LLC, a private investment vehicle (since 2001). Formerly, Chairman and Trustee, The Common Fund (2005-2014); Partner, New Technology Ventures Capital Management LLC, a venture capital fund (2011-2013); Chairman and Trustee, Atlantic Maritime Heritage Foundation (2007-2012); and Founder, President and CEO, Cypress Holding Company and Cypress Tree Investment Management Company (1995-2001).   89    Formerly, Chairman and Trustee of Grail Advisors ETF Trust (2009-2010); and Trustee of Nicholas- Applegate Institutional Funds (2007-2010).

James A. Jacobson

1945

  Trustee   Trustee of PCN, PTY and PHK since 2009, Trustee of PFL since 2012 and Trustee of PFN since 2013, expected to stand for re-election at the annual meeting of shareholders held during the 2016-2017 fiscal year for PHK, PTY and PFN, the 2017-2018 fiscal year for PFL and the 2018-2019 fiscal year for PCN.   Retired. Trustee (since 2002) and Chairman of Investment Committee (since 2007), Ronald McDonald House of New York; and Trustee, New Jersey City University (since 2014). Formerly, Vice Chairman and Managing Director, Spear, Leeds & Kellogg Specialists, LLC, a specialist firm on the New York Stock Exchange (2003-2008).   89    Trustee, Alpine Mutual Funds Complex consisting of 18 funds.

William B. Ogden, IV

1945

  Trustee   Trustee of each Fund since 2006, expected to stand for re-election at the annual meeting of shareholders for the 2016-2017 fiscal year for PFL, the 2017-2018 fiscal year for PCN and PFN and the 2018-2019 fiscal year for PHK and PTY.   Retired. Formerly, Asset Management Industry Consultant; and Managing Director, Investment Banking Division of Citigroup Global Markets Inc.   89    None

Alan Rappaport

1953

  Trustee   Trustee of each Fund (except PFL and PFN) since 2010 of PFN since 2012 and of PFL since 2014, expected to stand for re-election at the annual meeting of shareholders held during the 2017-2018 fiscal year for PCN, PFN and PFL and the 2018-2019 fiscal year for PHK and PTY.   Advisory Director (formerly Vice Chairman), Roundtable Investment Partners (since 2009); Adjunct Professor, New York University Stern School of Business (since 2011); Lecturer, Stanford University Graduate School of Business (since 2013); Director, Victory Capital Holdings, Inc., an asset management firm (since 2013); and Member of Board of Overseers, NYU Langone Medical Center (since 2015). Formerly, Trustee, American Museum of Natural History (2005-2015); Trustee, NYU Langone Medical Center (2007-2015); Vice Chairman, US Trust (formerly Chairman and President of Private Bank of Bank of America, the predecessor entity of US Trust) (2001-2008).   89    None

 

92   PIMCO CLOSED-END FUNDS     


Management of the Funds (Cont.)

 

(Unaudited)

 

Name And
Year of Birth
  Position(s)
Held
with the
Funds
  Term of
Office and
Length of
Time Served
 

Principal Occupation(s)

During the Past 5 Years

   Number
of Portfolios
in Fund
Complex*
Overseen by
Trustee
    

Other
Directorships
Held by
Trustee/

Director
During the
Past 5 Years

Interested Trustees      

Craig A. Dawson**

1968

  Trustee   Trustee of each Fund since 2014, expected to stand for re-election at the annual meeting of shareholders held during the 2016-2017 fiscal year for PHK and PCN, the 2017-2018 fiscal year for PTY and PFN and the 2018-2019 fiscal year for PFL.   Managing Director and Head of PIMCO Europe, Middle East and Africa (since 2016). Director of a number of PIMCO’s European investment vehicles and affiliates (since 2008). Formerly, Head of Strategic Business Management, PIMCO (2014-2016), Head of PIMCO’s Munich office and Head of European product management for PIMCO.      25       None

John C. Maney***

1959

  Trustee   Trustee of each Fund since 2006, expected to stand for re-election at the annual meeting of shareholders held during the 2016-2017 fiscal year for PCN and PFN, the 2017-2018 fiscal year for PHK and PTY and the 2018-2019 fiscal year for PFL.   Managing Director of Allianz Asset Management of America L.P. (since January 2005) and a member of the Management Board and Chief Operating Officer of Allianz Asset Management of America L.P. (since November 2006). Formerly, Member of the Management Board of Allianz Global Investors Fund Management LLC (2007-2014) and Managing Director of Allianz Global Investors Fund Management LLC (2011-2014).      25       None

 

* The “Fund Complex” includes all portfolios overseen by the Board that are advised by the Manager or have an investment adviser that is an affiliated person of the Manager.

** Mr. Dawson is an “interested person” of the Funds, as defined in Section 2(a)(19) of the Act, due to his affiliation with PIMCO and its affiliates. Mr. Dawson’s address is 650 Newport Center Drive, Newport Beach, CA 92660.

*** Mr. Maney is an “interested person” of the Funds, as defined in Section 2(a)(19) of the Act, due to his affiliation with Allianz Asset Management of America L.P. and its affiliates. Mr. Maney’s address is 650 Newport Center Drive, Newport Beach, CA 92660.

 

  ANNUAL REPORT   JULY 31, 2016   93


Management of the Funds (Cont.)

 

(Unaudited)

 

Officers

 

Name, Address and
Year of Birth
   Position(s)
Held with Funds
   Term of Office
and Length of
Time Served
   Principal Occupation(s) During Past 5 Years*
Peter G. Strelow1
1970
   President    Since 2014    Managing Director, PIMCO. President, PIMCO-Managed Funds, PIMCO Funds, PIMCO Variable Insurance Trust, PIMCO ETF Trust, PIMCO Equity Series and PIMCO Equity Series VIT.
Youse Guia1
1972
   Chief Compliance Officer    Since 2014    Senior Vice President and Deputy Chief Compliance Officer, PIMCO. Chief Compliance Officer, PIMCO-Managed Funds. Formerly, Head of Compliance, Allianz Global Investors U.S. Holdings LLC and Chief Compliance Officer of the Allianz Funds, Allianz Multi-Strategy Trust, Allianz Global Investors Sponsored Closed-End Funds, Premier Multi-Series VIT and The Korea Fund, Inc.
Joshua D. Ratner
1976
   Vice President, Secretary and Chief Legal Officer    Since 2014    Executive Vice President and Senior Counsel, PIMCO. Chief Legal Officer, PIMCO Investments LLC. Vice President, Secretary and Chief Legal Officer, PIMCO-Managed Funds. Vice President—Senior Counsel, Secretary, PIMCO Funds, PIMCO Variable Insurance Trust, PIMCO ETF Trust, PIMCO Equity Series and PIMCO Equity Series VIT.
Ryan G. Leshaw1
1980
   Assistant Secretary    Since 2014    Senior Vice President and Senior Counsel, PIMCO. Assistant Secretary, PIMCO-Managed Funds, PIMCO Funds, PIMCO Variable Insurance Trust, PIMCO ETF Trust, PIMCO Equity Series and PIMCO Equity Series VIT. Formerly, Associate, Willkie Farr & Gallagher LLP.
Stacie D. Anctil1
1969
   Vice President    Since 2015    Senior Vice President, PIMCO. Vice President, PIMCO-Managed Funds, PIMCO Funds, PIMCO Variable Insurance Trust, PIMCO ETF Trust, PIMCO Equity Series and PIMCO Equity Series VIT.
Eric D. Johnson
1970
   Vice President    Since 2014    Executive Vice President, PIMCO. Vice President, PIMCO-Managed Funds, PIMCO Funds, PIMCO Variable Insurance Trust, PIMCO ETF Trust, PIMCO Equity Series and PIMCO Equity Series VIT.
William G. Galipeau1
1974
   Treasurer    Since 2014    Executive Vice President, PIMCO. Treasurer, PIMCO-Managed Funds. Vice President, PIMCO Funds, PIMCO Variable Insurance Trust, PIMCO ETF Trust, PIMCO Equity Series and PIMCO Equity Series VIT.
Erik C. Brown1
1967
   Assistant Treasurer    Since 2015    Executive Vice President, PIMCO. Assistant Treasurer, PIMCO-Managed Funds, PIMCO Funds, PIMCO Variable Insurance Trust, PIMCO ETF Trust, PIMCO Equity Series and PIMCO Equity Series VIT.
Jason J. Nagler
1982
   Assistant Treasurer    Since 2015    Vice President, PIMCO. Assistant Treasurer, PIMCO-Managed Funds, PIMCO Funds, PIMCO Variable Insurance Trust, PIMCO ETF Trust, PIMCO Equity Series and PIMCO Equity Series VIT. Formerly, Head of Mutual Fund Reporting, GMO, and Assistant Treasurer, GMO Trust and GMO Series Trust Funds.
Trent W. Walker1
1974
   Assistant Treasurer    Since 2014    Executive Vice President, PIMCO. Assistant Treasurer, PIMCO-Managed Funds. Treasurer, PIMCO Funds, PIMCO Variable Insurance Trust, PIMCO ETF Trust, PIMCO Equity Series and PIMCO Equity Series VIT.

 

(1) 

The address of these officers is Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, California 92660.

 

94   PIMCO CLOSED-END FUNDS     


Approval of Investment Management Agreement

 

(Unaudited)

 

At an in-person meeting held on June 7, 2016 (the “Approval Meeting”), the Board of Trustees or Directors (for purposes of this disclosure, all Board members are hereinafter referred to as “Trustees”) of the Funds (the “Board”), including the Trustees who are not interested persons (as that term is defined in the Act) of the Funds or PIMCO (the “Independent Trustees”), formally considered and unanimously approved the continuation of the Investment Management Agreement between each Fund and PIMCO (the “Agreement”) for an additional one-year period commencing on September 5, 2016. Prior to the Approval Meeting, the Contracts Review Committee of the Board of each Fund (together, the “Committee”) held an in-person meeting on June 7, 2016 (the “Committee Meeting”) and formally considered and recommended to the Board the continuation of the Agreement for each Fund. Prior to the Approval Meeting, on May 4, 2016, the Chair of the Committee participated in a conference call with members of management and PIMCO personnel and counsel to the Independent Trustees (“Independent Counsel”) to discuss the process for the Board’s review of the Agreement and to consider certain information relating to the Funds, including, among other information, information relating to PIMCO’s profitability with respect to the Agreement, comparative fees and expenses and Fund performance. On April 29, 2016, PIMCO provided materials to the Committee for its consideration of the Agreement in response to a request from Independent Counsel (the “Manager Request Letter”), as well as other materials and information PIMCO believed was useful in evaluating the continuation of the Agreement.

 

On May 23, 2016, the Committee held a meeting via conference call (collectively with the May 4, 2016 conference call, Committee Meeting and the Approval Meeting, the “Contract Renewal Meetings”), at which the members of the Committee, all of whom are Independent Trustees, considered the materials and information provided by PIMCO bearing on the continuation of the Agreement. The Committee also received and reviewed a memorandum from counsel to the Funds regarding the Trustees’ responsibilities in evaluating the Agreement, which they discussed with Independent Counsel.

 

At the Committee Meeting and Approval Meeting, PIMCO presented certain additional supplemental information to the Independent Trustees regarding the Funds. Following the presentation at the Committee Meeting, the Independent Trustees met separately in executive session with Independent Counsel to review and discuss all relevant information, including, but not limited to, information provided in response to the Manager Request Letter and information presented and discussed at the prior Contract Renewal Meetings.

 

In connection with their deliberations regarding the proposed continuation of the Agreement for each Fund, the Trustees, including

the Independent Trustees, considered such information and factors as they believed, in light of the legal advice furnished to them and their own business judgment, to be relevant. The Trustees also considered the nature, quality and extent of the various investment management, administrative and other services performed by PIMCO under the Agreement.

 

It was noted that, in connection with their Contract Renewal Meetings, the Trustees relied upon materials provided by PIMCO which included, among other items: (i) information provided by Broadridge Financial Solutions, Inc./Lipper Inc. (“Lipper”), an independent third party, on the total return investment performance (based on net asset value and common share market price) of the Funds for various time periods, the investment performance of a group of funds with investment classifications/objectives comparable to those of the Funds identified by Lipper (the “Lipper performance universe”) and, with respect to each Fund, the performance of an applicable benchmark index, if any, (ii) information provided by Lipper on each Fund’s management fees and other expenses under the Agreement and the management fees and other expenses of a smaller sample of comparable funds identified by Lipper (the “Lipper expense group”) as well as of a larger sample of comparable funds identified by Lipper (the “Lipper expense universe”), (iii) information regarding the market value performance of each Fund’s common shares and related share price premium and/or discount information, (iv) information regarding the investment performance and fees for other funds and accounts managed by PIMCO, if any, with similar investment strategies to those of the Funds, (v) the estimated profitability to PIMCO with respect to the Funds for the one-year period ended December 31, 2015, (vi) descriptions of various functions performed by PIMCO for the Funds, such as portfolio management, compliance monitoring and portfolio trading practices, (vii) information regarding PIMCO’s compliance policies applicable to the Funds, (viii) information regarding the Funds’ use of leverage, (ix) a comparison of each Fund’s annualized total expense ratio as a percentage of average net assets attributable to common shareholders (excluding interest expenses) under the unified fee arrangements (the “Unified Fee Arrangements”) for the three most recent fiscal periods, as disclosed in each Fund’s annual report, (x) summaries assigning a quadrant placement to each Fund based on an average of certain measures of performance and fees/expenses versus Lipper peer group medians (the “Fund Scoring Summaries”), (xi) fact cards for each Fund that included summary information regarding each Fund, (xiii) information regarding the yields of the Funds, (xiv) information regarding the risk-adjusted returns of the Funds, and (xv) information regarding the overall organization of PIMCO, including information regarding senior management, portfolio managers and other personnel providing investment management, administrative, compliance and other services to the Funds.

 

 

  ANNUAL REPORT   JULY 31, 2016   95


Approval of Investment Management Agreement (Cont.)

 

 

The Trustees’ conclusions as to the continuation of the Agreement were based on a comprehensive consideration of all information provided to the Trustees and were not the result of any single factor. Some of the factors that figured particularly in the Trustees’ deliberations are described below, although individual Trustees may have evaluated the information presented differently from one another, attributing different weights to various factors. The Trustees also took into account that the Funds’ current fee and expense arrangements were closely reviewed in 2014 in connection with the proposed transition from Allianz Global Investors Fund Management LLC (“AGIFM”) to PIMCO as the Funds’ investment manager, and that the Agreement had been approved by the shareholders of each Fund at special shareholder meetings in 2014.

 

As part of their review, the Trustees examined PIMCO’s abilities to provide high-quality investment management and other services to the Funds. Among other information, the Trustees considered the investment philosophy and research and decision-making processes of PIMCO; the experience of key advisory personnel of PIMCO responsible for portfolio management of the Funds; the ability of PIMCO to attract and retain capable personnel; and the capabilities of the senior management and staff of PIMCO. In addition, the Trustees reviewed the quality of PIMCO’s services with respect to regulatory compliance and compliance with the investment policies of the Funds; the nature and quality of the supervisory and administrative services PIMCO is responsible for providing to the Funds; and conditions that might affect PIMCO’s ability to provide high-quality services to the Funds in the future under the Agreement, including PIMCO’s financial condition and operational stability. Based on the foregoing, the Trustees concluded that PIMCO’s investment process, research capabilities and philosophy were well suited to the Funds given their investment objectives and policies, and that PIMCO would be able to continue to meet any reasonably foreseeable obligations under the Agreement.

 

In assessing the reasonableness of each Fund’s fees under the Agreement, the Trustees considered, among other information, the Fund’s management fee and its total expense ratio as a percentage of average net assets attributable to common shareholders and as a percentage of average managed assets (including assets attributable to common shares and leverage outstanding combined), and the management fee and total expense ratios of the Lipper expense group and Lipper expense universe for each Fund. In each case, the total expense ratio information was provided both inclusive and exclusive of interest and borrowing expenses. Fund-specific comparative fees/expenses reviewed by the Trustees are discussed below. The Fund-specific fee and expense results discussed below were prepared and provided by Lipper and were not independently verified by the Trustees.

The Trustees specifically took note of how each Fund compared to its Lipper peers as to performance, management fee expense and total expense ratio. The Trustees noted that, while the Funds are not currently charged a separate administration fee (recognizing that their management fees include a component for administrative services under the Unified Fee Arrangements), it was not clear in all cases whether the peer funds in the Lipper categories were separately charged such a fee by their investment managers, so that the total expense ratio, as opposed to any individual expense component, represented the most relevant comparison. The Trustees also considered that the total expense ratio seems to provide a more apt comparison than management fee expense because the Funds’ Unified Fee Arrangements cover Operating Expenses (defined below) that are typically paid for or incurred by peer funds directly in addition to their management fees as discussed below. It was noted that the total expense ratio comparisons reflect the effect of expense waivers/reimbursements, if any. The Trustees considered total expense ratio comparisons both including and excluding interest and borrowing expenses. The Trustees noted that only leveraged closed-end funds were considered for inclusion in the Lipper expense groups and Lipper expense universes presented for comparison with the Funds.

 

The Trustees noted that the contractual management fee rate for PHK and PFN under each Fund’s Unified Fee Arrangement was above the median contractual management fees of the other funds in each Fund’s Lipper expense group, calculated both on average net assets and on average managed assets However, in this regard, the Trustees took into account that each Fund’s Unified Fee Arrangement covers substantially all of the Fund’s other supervisory and administrative services required by the Fund that are typically paid for or incurred by closed-end

funds directly in addition to a fund’s management fee (such fees and expenses, “Operating Expenses”) and therefore would tend to be higher than the contractual management fee rates of other funds in the Lipper peer groups, which generally do not have a unified fee structure and bear Operating Expenses directly and in addition to the management fee. The Trustees determined that a review of each Fund’s total expense ratio with the total expense ratios of peer funds would generally provide more meaningful comparisons than considering contractual management fee rates in isolation.

 

In this regard, the Trustees noted PIMCO’s view that the Unified Fee Arrangements have benefited and will continue to benefit common shareholders because they provide a management fee expense structure (including Operating Expenses) that is essentially fixed as a percentage of managed assets, making it more predictable under ordinary circumstances in comparison to fee and expense structures, such as the structure in place for the Funds prior to September 6, 2014, under which the Funds’ Operating Expenses (including certain third-party fees and expenses) can vary significantly over time. The

 

 

96   PIMCO CLOSED-END FUNDS     


 

(Unaudited)

 

Trustees also considered that the Unified Fee Arrangements generally insulate the Funds and common shareholders from increases in applicable third-party and certain other expenses because PIMCO, rather than the Funds, would bear the risk of such increases (though the Trustees also noted that PIMCO would benefit from any reductions in such expenses).

 

The Trustees noted that each Fund’s annualized total expense ratio as a percentage of average net assets attributable to common shareholders (excluding interest expenses) under the Unified Fee Arrangements was generally similar or lower than the annualized total expense ratio (excluding interest expenses) under the fee arrangements with AGIFM prior to September 6, 2014.

 

Fund-specific comparative performance results for the Funds reviewed by the Trustees are discussed below. The comparative performance information was prepared and provided by Lipper and was not independently verified by the Trustees. Due to the passage of time, these performance results may differ from the performance results for more recent periods. With respect to all Funds, the Trustees reviewed, among other information, comparative information showing performance of the Funds against the Lipper performance universes for the one-year, three-year, five-year and ten-year periods (to the extent each such Fund had been in existence) ended December 31, 2015. The Trustees also reviewed the Fund Scoring Summaries prepared by PIMCO at the Independent Trustees’ request comparing each Fund’s fees/expenses and performance against those of its Lipper performance universe and Lipper expense universe by identifying a quadrant designation based on the average of six different measures of fees/expenses versus performance (one-year, three-year and five-year performance for the period ended December 31, 2015, in each case, versus a Fund’s management fees or total expense ratio). The Fund Scoring Summaries were based both on net assets and averaged managed assets and in each case both inclusive and exclusive of interest and borrowing expenses. In addition, the Trustees also reviewed fact cards for each Fund that included summary information regarding each Fund, including investment objective and strategy, portfolio managers, assets under management, outstanding leverage, net asset value and market performance comparisons, comparative fee and expense information, premium/discount information and information regarding PIMCO’s estimated profitability.

 

In addition, it was noted that the Trustees considered matters bearing on the Funds and their advisory arrangements at their meetings throughout the year, including a review of performance data at each regular meeting.

 

Among other information, the Trustees took into account the following regarding particular Funds.

PTY

 

With respect to the Fund’s common share total return performance (based on net asset value) relative to its respective Lipper performance universe, consisting of 26 funds for one-year performance, 22 funds for three-year performance, 20 funds for five-year performance and 16 funds for ten-year performance, the Trustees noted that the Fund had first quintile performance for the one-year, three-year, five-year and ten-year periods ended December 31, 2015.

 

The Trustees noted that the Lipper expense group for the Fund consisted of a total of eight funds, including the Fund. The Trustees also noted that the average net assets of the common shares of the funds in the group ranged from $327.4 million to $1.907 billion, and that two of the funds in the group were larger in asset size than the Fund. The Trustees noted that the Lipper expense universe for the Fund consisted of a total of 26 funds, including the Fund. The Trustees noted that the Fund’s total expense ratio (including interest and borrowing expenses) calculated on both average managed assets and average net assets was below the median total expense ratio (including interest and borrowing expenses) of the funds in its Lipper expense group and Lipper expense universe. The Trustees noted that the Fund’s total expense ratio (excluding interest and borrowing expenses) calculated on both average managed assets and average net assets was below the median total expense ratio (excluding interest and borrowing expenses) of the funds in its Lipper expense group and Lipper expense universe.

 

PCN

 

With respect to the Fund’s common share total return performance (based on net asset value) relative to its respective Lipper performance universe, consisting of 26 funds for one-year performance, 22 funds for three-year performance, 20 funds for five-year performance and 16 funds for ten-year performance, the Trustees noted that the Fund had first quintile performance for the one-year period, second quintile performance for the three-year and five-year period and first quintile performance for the ten-year period ended December 31, 2015.

 

The Trustees noted that the Lipper expense group for the Fund consisted of a total of 12 funds, including the Fund. The Trustees also noted that the average net assets of the common shares of the funds in the group ranged from $217.2 million to $746.4 million, and that three of the funds in the group were larger in asset size than the Fund. The Trustees noted that the Lipper expense universe for the Fund consisted of a total of 26 funds, including the Fund. The Trustees noted that the Fund’s total expense ratio (including interest and borrowing expenses) calculated on both average managed assets and average net assets was below the median total expense ratio (including interest and borrowing expenses) of the funds in its Lipper expense group and Lipper expense universe. The Trustees noted that the Fund’s total

 

 

  ANNUAL REPORT   JULY 31, 2016   97


Approval of Investment Management Agreement (Cont.)

 

expense ratio (excluding interest and borrowing expenses) calculated on average net assets was below the median total expense ratio (excluding interest and borrowing expenses) of the funds in its Lipper expense group and Lipper expense universe. The Trustees noted that the Fund’s total expense ratio (excluding interest and borrowing expenses) calculated on average managed assets was above the median total expense ratio (excluding interest and borrowing expenses) of the funds in its Lipper expense universe. The Trustees noted that the Fund’s total expense ratio (excluding interest and borrowing expenses) calculated on average managed assets was below the median total expense ratio (excluding interest and borrowing expenses) of the funds in its Lipper expense group.

 

PHK

 

With respect to the Fund’s common share total return performance (based on net asset value) relative to its respective Lipper performance universe, consisting of 26 funds for one-year performance, 22 funds for three-year performance, 20 funds for five-year performance, and 16 funds for ten-year performance, the Trustees noted that the Fund had first quintile performance for the one-year, three-year, five-year and ten-year periods ended December 31, 2015.

 

The Trustees noted that the Lipper expense group for the Fund consisted of a total of seven funds, including the Fund. The Trustees also noted that the average net assets of the common shares of the funds in the group ranged from $352.1 million to $1.907 billion, and that one of the funds in the group was larger in asset size than the Fund. The Trustees noted that the Lipper expense universe for the Fund consisted of a total of 26 funds, including the Fund. The Trustees noted that the Fund’s total expense ratio (including interest and borrowing expenses) calculated on average managed assets was at the median total expense ratio (including interest and borrowing expenses) of the funds in its Lipper expense group. The Trustees noted that the Fund’s total expense ratio (including interest and borrowing expenses) calculated on average net assets was below the median total expense ratio (including interest and borrowing expenses) of the funds in its Lipper expense group and Lipper expense universe. The Trustees noted that the Fund’s total expense ratio (excluding interest and borrowing expenses) calculated on average managed assets was at the median total expense ratio (excluding interest and borrowing expenses) of the funds in its Lipper expense group. The Trustees noted that the Fund’s total expense ratio (including interest and borrowing expenses) calculated on average managed assets was below the median total expense ratio (including interest and borrowing expenses) of the Funds in its Lipper expense universe. The Trustees noted that the Fund’s total expense ratio (excluding interest and borrowing expenses) calculated on average managed assets was below the median total expense ratio (excluding interest and borrowing expenses) of the Funds in its Lipper expense universe.

PFL

 

With respect to the Fund’s common share total return performance (based on net asset value) relative to its respective Lipper performance universe, consisting of 26 funds for one-year performance, 22 funds for three-year performance, 20 funds for five-year performance and 16 funds for ten-year performance, the Trustees noted that the Fund had third quintile performance for the one-year, three-year period and five-year period and fourth quintile performance for the ten-year period ended December 31, 2015.

 

The Trustees noted that the Lipper expense group for the Fund consisted of a total of 12 funds, including the Fund. The Trustees also noted that the average net assets of the common shares of the funds in the group ranged from $156.9 million to $519.8 million, and that four of the funds in the group were larger in asset size than the Fund. The Trustees noted that the Lipper expense universe for the Fund consisted of a total of 26 funds, including the Fund. The Trustees noted that the Fund’s total expense ratio (including interest and borrowing expenses) calculated on average managed assets was below the median total expense ratio (including interest and borrowing expenses) of the funds in its Lipper expense group. The Trustees noted that the Fund’s total expense ratio (including interest and borrowing expenses) calculated on average net assets was below the median total expense ratio (including interest and borrowing expenses) of the funds in its Lipper expense group and Lipper expense universe. The Trustees noted that the Fund’s total expense ratio (excluding interest and borrowing expenses) calculated on both average managed assets and average net assets was below the median total expense ratio (excluding interest and borrowing expenses) of the funds in its Lipper expense group. The Trustees noted that the Fund’s total expense ratio (excluding interest and borrowing expenses) calculated on both average managed assets and average net assets was above the median total expense ratio (excluding interest and borrowing expenses) of the funds in its Lipper expense universe. The Trustees noted that the Fund’s total expense ratio (including interest and borrowing expenses) calculated on average managed assets was above the median total expense ratio (including interest and borrowing expenses) of the funds in its Lipper expense universe.

 

PFN

 

With respect to the Fund’s common share total return performance (based on net asset value) relative to its respective Lipper performance universe, consisting of 26 funds for one-year performance, 22 funds for three-year performance, 20 funds for five-year performance and 16 funds for ten-year performance, the Trustees noted that the Fund had second quintile performance for the one-year, three-year and five-year periods and fifth quintile performance for the ten-year period ended December 31, 2015.

 

 

98   PIMCO CLOSED-END FUNDS     


 

(Unaudited)

 

 

The Trustees noted that the Lipper expense group for the Fund consisted of a total of eight funds, including the Fund. The Trustees also noted that the average net assets of the common shares of the funds in the group ranged from $327.4 million to $1.907 billion, and that three of the funds in the group were larger in asset size than the Fund. The Trustees noted that the Lipper expense universe for the Fund consisted of a total of 26 funds, including the Fund. The Trustees noted that the Fund’s total expense ratio (including interest and borrowing expenses) calculated both on average managed assets and average net assets was below the median total expense ratio (including interest and borrowing expenses) of the funds in its Lipper expense group and Lipper expense universe. The Trustees noted that the Fund’s total expense ratio (excluding interest and borrowing expenses) calculated on average net assets was below the median total expense ratio (excluding interest and borrowing expenses) of the funds in its Lipper expense group and Lipper expense universe. The Trustees noted that the Fund’s total expense ratio (excluding interest and borrowing expenses) calculated on average managed assets was above the median total expense ratio (excluding interest and borrowing expenses) of the funds in its Lipper expense group and Lipper expense universe.

 

In addition to their review of Fund performance based on net asset value, the Trustees also considered the market value performance of each Fund’s common shares and related share price premium and/or discount information based on the materials provided by Lipper and PIMCO.

 

The Trustees also considered the management fees charged by PIMCO to other funds and accounts with similar strategies to those of the Funds, including any similar open-end funds. The Trustees noted that the management fees paid by the Funds are generally higher than the fees paid by any open-end funds offered for comparison, but were advised by PIMCO that there are additional portfolio management challenges in managing closed-end funds such as the Funds, such as those associated with less liquid holdings, the use of leverage, issues relating to trading on a national exchange and attempting to meet a regular dividend.

 

The Trustees also took into account that the Funds have Preferred Shares outstanding and use leverage, such as by the use of reverse repurchase agreements, which increases the amount of management fees payable by the Funds under the Agreement (because each Fund’s fees are calculated either based on net assets including assets attributable to preferred shares outstanding or based on total managed assets, including assets attributable to preferred shares and certain other forms of leverage outstanding). In this regard, the Trustees took into account that PIMCO has a financial incentive for the Funds to continue to use leverage, which may create a conflict of interest between PIMCO, on one hand, and the Funds’ common shareholders,

on the other. The Trustees further noted that this incentive may be greater under the Unified Fee Arrangements because the contractual management fee rates under the Unified Fee Agreements are higher for each Fund than the Fund’s management fee would otherwise be if it did not cover the Fund’s Operating Expenses — i.e., in comparison to their non-unified management fee rates in place prior to September 6, 2014. Therefore, the total fees paid by each Fund to PIMCO under the Unified Fee Arrangements will vary more with increases and decreases in applicable leverage incurred by a Fund than under its prior non-unified fee arrangement, all things being equal. The Trustees considered information provided by PIMCO and related presentations as to why each Fund’s use of leverage continues to be appropriate and in the best interests of the respective Fund under current market conditions. The Trustees also considered PIMCO’s representation that it will use leverage for the Funds solely as it determines to be in the best interests of the Funds from an investment perspective and without regard to the level of compensation PIMCO receives.

 

The Trustees also considered estimated profitability analyses provided by PIMCO, which included, among other information, (i) the estimated profitability to PIMCO with respect to each Fund for the one-year period ended December 31, 2015, (ii) information comparing the estimated profitability to PIMCO with respect to all of the closed-end funds advised by PIMCO, including the Funds, for the one-year period ended December 31, 2015 for serving as the Funds’ investment manager to the profitability to PIMCO with respect to all of the closed-end funds advised by PIMCO, including the Funds, for the one-year period ended December 31, 2014 for serving as the sub-adviser from January 1, 2014 through the close of business on September 5, 2014, and for serving as the Funds’ investment manager from September 6, 2014 through December 31, 2014; (iii) PIMCO’s estimated pre- and post-distribution operating margin for each Fund, as well as PIMCO’s estimated pre- and post-distribution operating margin for all of the closed-end funds advised by PIMCO, including the Funds; and (iv) an overview of PIMCO’s estimated profitability with respect to all of the closed-end funds advised by PIMCO, including the Funds, compared to PIMCO’s profitability with respect to its other clients, including PIMCO-advised separate accounts, open-end funds and hedge funds and private equity funds. The Trustees also took into account explanations from PIMCO regarding how certain corporate and shared expenses were allocated among the Funds and other funds and accounts managed by PIMCO for purposes of developing profitability estimates. Based on the profitability analyses provided by PIMCO, the Trustees determined, taking into account the various assumptions made, that such profitability did not appear to be excessive.

 

The Trustees also took into account the entrepreneurial and business risk PIMCO has undertaken as investment manager and sponsor of the Funds.

 

 

  ANNUAL REPORT   JULY 31, 2016   99


Approval of Investment Management Agreement (Cont.)

 

(Unaudited)

 

 

The Trustees also took into account that the Funds do not currently have any breakpoints in their management fees and, as closed-end investment companies, the Funds did not at the time of the review intend to raise additional assets, so the assets of the Funds were expected to grow (if at all) principally through the investment performance of each Fund and/or the increased use of leverage. The Trustees also considered that the Unified Fee Arrangements provide inherent economies of scale because a Fund maintains competitive fixed unified fees even if the particular Fund’s assets decline and/or operating costs rise. The Trustees further considered that, in contrast, breakpoints are a proxy for charging higher fees on lower asset levels and that when a fund’s assets decline, breakpoints may reverse, which causes expense ratios to increase. The Trustees also considered that, unlike the Funds’ Unified Fee Arrangements, funds with “pass through” administrative fee structures may experience increased expense ratios when fixed dollar fees are charged against declining fund assets. The Trustees also considered that the Unified Fee Arrangements protect shareholders from a rise in operating costs that may result from, including, among other things, PIMCO’s investments in various business enhancements and infrastructure. The Trustees noted that PIMCO has made extensive investments in these areas.

 

Additionally, the Trustees considered so-called “fall-out benefits” to PIMCO, such as reputational value derived from serving as investment manager to the Funds and research, statistical and quotation services PIMCO may receive from broker-dealers executing the Funds’ portfolio transactions on an agency basis.

 

After reviewing these and other factors described herein, the Trustees concluded, with respect to each Fund, within the context of their overall conclusions regarding the Agreement and based on the information provided and related representations made by management, that they were satisfied with PIMCO’s responses and efforts relating to the investment performance of the Funds. The Trustees also concluded that the fees payable under the Agreement represent reasonable compensation in light of the nature, extent and quality of services provided by PIMCO. Based on their evaluation of factors that they deemed to be material, including those factors described above, the Trustees, including the Independent Trustees, unanimously concluded that the continuation of the Agreement was in the interests of each Fund and its shareholders, and should be approved.

 

 

100   PIMCO CLOSED-END FUNDS     


Privacy Policy1

 

(Unaudited)

 

The Funds2 consider customer privacy to be a fundamental aspect of their relationships with shareholders and are committed to maintaining the confidentiality, integrity and security of their current, prospective and former shareholders’ non-public personal information. The Funds have developed policies that are designed to protect this confidentiality, while allowing shareholder needs to be served.

 

OBTAINING PERSONAL INFORMATION

 

In the course of providing shareholders with products and services, the Funds and certain service providers to the Funds, such as the Funds’ investment adviser or sub-adviser (“Adviser”), may obtain non-public personal information about shareholders, which may come from sources such as account applications and other forms, from other written, electronic or verbal correspondence, from shareholder transactions, from a shareholder’s brokerage or financial advisory firm, financial advisor or consultant, and/or from information captured on applicable websites.

 

RESPECTING YOUR PRIVACY

 

As a matter of policy, the Funds do not disclose any non-public personal information provided by shareholders or gathered by the Funds to non-affiliated third parties, except as required or permitted by law or as necessary for such third parties to perform their agreements with respect to the Funds. As is common in the industry, non-affiliated companies may from time to time be used to provide certain services, such as preparing and mailing prospectuses, reports, account statements and other information, conducting research on shareholder satisfaction and gathering shareholder proxies. The Funds or their affiliates may also retain non-affiliated companies to market Fund shares or products which use Fund shares and enter into joint marketing arrangements with them and other companies. These companies may have access to a shareholder’s personal and account information, but are permitted to use this information solely to provide the specific service or as otherwise permitted by law. In most cases, the shareholders will be clients of a third party, but the Funds may also provide a shareholder’s personal and account information to the shareholder’s respective brokerage or financial advisory firm and/or financial advisor or consultant.

 

SHARING INFORMATION WITH THIRD PARTIES

 

The Funds reserve the right to disclose or report personal or account information to non-affiliated third parties in limited circumstances where the Funds believe in good faith that disclosure is required under law, to cooperate with regulators or law enforcement authorities, to protect their rights or property, or upon reasonable request by any fund advised by PIMCO in which a shareholder has invested. In addition, the Funds may disclose information about a shareholder or a

shareholder’s accounts to a non-affiliated third party at the shareholder’s request or with the consent of the shareholder.

 

SHARING INFORMATION WITH AFFILIATES

 

The Funds may share shareholder information with their affiliates in connection with servicing shareholders’ accounts, and subject to applicable law may provide shareholders with information about products and services that the Funds or their Adviser or its affiliates (“Service Affiliates”) believe may be of interest to such shareholders. The information that the Funds may share may include, for example, a shareholder’s participation in the Funds or in other investment programs sponsored by a Service Affiliate, a shareholder’s ownership of certain types of accounts (such as IRAs), information about the Funds’ experiences or transactions with a shareholder, information captured on applicable websites, or other data about a shareholder’s accounts, subject to applicable law. The Funds’ Service Affiliates, in turn, are not permitted to share shareholder information with non-affiliated entities, except as required or permitted by law.

 

PROCEDURES TO SAFEGUARD PRIVATE INFORMATION

 

The Funds take seriously the obligation to safeguard shareholder non-public personal information. In addition to this policy, the Funds have implemented procedures that are designed to restrict access to a shareholder’s non-public personal information to internal personnel who need to know that information to perform their jobs, such as servicing shareholder accounts or notifying shareholders of new products or services. Physical, electronic and procedural safeguards are in place to guard a shareholder’s non-public personal information.

 

INFORMATION COLLECTED FROM WEBSITES

 

Websites maintained by the Funds or their service providers may use a variety of technologies to collect information that help the Funds and their service providers understand how the website is used. Information collected from your web browser (including small files stored on your device that are commonly referred to as “cookies”) allow the websites to recognize your web browser and help to personalize and improve your user experience and enhance navigation of the website. In addition, the Funds or their Service Affiliates may use third parties to place advertisements for the Funds on other websites, including banner advertisements. Such third parties may collect anonymous information through the use of cookies or action tags (such as web beacons). The information these third parties collect is generally limited to technical and web navigation information, such as your IP address, web pages visited and browser type, and does not include personally identifiable information such as name, address, phone number or email address.

 

 

  ANNUAL REPORT   JULY 31, 2016   101


Privacy Policy1 (Cont.)

 

(Unaudited)

 

 

You can change your cookie preferences by changing the setting on your web browser to delete or reject cookies. If you delete or reject cookies, some website pages may not function properly.

 

CHANGES TO THE PRIVACY POLICY

 

From time to time, the Funds may update or revise this privacy policy. If there are changes to the terms of this privacy policy, documents containing the revised policy on the relevant website will be updated.

 

1 Amended as of May 13, 2015.

2 When distributing this Policy, a Fund may combine the distribution with any similar distribution of its investment adviser’s privacy policy. The distributed, combined policy may be written in the first person (i.e., by using “we” instead of “the Funds”).

 

102   PIMCO CLOSED-END FUNDS     


General Information

 

Investment Manager

Pacific Investment Management Company LLC

1633 Broadway

New York, NY 10019

 

Custodian

State Street Bank and Trust Company

801 Pennsylvania Avenue

Kansas City, MO 64105

 

Transfer Agent, Dividend Paying Agent and Registrar

American Stock Transfer & Trust Company, LLC

6201 15th Avenue

Brooklyn, NY 11219

 

Legal Counsel

Ropes & Gray LLP

Prudential Tower

800 Boylston Street

Boston, MA 02199

 

Independent Registered Public Accounting Firm

PricewaterhouseCoopers LLP

1100 Walnut Street, Suite 1300

Kansas City, MO 64106

 

This report is submitted for the general information of the shareholders of PIMCO Corporate & Income Opportunity Fund, PIMCO Corporate & Income Strategy Fund, PIMCO High Income Fund, PIMCO Income Strategy Fund and PIMCO Income Strategy Fund II.


LOGO

 

CEF3011AR_073116


Item  2. Code of Ethics.

As of the end of the period covered by this report, the Registrant has adopted a code of ethics (the “Code”) that applies to the Registrant’s principal executive officer and principal financial & accounting officer. The Registrant did not grant any waivers, including implicit waivers, from any provisions of the Code to the principal executive officer or principal financial & accounting officer during the period covered by this report.

A copy of the Code is included as an exhibit to this report.

 

Item  3. Audit Committee Financial Expert.

(a) The Board of Trustees has determined that James A. Jacobson, who serves on the Board’s Audit Oversight Committee, qualifies as an “audit committee financial expert” as such term is defined in the instructions to this Item 3. The Board has also determined that Mr. Jacobson is “independent” as such term is interpreted under this Item 3.


Item  4. Principal Accountant Fees and Services.

 

                      
  (a)      Fiscal Year Ended    Audit Fees   
       July 31, 2016    $            45,910   
       July 31, 2015    $            47,476   
 

 

(b)

     Fiscal Year Ended    Audit-Related Fees   
       July 31, 2016    $            12,360   
       July 31, 2015    $            12,360   
 

 

(c)

     Fiscal Year Ended    Tax Fees   
       July 31, 2016    $            15,750   
       July 31, 2015    $            39,220   
 

 

(d)

     Fiscal Year Ended    All Other Fees(1)   
       July 31, 2016    $                  —   
       July 31, 2015    $                  —   

“Audit Fees” represents fees billed for each of the last two fiscal years for professional services rendered for the audit and review of the Registrant’s annual financial statements for those fiscal years or services that are normally provided by the accountant in connection with statutory or regulatory filings or engagements for those fiscal years.

“Audit-Related Fees” represents fees billed for each of the last two fiscal years for assurance and related services that are reasonably related to the performance of the audit or review of the Registrant’s financial statements, but not reported under “Audit Fees” above, and that include accounting consultations, agreed-upon procedure reports (inclusive of annual review of basic maintenance testing associated with the Preferred Shares), attestation reports and comfort letters for those fiscal years.

“Tax Fees” represents fees billed for each of the last two fiscal years for professional services related to tax compliance, tax advice and tax planning, including services relating to the filing or amendment of federal, state or local income tax returns, regulated investment company qualification reviews, and tax distribution and analysis reviews. The amounts under “Tax Fees” shown above have been updated from amounts shown in prior filings of this report, as applicable, due to changes in how certain fees are categorized for these purposes.

“All Other Fees” represents fees, if any, billed for other products and services rendered by the principal accountant to the Registrant other than those reported above under “Audit Fees,” “Audit-Related Fees” and “Tax Fees” for the last two fiscal years.

(1)There were no “All Other Fees” for the last two fiscal years.

 

  (e) Pre-approval policies and procedures

(1) The Registrant’s Audit Oversight Committee has adopted pre-approval policies and procedures (the “Procedures”) to govern the Audit Oversight Committee’s pre-approval of (i) all audit services and permissible non-audit services to be provided to the Registrant by its independent accountant, and (ii) all permissible non-audit services to be provided by such independent accountant to the Registrant’s investment adviser and to any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the Registrant (collectively, the “Service Affiliates”) if the services provided directly relate to the Registrant’s operations and financial reporting. In accordance with the Procedures, the Audit Oversight Committee is responsible for the engagement of the independent accountant to certify the Registrant’s financial statements for each fiscal year. With respect to the pre-approval of non-audit services provided to the Registrant and its Service Affiliates, the Procedures provide that the Audit Oversight Committee may annually pre-approve a list of types or categories of non-audit services that may be provided to the Registrant or its Service Affiliates, or the Audit Oversight Committee may pre-approve such services on a project-by-project basis as they arise. Unless a type of service has received general pre-approval, it will require specific pre-approval by the Audit Oversight Committee if it is to be provided by the independent accountant. The Procedures also permit the Audit Oversight Committee to delegate authority to one or more of its members to pre-approve any proposed non-audit services that have not been previously pre-approved by the Audit Oversight Committee, subject to the ratification by the full Audit Oversight Committee no later than its next scheduled meeting.


(2) With respect to the services described in paragraphs (b) through (d) of this Item 4, no amount was approved by the Audit Oversight Committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.

 

  f) Not applicable.

 

  g)     

 

Entity

    

 

Aggregate Non-Audit Fees Billed to Entity*

  

             July 31, 2016            July 31, 2015   

  PIMCO Corporate & Income Opportunity Fund

     $           28,110                   $ 51,580     

  Pacific Investment Management Company LLC (“PIMCO”)

          7,767,308                 9,815,893     
 

 

 

 

Total

     $           7,795,418                   $ 9,867,473    
 

 

 

    

 

 

 

*The amounts have been updated from amounts shown in prior filings of this report, as applicable, due to changes in how certain fees are categorized for these purposes.

 

  h) The Registrant’s Audit Oversight Committee has considered whether the provision of non-audit services that were rendered to the Registrant’s investment adviser, and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the Registrant which were not pre-approved (not requiring pre-approval) is compatible with maintaining the principal accountant’s independence.

 

Item  5. Audit Committee of Listed Registrants.

The Registrant has a separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Securities Exchange Act of 1934, as amended. The audit committee is comprised of:

Deborah A. DeCotis;

Bradford K. Gallagher;

James A. Jacobson;

Hans W. Kertess;

William B. Ogden, IV; and

Alan Rappaport.

 

Item  6. Schedule of Investments.

The Schedule of Investments is included as part of the reports to shareholders under Item 1.

 

Item  7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.

PIMCO has adopted written proxy voting policies and procedures (“Proxy Policy”) as required by Rule 206(4)-6 under the Advisers Act. In addition to covering the voting of equity securities, the Proxy Policy also applies generally to voting and/or consent rights of fixed income securities, including but not limited to, plans of reorganization, and waivers and consents under applicable indentures. The Proxy Policy does not apply, however, to consent rights that primarily entail decisions to buy or sell investments, such as tender or exchange offers, conversions, put options, redemption and Dutch auctions. The Proxy Policy is designed and implemented in a manner reasonably expected to ensure that voting and consent rights (collectively, “proxies”) are exercised in the best interests of accounts.

With respect to the voting of proxies relating to equity securities, PIMCO has selected an unaffiliated third party proxy research and voting service (“Proxy Voting Service”), to assist it in researching and voting proxies. With respect to each proxy received, the Proxy Voting Service researches the financial implications of the proposals and provides a recommendation to PIMCO as to how to vote on each proposal based on the Proxy Voting Service’s research of the individual facts and circumstances and the Proxy Voting Service’s application of its research findings to a set of guidelines that have been approved by PIMCO. Upon the recommendation of the applicable portfolio managers, PIMCO may determine to override any recommendation made by the Proxy Voting Service. In the event that the Proxy Voting Service does not provide a recommendation with respect to a proposal, PIMCO may determine to vote on the proposals directly.


With respect to the voting of proxies relating to fixed income securities, PIMCO’s fixed income credit research group (the “Credit Research Group”) is responsible for researching and issuing recommendations for voting proxies. With respect to each proxy received, the Credit Research Group researches the financial implications of the proxy proposal and makes voting recommendations specific for each account that holds the related fixed income security. PIMCO considers each proposal regarding a fixed income security on a case-by-case basis taking into consideration any relevant contractual obligations as well as other relevant facts and circumstances at the time of the vote. Upon the recommendation of the applicable portfolio managers, PIMCO may determine to override any recommendation made by the Credit Research Group. In the event that the Credit Research Group does not provide a recommendation with respect to a proposal, PIMCO may determine to vote the proposal directly.

PIMCO may determine not to vote a proxy for an equity or fixed income security if: (1) the effect on the applicable account’s economic interests or the value of the portfolio holding is insignificant in relation to the account’s portfolio; (2) the cost of voting the proxy outweighs the possible benefit to the applicable account, including, without limitation, situations where a jurisdiction imposes share blocking restrictions which may affect the ability of the portfolio managers to effect trades in the related security; or (3) PIMCO otherwise has determined that it is consistent with its fiduciary obligations not to vote the proxy.

In the event that the Proxy Voting Service or the Credit Research Group, as applicable, does not provide a recommendation or the portfolio managers of a client account propose to override a recommendation by the Proxy Voting Service, or the Credit Research Group, as applicable, PIMCO will review the proxy to determine whether there is a material conflict between PIMCO and the applicable account or among PIMCO-advised accounts. If no material conflict exists, the proxy will be voted according to the portfolio managers’ recommendation. If a material conflict does exist, PIMCO will seek to resolve the conflict in good faith and in the best interests of the applicable client account, as provided by the Proxy Policy. The Proxy Policy permits PIMCO to seek to resolve material conflicts of interest by pursuing any one of several courses of action. With respect to material conflicts of interest between PIMCO and a client account, the Proxy Policy permits PIMCO to either: (i) convene a committee to assess and resolve the conflict (the “Proxy Conflicts Committee”); or (ii) vote in accordance with protocols previously established by the Proxy Policy, the Proxy Conflicts Committee and/or other relevant procedures approved by PIMCO’s Legal and Compliance department with respect to specific types of conflicts. With respect to material conflicts of interest between one or more PIMCO-advised accounts, the Proxy Policy permits PIMCO to: (i) designate a PIMCO portfolio manager who is not subject to the conflict to determine how to vote the proxy if the conflict exists between two accounts with at least one portfolio manager in common; or (ii) permit the respective portfolio managers to vote the proxies in accordance with each client account’s best interests if the conflict exists between client accounts managed by different portfolio managers.

PIMCO will supervise and periodically review its proxy voting activities and the implementation of the Proxy Policy. PIMCO’s Proxy Policy, and information about how PIMCO voted a client’s proxies, is available upon request.

 

Item  8. Portfolio Managers of Closed-End Management Investment Companies.

(a)(1)    

As of September 27, 2016, the following individuals have primary responsibility for the day-to-day implementation of the PIMCO Corporate & Income Opportunity Fund (the “Fund”):

Alfred T. Murata

Mr. Murata has been a portfolio manager of the Fund since September 2014. Mr. Murata is a managing director in the Newport Beach office and a portfolio manager on the mortgage credit team. Prior to joining PIMCO in 2001, he researched and implemented exotic equity and interest rate derivatives at Nikko Financial Technologies.

Mohit Mittal

Mr. Mittal has been a portfolio manager of the Fund since September 2014. Mr. Mittal is a managing director and portfolio manager in the Newport Beach office. He manages investment grade credit, total return and unconstrained bond portfolios and is a member of the Americas Portfolio Committee. Previously, he was a specialist on PIMCO’s interest rates and derivatives desk.


(a)(2)

The following summarizes information regarding each of the accounts, excluding the Fund, managed by the Portfolio Managers as of July 31, 2016, including accounts managed by a team, committee, or other group that includes a Portfolio Manager. Unless mentioned otherwise, the advisory fee charged for managing each of the accounts listed below is not based on performance.

 

    

Registered Investment Companies

 

   Other Pooled Investment
Vehicles
   Other Accounts

PM

 

  

#

 

  

AUM($million)

 

  

#

 

  

AUM($million)

 

  

#

 

  

AUM($million)

 

Alfred T. Murata

 

  

11

 

  

$71,903.04

 

  

8

 

  

$9,824.12

 

  

9

 

  

$1,441.55

 

    Mohit Mittal

 

  

8

 

  

$7,119.35

 

  

12

 

  

$8,501.59*

 

  

123

 

  

$55,849.88**

 

* Of these Other Pooled Investment Vehicles, 2 account(s) totaling $1,444.11 million in assets pay(s) an advisory fee that is based in part on the performance of the accounts.

**Of these Other Accounts, 5 account(s) totaling $1,199.24 million in assets pay(s) an advisory fee that is based in part on the performance of the accounts.

From time to time, potential and actual conflicts of interest may arise between a portfolio manager’s management of the investments of the Fund, on the one hand, and the management of other accounts, on the other. Potential and actual conflicts of interest may also arise as a result of PIMCO’s other business activities and PIMCO’s possession of material non-public information about an issuer. Other accounts managed by a portfolio manager might have similar investment objectives or strategies as the Fund, track the same index as the Fund or otherwise hold, purchase, or sell securities that are eligible to be held, purchased or sold by the Fund. The other accounts might also have different investment objectives or strategies than the Fund. Potential and actual conflicts of interest may also arise as a result of PIMCO serving as investment adviser to accounts that invest in the Fund. In this case, such conflicts of interest could in theory give rise to incentives for PIMCO to, among other things, vote proxies of the Fund in a manner beneficial to the investing account but detrimental to the Fund. Conversely, PIMCO’s duties to the Fund, as well as regulatory or other limitations applicable to the Fund, may affect the courses of action available to PIMCO-advised accounts (including certain funds) that invest in the Fund in a manner that is detrimental to such investing accounts.

Because PIMCO is affiliated with Allianz, a large multi-national financial institution, conflicts similar to those described below may occur between the Fund and other accounts managed by PIMCO and PIMCO’s affiliates or accounts managed by those affiliates. Those affiliates (or their clients), which generally operate autonomously from PIMCO, may take actions that are adverse to the Fund or other accounts managed by PIMCO. In many cases, PIMCO will not be in a position to mitigate those actions or address those conflicts, which could adversely affect the performance of the Fund or other accounts managed by PIMCO.

Knowledge and Timing of Fund Trades. A potential conflict of interest may arise as a result of the portfolio manager’s day-to-day management of the Fund. Because of their positions with the Fund, the portfolio managers know the size, timing and possible market impact of the Fund’s trades. It is theoretically possible that the portfolio managers could use this information to the advantage of other accounts they manage and to the possible detriment of the Fund.

Investment Opportunities. A potential conflict of interest may arise as a result of the portfolio manager’s management of a number of accounts with varying investment guidelines. Often, an investment opportunity may be suitable for both the Fund and other accounts managed by the portfolio manager, but may not be available in sufficient quantities for both the Fund and the other accounts to participate fully. In addition, regulatory issues applicable to PIMCO or the Fund or other accounts may result in the Fund not receiving securities that may otherwise be appropriate for it.


Similarly, there may be limited opportunity to sell an investment held by the Fund and another account. PIMCO has adopted policies and procedures reasonably designed to allocate investment opportunities on a fair and equitable basis over time.

Under PIMCO’s allocation procedures, investment opportunities are allocated among various investment strategies based on individual account investment guidelines and PIMCO’s investment outlook. PIMCO has also adopted additional procedures to complement the general trade allocation policy that are designed to address potential conflicts of interest due to the side-by-side management of the Fund and certain pooled investment vehicles, including investment opportunity allocation issues.

Conflicts potentially limiting the Fund’s investment opportunities may also arise when the Fund and other PIMCO clients invest in different parts of an issuer’s capital structure, such as when the Fund owns senior debt obligations of an issuer and other clients own junior tranches of the same issuer. In such circumstances, decisions over whether to trigger an event of default, over the terms of any workout, or how to exit an investment may result in conflicts of interest. In order to minimize such conflicts, a portfolio manager may avoid certain investment opportunities that would potentially give rise to conflicts with other PIMCO clients or PIMCO may enact internal procedures designed to minimize such conflicts, which could have the effect of limiting the Fund’s investment opportunities. Additionally, if PIMCO acquires material non-public confidential information in connection with its business activities for other clients, a portfolio manager may be restricted from purchasing securities or selling securities for the Fund. Moreover, the Fund or other accounts managed by PIMCO may invest in a transaction in which one or more other funds or accounts managed by PIMCO are expected to participate, or already have made or will seek to make, an investment. Such funds or accounts may have conflicting interests and objectives in connection with such investments, including, for example and without limitation, with respect to views on the operations or activities of the issuer involved, the targeted returns from the investment, and the timeframe for, and method of, exiting the investment. When making investment decisions where a conflict of interest may arise, PIMCO will endeavor to act in a fair and equitable manner as between the Fund and other clients; however, in certain instances the resolution of the conflict may result in PIMCO acting on behalf of another client in a manner that may not be in the best interest, or may be opposed to the best interest, of the Fund.

Performance Fees. A portfolio manager may advise certain accounts with respect to which the advisory fee is based entirely or partially on performance. Performance fee arrangements may create a conflict of interest for the portfolio manager in that the portfolio manager may have an incentive to allocate the investment opportunities that he or she believes might be the most profitable to such other accounts instead of allocating them to the Fund. PIMCO has adopted policies and procedures reasonably designed to allocate investment opportunities between the Fund and certain pooled investment vehicles on a fair and equitable basis over time.

(a)(3)

As of July 31, 2016 the following explains the compensation structure of the individuals who have primary responsibility for day-to-day portfolio management of the Fund:

Portfolio Manager Compensation

PIMCO has adopted a Total Compensation Plan for its professional level employees, including its portfolio managers, that is designed to pay competitive compensation and reward performance, integrity and teamwork consistent with the firm’s mission statement. The Total Compensation Plan includes an incentive component that rewards high performance standards, work ethic and consistent individual and team contributions to the firm. The compensation of portfolio managers consists of a base salary and discretionary performance bonuses, and may include an equity or long term incentive component.

Certain employees of PIMCO, including portfolio managers, may elect to defer compensation through PIMCO’s deferred compensation plan. PIMCO also offers its employees a non-contributory defined contribution plan through which PIMCO makes a contribution based on the employee’s compensation. PIMCO’s contribution rate increases at a specified compensation level, which is a level that would include portfolio managers.


Key Principles on Compensation Philosophy include:

 

    PIMCO’s pay practices are designed to attract and retain high performers.

 

    PIMCO’s pay philosophy embraces a corporate culture of rewarding strong performance, a strong work ethic and meritocracy.

 

    PIMCO’s goal is to ensure key professionals are aligned to PIMCO’s long-term success through equity participation.

 

    PIMCO’s “Discern and Differentiate” discipline is exercised where individual performance rating is used for guidance as it relates to total compensation levels.

The Total Compensation Plan consists of three components:

Base Salary – Base salary is determined based on core job responsibilities, positions/levels and market factors. Base salary levels are reviewed annually, when there is a significant change in job responsibilities or position, or a significant change in market levels.

Performance Bonus – Performance bonuses are designed to reward individual performance. Each professional and his or her supervisor will agree upon performance objectives to serve as a basis for performance evaluation during the year. The objectives will outline individual goals according to pre-established measures of the group or department success. Achievement against these goals as measured by the employee and supervisor will be an important, but not exclusive, element of the bonus decision process. Award amounts are determined at the discretion of the Compensation Committee (and/or certain senior portfolio managers, as appropriate) and will also consider firm performance.

Deferred Compensation – M Options and/or Long-Term Incentive Plan (LTIP) is awarded to key professionals. Employees who reach a total compensation threshold are delivered their annual compensation in a mix of cash and/or deferred compensation. PIMCO incorporates a progressive allocation of deferred compensation as a percentage of total compensation, which is in line with market practices.

 

    The M Unit program provides mid-to-senior level employees with the potential to acquire an equity stake in PIMCO over their careers and to better align employee incentives with the firm’s long-term results. In the program, options are awarded and vest over a number of years and may convert into PIMCO equity which shares in the profit distributions of the firm. M Units are non-voting common equity of PIMCO and provide a mechanism for individuals to build a significant equity stake in PIMCO over time.

 

    The LTIP provides deferred cash awards that appreciate or depreciate based on PIMCO’s operating earnings over a rolling three-year period. The plan provides a link between longer term company performance and participant pay, further motivating participants to make a long-term commitment to PIMCO’s success.

 

    Participation in M Unit program and LTIP is contingent upon continued employment at PIMCO.

In addition, the following non-exclusive list of criteria may be considered when specifically determining the total compensation for portfolio managers:

 

    3-year, 2-year and 1-year dollar-weighted and account-weighted, pre-tax investment performance as judged against the applicable benchmarks for each account managed by a portfolio manager (including the Funds) and relative to applicable industry peer groups;

 

    Appropriate risk positioning that is consistent with PIMCO’s investment philosophy and the Investment Committee/CIO approach to the generation of alpha;

 

    Amount and nature of assets managed by the portfolio manager;

 

    Consistency of investment performance across portfolios of similar mandate and guidelines (reward low dispersion);


    Generation and contribution of investment ideas in the context of PIMCO’s secular and cyclical forums, portfolio strategy meetings, Investment Committee meetings, and on a day-to-day basis;

 

    Absence of defaults and price defaults for issues in the portfolios managed by the portfolio manager;

 

    Contributions to asset retention, gathering and client satisfaction;

 

    Contributions to mentoring, coaching and/or supervising; and

 

    Personal growth and skills added.

A portfolio manager’s compensation is not based solely on the performance of any Fund or any other account managed by that portfolio manager. They are also evaluated against some of the non-exclusive list of qualitative criteria listed above.

Profit Sharing Plan. Portfolio managers who are Managing Directors of PIMCO receive compensation from a non-qualified profit sharing plan consisting of a portion of PIMCO’s net profits. Portfolio managers who are Managing Directors receive an amount determined by the Compensation Committee, based upon an individual’s overall contribution to the firm.

(a)(4)

The following summarizes the dollar range of securities of the Fund the Portfolio Managers beneficially owned as of July 31, 2016:

 

Portfolio Manager   Dollar Range of Equity Securities of the Fund Owned
as of July 31, 2016
Alfred T. Murata   None
Mohit Mittal   None

 

Item  9. Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers.

None.

 

Item  10. Submission of Matters to a Vote of Security Holders.

There have been no material changes to the procedures by which shareholders may recommend nominees to the Fund’s Board of Trustees since the Fund last provided disclosure in response to this item.

 

Item  11. Controls and Procedures.

 

  (a) The principal executive officer and principal financial & accounting officer have concluded that the Registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the 1940 Act) provide reasonable assurances that material information relating to the Registrant is made known to them by the appropriate persons, based on their evaluation of these controls and procedures as of a date within 90 days of the filing of this report.

 

  (b) There were no changes in the Registrant’s internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act) that occurred during the second fiscal quarter of the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Registrant’s internal control over financial reporting.

 

Item  12. Exhibits.

 

  (a)(1) Exhibit 99.CODE — Code of Ethics pursuant to Section 406 of the Sarbanes-Oxley Act of 2002.

 

  (a)(2) Exhibit 99.CERT— Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

  (b) Exhibit 99.906CERT — Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

PIMCO Corporate & Income Opportunity Fund
By:  

/s/    PETER G. STRELOW

 

  Peter G. Strelow
  President (Principal Executive Officer)                        
Date:   September 27, 2016

Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

By:  

/s/    PETER G. STRELOW

 

  Peter G. Strelow
  President (Principal Executive Officer)

Date:

  September 27, 2016
By:  

/s/    WILLIAM G. GALIPEAU

 

  William G. Galipeau
  Treasurer (Principal Financial & Accounting Officer)

Date:

  September 27, 2016