Examples of secular trends that have framed PIMCO’s investment strategy in recent years include:

• Globalization and its effect on pricing power and competition 
• Technological advancements and their effect on productivity 
• Government and defence expenditures and how they influence inflation 
• Demographics and the aging of the baby boomer generation 
• Financial engineering and its impact on the economy and the corporate sector

The 2005 Secular Forum Agenda
The Secular Forum typically begins with presentations by our guest speakers. Guest speakers at previous Secular Forums have included Nobel Laureate economists, policymakers, regulators, demographers, historians and commodity experts. Our purpose in inviting these outside experts is to inject new thinking into our process and avoid institutionalizing our views on some of the long-term themes that run consistently through our forums. We also invite specialists to enhance our understanding of specific factors we expect to affect the secular outlook. For the 2005 Secular Forum, PIMCO has invited four guest speakers, all world-renowned experts in their fields, to offer their views on three topics we have identified as central to the secular outlook.

Topic: The Bretton Woods II Currency Regime
Under the "Bretton Woods II" currency regime, foreign investors (primarily Asian central banks) have been funding the burgeoning U.S. current account deficit. U.S. consumers reap the benefits of artificially low interest rates and an overvalued dollar, while Asia benefits from the continued U.S. demand for imported goods. While this unwritten pact has benefited both the U.S. and Asia, it has also created imbalances in the global financial system that cannot be sustained indefinitely. The key secular questions are how long the Bretton Woods II regime can be sustained, what will cause its demise and how the regime is affecting asset prices. PIMCO has invited two speakers to address different aspects of this topic:

• Michael Dooley, Professor at University of California, Santa Cruz, will discuss the sustainability of the Bretton Woods II currency regime. Professor Dooley has postulated that the U.S. current account deficit is desirable and will be sustained by the secular nature of Asian urbanization.

• Jonathan Wilmot, Managing Director of Credit Suisse First Boston and Chief Global Strategist, will discuss whether or not asset bubbles are endemic in the Bretton Woods II world.

Topic: Global Pension Reform
The global trend toward greater regulation of pension plans has significant long-term implications for asset allocation and the fixed income market. PIMCO has invited one of the world’s foremost authorities on pensions and retirement issues to discuss the issue:

• Olivia Mitchell, Professor of Insurance and Risk Management and Business and Public Policy at Wharton, will discuss the evolution, or revolution, underway in the global pension industry. Professor Mitchell served on President George Bush’s Commission to Strengthen Social Security and has written extensively on the topic of pensions and retirement.

Topic: Global Competition for Oil and Other Resources
Asia’s industrialization and the development of emerging economies around the globe have contributed to a steady rise in demand for oil and other resources. At the same time, oil production has increasingly shifted from developed countries to less-stable developing nations. PIMCO has invited a renowned author to discuss these trends and their implications for globalization, geopolitics and global economic growth:

• Michael Klare, author of Blood and Oil: The Dangers and Consequences of America’s Growing Dependency on Imported Petroleum, will discuss the militarization of U.S. energy policy and the potential for future "resource wars".

Guest speakers are typically scheduled for the first two days of the Secular Forum. Each presentation is followed by discussion and debate among PIMCO’s investment professionals and our guest expert about the issues raised and their implications for financial markets. The final day of the Secular Forum is reserved for an intensive internal debate and discussion about how secular themes will interact with each other in the global financial markets.

Structuring Portfolios for the Long-Term Improves Consistency
The Secular Forum is not an academic exercise. Our purpose is to identify opportunities to profit from secular trends. As Bill Gross often notes, PIMCO cannot invest in GDP futures or productivity options.

"When all is said and done, the task of the Forum is to tell us where to invest our clients’ money-domestically or internationally, long duration or short, high quality or high yield. If we can’t translate an economic outlook into a portfolio of bonds then the three days of discussion could better have been spent on the golf course." -Bill Gross, Investment Outlook, March 2000

Based on the conclusions drawn at the Secular Forum, PIMCO’s Investment Committee develops the major strategies that serve as a model for all portfolios. We firmly believe that structuring portfolios around these secular trends, rather than short-term forecasts, may improve our ability to consistently add value over the long term.

While PIMCO has a strong record when it comes to forecasting economic fundamentals over short time horizons, the mechanisms that translate those fundamentals into interest rate changes are less predictable and they are influenced by random events, market sentiment, often-unreliable economic statistics and other temporary factors. This randomness makes it difficult to add value consistently through strategies based simply on short-term factors.

Maintaining a disciplined focus on our long-term expectations and structuring our portfolios around secular trends helps to remove emotion from the equation. In so doing, it increases our ability to recognize value when short-term trends diverge from the market’s long-term course, and can allow us to capture the broad, long-term market moves that constitute a key aspect of value creation in portfolios.

For example, the market’s initial reaction to the fall of the Berlin Wall in late 1989 caused interest rates to rise. But PIMCO recognized that the end of the Cold War was a secular event that would accelerate the trend of globalization and its disinflationary consequences, creating a favourable environment for bonds over the long term. By focusing on the secular implications of the end of the Cold War, we were able to position PIMCO portfolios to profit from the resumption of the long-term bull market in bonds in late 1990.

Secular vs. Cyclical Forces
Secular forces determine market direction over the long term, but there are clearly times when cyclical forces dominate, either reinforcing or contradicting the secular trend. For this reason, PIMCO supplements our secular views with quarterly Economic Forums that examine cyclical factors and help to fine-tune our strategy over shorter time periods. The Secular Forum establishes our outlook for the global economy and the broad direction of bond markets over the next several years. The Economic Forums provide forecasts for economic growth, inflation and interest rates over the next several quarters.

PIMCO’s portfolios and strategies are rooted within our secular views, with the flexibility to fine tune our strategies based on the shorter-term views developed at our cyclical forums. We would not reverse course or alter our secular views without the full examination of long-term structural forces that our Secular Forum provides. For example, we may trim exposure to a bond market sector that we believe to be temporarily overvalued, such as mortgage-backed bonds, even though we take a strongly favourable view of that sector for the long run.

A Disciplined Long-Term Approach is the Foundation of Our Success
There are many factors that contribute to PIMCO’s potential to add value to our clients’ portfolios, from our corporate structure to our state-of-the-art technology. But our growth, reputation and success have been fundamentally built on our secular approach. A short-term orientation can dazzle one year and disappoint the next. Our goal is to consistently add value and enhance returns for our clients. We believe that our track record is evidence that a secular orientation, combined with a disciplined yet flexible approach, is critical to achieving that goal.