PIMCO Income Strategy 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: 811-21374

PIMCO Income Strategy Fund

(Exact name of registrant as specified in charter)

1633 Broadway, New York, NY 10019

(Address of principal executive offices)

Trent W. Walker

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, 2018

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).

 


LOGO

 

PIMCO Closed-End Funds

 

 

Annual Report

 

July 31, 2018

 

 

 

PIMCO Corporate & Income Opportunity Fund | PTY | NYSE

PIMCO Corporate & Income Strategy Fund | PCN | NYSE

PIMCO High Income Fund | PHK | NYSE

PIMCO Income Strategy Fund | PFL | NYSE

PIMCO Income Strategy Fund II | PFN | NYSE


Table of Contents

 

            Page  
     

Letter from the Chairman of the Board & President

        2  

Important Information About the Funds

        4  

Financial Highlights

        16  

Statements of Assets and Liabilities

        18  

Statements of Operations

        19  

Statements of Changes in Net Assets

        20  

Statements of Cash Flows

        22  

Notes to Financial Statements

        79  

Report of Independent Registered Public Accounting Firm

        102  

Glossary

        103  

Federal Income Tax Information

        104  

Shareholder Meeting Results

        105  

Changes to Boards of Trustees

        106  

Dividend Reinvestment Plan

        107  

Management of the Funds

        109  

Approval of Investment Management Agreement

        112  

Privacy Policy

        118  
     
Fund    Fund
Summary
     Schedule of
Investments
 
     

PIMCO Corporate & Income Opportunity Fund

     11        23  

PIMCO Corporate & Income Strategy Fund

     12        36  

PIMCO High Income Fund

     13        47  

PIMCO Income Strategy Fund

     14        58  

PIMCO Income Strategy Fund II

     15        68  


Letter from the Chairman of the Board & President

 

Dear Shareholder,

 

Following is the PIMCO Closed-End Funds Annual Report, which covers the 12-month reporting period ended July 31, 2018. On the subsequent pages you will find specific details regarding investment results and a discussion of factors that most affected performance over the reporting period.

 

For the 12-month reporting period ended July 31, 2018

 

The U.S. economy continued to expand during the reporting period. Looking back, U.S. gross domestic product (GDP) grew at an annual pace of 2.8% and 2.3% during the third and fourth quarters of 2017, respectively. First-quarter 2018 GDP then moderated to an annual pace of 2.2%. The Commerce Department’s second reading — released after the end of the reporting period — showed that second-quarter 2018 GDP grew at an annual pace of 4.2%.

 

The Federal Reserve (Fed) continued to normalize monetary policy during the reporting period. In October 2017, the Fed started to reduce its balance sheet. The Fed then raised interest rates in December 2017, moving the federal funds rate up to a range between 1.25% and 1.50%. At its March 2018 meeting, the Fed again increased rates to a range between 1.50% and 1.75%. Finally, at its meeting that concluded on June 13, 2018, the Fed raised rates to a range between 1.75% and 2.00%.

 

Economic activity outside the U.S. initially accelerated during the reporting period, but then moderated somewhat as the reporting period progressed. Against this backdrop, the European Central Bank (ECB) and Bank of Japan largely maintained their highly accommodative monetary policies. Other central banks took a more hawkish stance. In November 2017, the Bank of England instituted its first rate hike since 2007, and again raised rates at its meeting in August 2018 (after the reporting period ended). Elsewhere, the Bank of Canada raised rates once during the reporting period. Meanwhile, in June 2018, the ECB indicated that it plans to end its quantitative easing program by the end of the year, but it did not expect to raise interest rates “at least through the summer of 2019.”

 

The U.S. Treasury yield curve flattened during the reporting period as short-term rates moved up more than their longer-term counterparts. In our view, the increase in rates at the short end of the yield curve was mostly due to Fed interest rate hikes. The yield on the benchmark 10-year U.S. Treasury note was 2.96% at the end of the reporting period, up from 2.30% on July 31, 2017. U.S. Treasuries, as measured by the Bloomberg Barclays U.S. Treasury Index, returned -1.23% over the twelve months ended July 31, 2018. Meanwhile, the Bloomberg Barclays U.S. Aggregate Bond Index, a widely used index of U.S. investment grade bonds, returned -0.80% over the period. Riskier fixed income asset classes, including high yield corporate bonds and emerging market debt, generated mixed results versus the broad U.S. market. The ICE BofAML U.S. High Yield Index gained 2.49% over the reporting period, whereas emerging market external debt, as represented by the J.P. Morgan Emerging Markets Bond Index (EMBI) Global, returned -1.09% over the reporting period. Emerging market local bonds, as represented by the J.P. Morgan Government Bond Index-Emerging Markets Global Diversified Index (Unhedged), returned -2.50% over the period.

 

Global equities generally rose over the first six months of the period. We believe this rally was driven by a number of factors, including improving global growth, corporate profits that often exceeded expectations and, in the U.S., optimism surrounding the passage of a tax reform bill in December 2017. A portion of those gains in the U.S. were given back in February and March 2018 partially due to concerns over less accommodative central bank policies and fears of a trade war. However, U.S. equities rallied over the last four months of the reporting period. All told, U.S. equities, as represented by the S&P 500 Index, returned 16.24% during the reporting period. Emerging market equities, as measured by the MSCI Emerging Markets Index, returned 4.36% over the period, whereas global equities, as represented by the MSCI World Index, returned 11.88%. Elsewhere, Japanese equities, as represented by the Nikkei 225 Index (in JPY), returned 15.37% over the reporting period and European equities, as represented by the MSCI Europe Index (in EUR), returned 6.44%.

 

2   PIMCO CLOSED-END FUNDS     


Commodity prices fluctuated and generated mixed results during the twelve months ended July 31, 2018. When the reporting period began, crude oil was approximately $50 a barrel. By the end of the period, it was roughly $69 a barrel. We believe this ascent was driven partly by planned and observed production cuts by the Organization of Petroleum Exporting Countries (OPEC) and the collapse in Venezuelan oil production, as well as demands from global growth. Elsewhere, gold and copper prices moved modestly lower over the reporting period.

 

Finally, during the reporting period, there were episodes of volatility in the foreign exchange markets, due in part to rising trade tensions, signs of improving global growth, decoupling central bank policies and a number of geopolitical events. The U.S. dollar generally strengthened against other major currencies over the reporting period. For example, the U.S. dollar returned 1.28%, 0.69% and 1.44% versus the euro, British pound and Japanese yen, respectively, during the twelve months ended July 31, 2018.

 

Thank you for the assets you have placed with us. We deeply value your trust, and will continue to work diligently to meet your broad 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. We also invite you to visit our website at pimco.com to learn more about our views.

 

Sincerely,

 

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

 

Past performance is no guarantee of future results.

 

  ANNUAL REPORT   JULY 31, 2018   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 may trend upward, rising rates would negatively impact the performance of most bond funds, and fixed-income securities and other instruments held by a Fund are likely to decrease in value. A wide variety of factors can cause interest rates to rise (e.g., central bank monetary policies, inflation rates, general economic conditions). In addition, changes in interest rates can be sudden and unpredictable, and there is no guarantee that Fund management will anticipate such movement accurately. A Fund may lose money as a result of movement in interest rates.

 

As of the date of this report, interest rates in the U.S. and many parts of the world, including certain European countries, are at or near historically low levels. As such, bond funds may currently face an increased exposure to the risks associated with a rising interest rate environment. This is especially true as the Fed ended its quantitative easing program in October 2014 and has begun, and may continue, to raise interest rates. To the extent the Federal Reserve Board continues to raise interest rates, there is a risk that rates across the financial system may rise. Further, while bond markets have steadily grown over the past three decades, dealer inventories of corporate bonds are near historic lows in relation to market size. As a result, there has been a significant reduction in the ability of dealers to “make markets.” Bond funds and individual bonds with a longer duration (a measure used to determine 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. All of the factors mentioned above, individually or collectively, could lead to increased volatility and/or lower liquidity in the fixed income markets or negatively impact a Fund’s performance or cause a Fund to incur losses.

 

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, leverage risk, management risk and the risk that a Fund may not be able to close out a position when it would be most advantageous to do so. Changes in regulation relating to a 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/or adversely affect the value or performance of derivatives and the Fund. 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 an asset, instrument or component of the index underlying 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 the 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 own.

 

Certain Funds’ monthly distributions may include, among other possible sources, interest income from its debt portfolio and 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, the 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 rate) with respect to a contract whereby the payment obligations do

 

 

4   PIMCO CLOSED-END FUNDS     


 

not commence until a date following the commencement of the initial leg (the “forward leg”).

 

A Fund’s income- and gain-generating strategies, including certain derivatives strategies, may generate current, distributable income, even if such strategies could potentially result in declines in a 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. 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 a substantial possibility 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. Moreover, to make payments of interest and other loan costs, a Fund may be forced to sell portfolio securities when it is not otherwise advantageous to do so.

 

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. Investing in foreign (non-U.S.) securities may entail risk due to foreign (non-U.S.) economic and political developments; this risk may be increased when investing 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 foreign (non-U.S.) issuer.

 

The geographical classification of 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.

 

Investments in loans (including whole 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

 

 

  ANNUAL REPORT   JULY 31, 2018   5


Important Information About the Funds (Cont.)

 

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. A Fund may be subject to heightened or additional risks and potential liabilities and costs by investing in mezzanine and other subordinated 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.

 

Mortgage-related and other asset-backed securities represent interests in “pools” of mortgages or other assets such as consumer loans or receivables held in trust and often involve risks that are different from or possibly 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 exhibit 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. Additionally, investments in subordinate mortgage-backed and other asset-backed securities will be subject to risks arising from delinquencies and foreclosures, thereby exposing a Fund’s investment portfolio to potential losses. Subordinate securities of mortgage-backed and other asset-backed securities are also subject to greater credit risk than those mortgage-backed or other asset-backed securities that are more highly rated.

A Fund may also invest in the residual or equity tranches of mortgage-related and other asset-backed instruments, which may be referred to as subordinate mortgage-backed or asset-backed instruments and interest-only mortgage-backed or asset-backed instruments. Subordinate mortgage-backed or asset-backed instruments are paid interest only to the extent that there are funds available to make payments. To the extent the collateral pool includes a large percentage of delinquent loans, there is a risk that interest payment on subordinate mortgage-backed or asset-backed instruments will not be fully paid. There are multiple tranches of mortgage-backed and asset-backed instruments, offering investors various maturity and credit risk characteristics. Tranches are categorized as senior, mezzanine, and subordinated/equity or “first loss,” according to their degree of risk. The most senior tranche of a mortgage-backed or asset-backed instrument has the greatest collateralization and pays the lowest interest rate. If there are defaults or the collateral otherwise underperforms, scheduled payments to senior tranches take precedence over those of mezzanine tranches, and scheduled payments to mezzanine tranches take precedence over those to subordinated/equity tranches. Lower tranches represent lower degrees of credit quality and pay higher interest rates intended to compensate for the attendant risks. The return on the lower tranches is especially sensitive to the rate of defaults in the collateral pool. The lowest tranche (i.e., the “equity” or “residual” tranche) specifically receives the residual interest payments (i.e., money that is left over after the higher tranches have been paid and expenses of the issuing entities have been paid) rather than a fixed interest rate. Each Fund expects that investments in subordinate mortgage-backed and other asset-backed instruments will be subject to risks arising from delinquencies and foreclosures, thereby exposing its investment portfolio to potential losses. Subordinate securities of mortgage-backed and other asset-backed instruments are also subject to greater credit risk than those mortgage-backed or other asset-backed securities that are more highly rated.

 

The risk of investing in collateralized loan obligations (“CLOs”), include prepayment risk, credit risk, liquidity risk, market risk, structural risk, legal risk and interest rate risk. CLOs may 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 quality of the collateral may decline in value or default; (iii) the possibility that the investments in CLOs are subordinate to other classes or tranches thereof; 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.

 

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,

 

 

6   PIMCO CLOSED-END FUNDS     


 

markets for lower-rated bonds are typically less liquid than for higher-rated bonds, and public information is usually less abundant in markets for lower-rated bonds. Thus, high yield investments increase the chance that a Fund will lose money. PIMCO does not rely solely on credit ratings, and develops its own analysis of issuer credit quality. A Fund may purchase unrated securities (which are not rated by a rating agency) if PIMCO determines that the security is of comparable quality to a rated security that a Fund may purchase. Unrated securities may be less liquid than comparable rated securities and involve the risk that PIMCO may not accurately evaluate the security’s comparative credit quality, which could result in a Fund’s portfolio having a higher level of credit and/or high yield risk than PIMCO has estimated or desires for the Fund, and could negatively impact the Fund’s performance and/or returns. Certain Funds may invest a substantial portion of their assets in unrated securities and therefore may be particularly subject to the associated risks. Analysis of the creditworthiness of issuers of high yield securities may be more complex than for issuers of higher-quality debt obligations. To the extent that a Fund invests in high yield and/or unrated securities, the Fund’s success in achieving its investment objectives may depend more heavily on the portfolio manager’s creditworthiness analysis than if the Fund invested exclusively in higher-quality and rated securities. 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 obligations might be repaid only after lengthy workout or bankruptcy proceedings, during which the issuer might not make any interest or other payments. Defaulted securities are often illiquid and may not be actively traded. Sales 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. The credit quality of a particular security or group of securities does not ensure the stability or safety of the overall portfolio.

 

Contingent convertible securities (“CoCos”) are a form of hybrid debt security issued primarily by non-U.S. issuers, which have loss absorption mechanisms built into their terms. CoCos have no stated maturity, have fully discretionary coupons and are typically issued in the form of subordinated debt instruments. CoCos generally either convert into equity of the issuer or have their principal written down upon the occurrence of certain triggering events (“triggers”) linked to regulatory capital thresholds or regulatory actions relating to the issuer’s continued viability. As a result, an investment by a Fund in CoCos is subject to the risk that interest payments will be cancelled by the issuer or a regulatory authority, the risk of ranking junior to other creditors in the event of a liquidation or other bankruptcy-related event as a result of holding subordinated debt, the risk of the Fund’s investment

becoming further subordinated as a result of conversion from debt to equity, the risk that the principal amount due can be written down to a lesser amount, and the general risks applicable to fixed income investments, including interest rate risk, credit risk, market risk and liquidity risk, any of which could result in losses to the Fund. In certain scenarios, investors in CoCos may suffer a loss of capital ahead of equity holders or when equity holders do not. There is no guarantee that a Fund will receive a return of principal on CoCos. Any indication that an automatic write-down or conversion event may occur can be expected to have an adverse effect on the market price of CoCos. CoCos are often rated below investment grade and are subject to the risks of high yield securities. Because CoCos are issued primarily by financial institutions, CoCos may present substantially increased risks at times of financial turmoil, which could affect financial institutions more than companies in other sectors and industries. Further, the value of an investment in CoCos is unpredictable and will be influenced by many factors and risks, including interest rate risk, credit risk, market risk and liquidity risk. An investment by a Fund in CoCos may result in losses to the Fund.

 

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 countries in Europe to the brink of default 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

 

 

  ANNUAL REPORT   JULY 31, 2018   7


Important Information About the Funds (Cont.)

 

European Union 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 and information security risks resulting from breaches in cyber security. A breach in cyber security refers to both intentional and unintentional cyber events that may, among other things, cause a Fund to lose proprietary information, suffer data corruption and/or destruction or lose operational capacity, result in the unauthorized release or other misuse of confidential information, or otherwise disrupt normal business operations. 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 involving a Fund’s third party service providers (including but not limited to advisers, sub-advisers, administrators, transfer agents, custodians, distributors and other third parties), trading counterparties or issuers in which a Fund invests can also subject a Fund to many of the same risks associated with direct cyber security breaches. Moreover, cyber security breaches involving trading counterparties or issuers in which a Fund invests could adversely impact such counterparties or issuers and cause the Fund’s investment to lose value.

 

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; additional compliance and cyber security risk management costs and other adverse consequences. 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 business continuity plans and risk management systems designed to reduce the risks associated with cyber security. However, there are inherent limitations in these plans and systems, including that certain risks may not have been identified, in large part because different or unknown threats may emerge in the future. As such, there is no guarantee that such efforts will succeed, especially because the Funds do not directly control the cyber security systems of issuers in which a Fund may invest, trading counterparties or third party service providers to the Funds. There is also a risk that cyber security breaches may not be detected. 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 they 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,

 

 

8   PIMCO CLOSED-END FUNDS     


 

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, including, but not limited to, the following: asset allocation risk, credit risk, stressed securities risk, distressed and defaulted securities risk, corporate bond risk, contingent convertible securities risk, high yield 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 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 shareholders 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

 

 

  ANNUAL REPORT   JULY 31, 2018   9


Important Information About the Funds (Cont.)

 

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, 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 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.

 

The SEC has adopted a rule that, beginning in 2021, generally will allow the Funds to fulfill their obligation to deliver shareholder reports to investors by providing access to such reports online free of charge and by mailing a notice that the report is electronically available. Pursuant to the rule, investors may still elect to receive a complete shareholder report in the mail. PIMCO currently is evaluating how to make the electronic delivery option available to shareholders in the future.

 

 

10   PIMCO CLOSED-END FUNDS     


PIMCO Corporate & Income Opportunity Fund

 

  Symbol on NYSE -  PTY

 

Allocation Breakdown as of 07/31/2018§

 

Corporate Bonds & Notes

    46.2%  

Non-Agency Mortgage-Backed Securities

    15.7%  

Asset-Backed Securities

    14.3%  

Loan Participations and Assignments

    5.8%  

Municipal Bonds & Notes

    3.6%  

Sovereign Issues

    3.4%  

U.S. Government Agencies

    3.4%  

Short-Term Instruments

    3.0%  

Preferred Securities

    1.9%  

Common Stocks

    1.2%  

Real Estate Investment Trusts

    1.0%  

Other

    0.5%  
    

% of Investments, at value.

 

  § 

Allocation Breakdown and % of investments exclude securities sold short and financial derivative instruments, if any.

 

Fund Information (as of July 31, 2018)(1)

 

Market Price

    $17.95  

NAV

    $14.80  

Premium/(Discount) to NAV

    21.28%  

Market Price Distribution Rate(2)

    8.69%  

NAV Distribution Rate(2)

    10.54%  

Total Effective Leverage(3)

    44%  
 

 

Average Annual Total Return(1) for the period ended July 31, 2018  
    1 Year     5 Year     10 Year     Commencement
of Operations
(12/27/02)
 
Market Price     16.78%       13.74%       17.55%       14.52%  
NAV     10.56%       12.98%       17.20%       14.37%  

 

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. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the sale of Fund shares. Total return, market price, NAV, market price distribution rate, and NAV distribution rate will fluctuate with changes in market conditions. The NAV presented may differ from the NAV reported for the same period in other Fund materials. Performance current to the most recent month-end is available at www.pimco.com or via (844) 33-PIMCO. Performance is calculated assuming all dividends and distributions are reinvested at prices obtained under the Fund’s dividend reinvestment plan. Performance does not reflect any brokerage commissions in connection with the purchase or sale of Fund shares.

 

(2) 

Distribution rates 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 in accordance with its policies and good accounting practices, 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 estimated 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 investment objective is to seek maximum total return through a combination of current income and capital appreciation.

 

Fund Insights at NAV

 

The following affected performance during the reporting period:

 

»  

Exposure to securitized products, including non-agency residential mortgage backed securities, benefited absolute performance, as spreads tightened during the period.

 

»  

Exposure to the U.S. dollar benefited absolute performance, as the U.S. dollar appreciated against most major currencies.

 

»  

Exposure to corporate credit benefited absolute performance.

 

»  

Exposure to the intermediate portion of the U.S. yield curve detracted from absolute performance, as rates rose during the period.

 

»  

Exposure to the Argentine peso (“ARS”) detracted from absolute performance, as the ARS depreciated against most major currencies.

 

  ANNUAL REPORT   JULY 31, 2018   11


PIMCO Corporate & Income Strategy Fund

 

  Symbol on NYSE - PCN

 

Allocation Breakdown as of 07/31/2018†§

 

Corporate Bonds & Notes

    40.0%  

Non-Agency Mortgage-Backed Securities

    19.5%  

Asset-Backed Securities

    16.7%  

U.S. Government Agencies

    5.2%  

Municipal Bonds & Notes

    4.0%  

Sovereign Issues

    3.7%  

Loan Participations and Assignments

    3.1%  

Preferred Securities

    3.0%  

Short-Term Instruments

    1.8%  

Real Estate Investment Trusts

    1.2%  

Common Stocks

    1.1%  

Other

    0.7%  
    

% of Investments, at value.

 

  § 

Allocation Breakdown and % of investments exclude securities sold short and financial derivative instruments, if any.

Fund Information (as of July 31, 2018)(1)

 

Market Price

    $18.09  

NAV

    $14.90  

Premium/(Discount) to NAV

    21.41%  

Market Price Distribution Rate(2)

    7.46%  

NAV Distribution Rate(2)

    9.06%  

Total Effective Leverage(3)

    22%  
 

 

Average Annual Total Return(1) for the period ended July 31, 2018  
    1 Year     5 Year     10 Year     Commencement
of Operations
(12/21/01)
 
Market Price     9.61%       13.21%       15.08%       12.57%  
NAV     6.36%       10.61%       15.43%       12.09%  

 

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. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the sale of Fund shares. Total return, market price, NAV, market price distribution rate, and NAV distribution rate will fluctuate with changes in market conditions. The NAV presented may differ from the NAV reported for the same period in other Fund materials. Performance current to the most recent month-end is available at www.pimco.com or via (844) 33-PIMCO. Performance is calculated assuming all dividends and distributions are reinvested at prices obtained under the Fund’s dividend reinvestment plan. Performance does not reflect any brokerage commissions in connection with the purchase or sale of Fund shares.

 

(2) 

Distribution rates 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 in accordance with its policies and good accounting practices, 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 estimated 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

 

The following affected performance during the reporting period:

 

»  

Exposure to securitized products, including non-agency residential mortgage backed securities, benefited absolute performance, as spreads tightened during the period.

 

»  

Exposure to the U.S. dollar benefited absolute performance, as the U.S. dollar appreciated against most major currencies.

 

»  

Exposure to investment grade corporates benefited absolute performance.

 

»  

Exposure to the intermediate portion of the U.S. yield curve detracted from absolute performance, as rates rose during the period.

 

»  

Exposure to the Argentine peso (“ARS”) detracted from absolute performance, as the ARS depreciated against most major currencies.

 

12   PIMCO CLOSED-END FUNDS     


PIMCO High Income Fund

 

Symbol on NYSE -  PHK

 

Allocation Breakdown as of 07/31/2018§

 

Corporate Bonds & Notes

    48.0%  

Non-Agency Mortgage-Backed Securities

    14.9%  

Asset-Backed Securities

    9.1%  

Municipal Bonds & Notes

    5.9%  

Short-Term Instruments

    5.2%  

Preferred Securities

    3.9%  

Sovereign Issues

    3.5%  

U.S. Government Agencies

    3.2%  

Loan Participations and Assignments

    2.5%  

Real Estate Investment Trusts

    1.8%  

Common Stocks

    1.5%  

Other

    0.5%  
    

% of Investments, at value.

 

  § 

Allocation Breakdown and % of investments exclude securities sold short and financial derivative instruments, if any.

Fund Information (as of July 31, 2018)(1)

 

Market Price

    $8.67  

NAV

    $6.54  

Premium/(Discount) to NAV

    32.57%  

Market Price Distribution Rate(2)

    11.17%  

NAV Distribution Rate(2)

    14.81%  

Total Effective Leverage(3)

    28%  
 

 

Average Annual Total Return(1) for the period ended July 31, 2018  
    1 Year     5 Year     10 Year     Commencement
of Operations
(04/30/03)
 
Market Price     13.13%       6.95%       11.59%       10.29%  
NAV     9.48%       13.23%       14.72%       11.94%  

 

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. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the sale of Fund shares. Total return, market price, NAV, market price distribution rate, and NAV distribution rate will fluctuate with changes in market conditions. The NAV presented may differ from the NAV reported for the same period in other Fund materials. Performance current to the most recent month-end is available at www.pimco.com or via (844) 33-PIMCO. Performance is calculated assuming all dividends and distributions are reinvested at prices obtained under the Fund’s dividend reinvestment plan. Performance does not reflect any brokerage commissions in connection with the purchase or sale of Fund shares.

 

(2) 

Distribution rates 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 in accordance with its policies and good accounting practices, 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 estimated 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

 

The following affected performance during the reporting period:

 

»  

Exposure to securitized products, including non-agency residential mortgage backed securities, benefited absolute performance, as spreads tightened during the period.

 

»  

Exposure to the U.S. dollar benefited absolute performance, as the U.S. dollar appreciated against most major currencies.

 

»  

Exposure to corporate credit benefited absolute performance.

 

»  

Exposure to the intermediate portion of the U.S. yield curve detracted from absolute performance, as rates rose during the period.

 

»  

Exposure to the Argentine peso (“ARS”) detracted from absolute performance, as the ARS depreciated against most major currencies.

 

  ANNUAL REPORT   JULY 31, 2018   13


PIMCO Income Strategy Fund

 

Symbol on NYSE -  PFL

 

Allocation Breakdown as of 07/31/2018§

 

Corporate Bonds & Notes

    43.2%  

Asset-Backed Securities

    20.0%  

Non-Agency Mortgage-Backed Securities

    10.7%  

Short-Term Instruments

    5.1%  

Municipal Bonds & Notes

    4.6%  

Loan Participations and Assignments

    4.6%  

Sovereign Issues

    3.2%  

U.S. Government Agencies

    3.2%  

Preferred Securities

    2.6%  

Real Estate Investment Trusts

    1.1%  

Common Stocks

    1.0%  

Other

    0.7%  
    

% of Investments, at value.

 

  § 

Allocation Breakdown and % of investments exclude securities sold short and financial derivative instruments, if any.

Fund Information (as of July 31, 2018)(1)

 

Market Price

    $12.23  

NAV

    $11.14  

Premium/(Discount) to NAV

    9.78%  

Market Price Distribution Rate(2)

    8.83%  

NAV Distribution Rate(2)

    9.69%  

Total Effective Leverage(3)

    25%  
 

 

Average Annual Total Return(1) for the period ended July 31, 2018  
    1 Year     5 Year     10 Year     Commencement
of Operations
(08/29/03)
 
Market Price     10.37%       11.20%       10.57%       7.36%  
NAV     5.62%       9.28%       9.24%       7.10%  

 

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. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the sale of Fund shares. Total return, market price, NAV, market price distribution rate, and NAV distribution rate will fluctuate with changes in market conditions. The NAV presented may differ from the NAV reported for the same period in other Fund materials. Performance current to the most recent month-end is available at www.pimco.com or via (844) 33-PIMCO. Performance is calculated assuming all dividends and distributions are reinvested at prices obtained under the Fund’s dividend reinvestment plan. Performance does not reflect any brokerage commissions in connection with the purchase or sale of Fund shares.

 

(2) 

Distribution rates 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 in accordance with its policies and good accounting practices, 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 estimated 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 investment objective is to seek high current income, consistent with the preservation of capital.

 

Fund Insights at NAV

 

The following affected performance during the reporting period:

 

»  

Exposure to securitized products, including non-agency residential mortgage backed securities, benefited absolute performance, as spreads tightened during the period.

 

»  

Exposure to the U.S. dollar benefited absolute performance, as the U.S. dollar appreciated against most major currencies.

 

»  

Exposure to investment grade corporates benefited absolute performance.

 

»  

Exposure to the intermediate portion of the U.S. yield curve detracted from absolute performance, as rates rose during the period.

 

»  

Exposure to the Argentine peso (“ARS”) detracted from absolute performance, as the ARS depreciated against most major currencies.

 

14   PIMCO CLOSED-END FUNDS     


PIMCO Income Strategy Fund II

 

Symbol on NYSE -  PFN

 

Allocation Breakdown as of 07/31/2018§

 

Corporate Bonds & Notes

    43.8%  

Non-Agency Mortgage-Backed Securities

    16.3%  

Asset-Backed Securities

    15.6%  

Municipal Bonds & Notes

    6.2%  

Loan Participations and Assignments

    4.0%  

Sovereign Issues

    3.2%  

Preferred Securities

    3.1%  

U.S. Government Agencies

    2.6%  

Short-Term Instruments

    2.1%  

Common Stocks

    1.3%  

Real Estate Investment Trusts

    1.1%  

Other

    0.7%  
    

% of Investments, at value.

 

  § 

Allocation Breakdown and % of investments exclude securities sold short and financial derivative instruments, if any.

 

Fund Information (as of July 31, 2018)(1)

 

Market Price

    $10.70  

NAV

    $10.07  

Premium/(Discount) to NAV

    6.26%  

Market Price Distribution Rate(2)

    8.97%  

NAV Distribution Rate(2)

    9.53%  

Total Effective Leverage(3)

    23%  
 

 

Average Annual Total Return(1) for the period ended July 31, 2018  
    1 Year     5 Year     10 Year     Commencement
of Operations
(10/29/04)
 
Market Price     9.19%       11.63%       10.03%       6.37%  
NAV     7.10%       10.02%       8.29%       6.24%  

 

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. Returns shown do not reflect the deduction of taxes that a shareholder would pay on Fund distributions or the sale of Fund shares. Total return, market price, NAV, market price distribution rate, and NAV distribution rate will fluctuate with changes in market conditions. The NAV presented may differ from the NAV reported for the same period in other Fund materials. Performance current to the most recent month-end is available at www.pimco.com or via (844) 33-PIMCO. Performance is calculated assuming all dividends and distributions are reinvested at prices obtained under the Fund’s dividend reinvestment plan. Performance does not reflect any brokerage commissions in connection with the purchase or sale of Fund shares.

 

(2) 

Distribution rates 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 in accordance with its policies and good accounting practices, 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 estimated 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 investment objective is to seek high current income, consistent with the preservation of capital.

 

Fund Insights at NAV

 

The following affected performance during the reporting period:

 

»  

Exposure to securitized products, including non-agency residential mortgage backed securities, benefited absolute performance, as spreads tightened during the period.

 

»  

Exposure to the U.S. dollar benefited absolute performance, as the U.S. dollar appreciated against most major currencies.

 

»  

Exposure to investment grade corporates benefited absolute performance.

 

»  

Exposure to the intermediate portion of the U.S. yield curve detracted from absolute performance, as rates rose during the period.

 

»  

Exposure to the Argentine peso (“ARS”) detracted from absolute performance, as the ARS depreciated against most major currencies.

 

  ANNUAL REPORT   JULY 31, 2018   15


Financial Highlights

 

         

Investment Operations

          Less Distributions to Preferred
Shareholders(b)
          Less Distributions to Common Shareholders(b)  
                                                                   
Selected Per Share Data for the Year or Period Ended^:  

Net Asset

Value
Beginning
of Year
or Period

    Net
Investment
Income
(Loss)(a)
    Net
Realized/
Unrealized
Gain (Loss)
           From Net
Investment
Income
    From Net
Realized
Capital Gains
   

Net Increase
(Decrease)

in Net Assets
Applicable

to Common

Shareholders
Resulting
from
Operations

    From Net
Investment
Income
    From Net
Realized
Capital
Gains
    Tax Basis
Return of
Capital
    Total  

PIMCO Corporate & Income Opportunity Fund

                     

07/31/2018

  $   14.87     $   1.30     $ 0.16             $ (0.09   $ 0.00     $ 1.37     $ (1.56   $ 0.00     $ 0.00     $ (1.56

07/31/2017

    13.27       1.21       2.06               (0.04     0.00       3.23       (1.59     0.00       (0.14     (1.73

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(g)

    15.41       0.68       (0.33             (0.00     0.00       0.35       (1.69     0.00       0.00       (1.69 )(j) 

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

PIMCO Corporate & Income Strategy Fund

                     

07/31/2018

  $ 15.32     $ 1.20     $ (0.24           $ (0.03   $ 0.00     $ 0.93     $ (1.35   $ 0.00     $ 0.00     $ (1.35

07/31/2017

    14.28       1.12       1.70               (0.01     0.00       2.81       (1.75     0.00       (0.02     (1.77

07/31/2016

    14.75       1.24       (0.84 )(k)              (0.01     0.00       0.39 (l)       (1.37     0.00       0.00       (1.37

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

    15.60       0.73       (0.21             (0.00     0.00       0.52       (1.37     0.00       0.00       (1.37 )(j) 

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

PIMCO High Income Fund

                     

07/31/2018

  $ 6.90     $ 0.62     $   0.01             $   (0.02   $ 0.00     $   0.61     $   (0.84   $ 0.00     $ (0.13   $   (0.97

07/31/2017

    6.63       0.67       0.71               (0.01     0.00       1.37       (0.91     0.00         (0.19     (1.10

07/31/2016

    7.37       0.74       (0.48 )(k)              (0.00     0.00       0.26 (l)       (1.18     0.00       (0.08     (1.26

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

    7.59       0.21       0.06               (0.00     0.00       0.27       (0.33     0.00       (0.16     (0.49 )(j) 

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

PIMCO Income Strategy Fund

                     

07/31/2018

  $ 11.60     $ 0.87     $ (0.19           $ (0.06   $ 0.00     $ 0.62     $ (1.07   $ 0.00     $ (0.01   $ (1.08

07/31/2017

    10.53       0.88       1.31               (0.04     0.00       2.15       (1.08     0.00       0.00       (1.08

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

PIMCO Income Strategy Fund II

                     

07/31/2018

  $ 10.33     $ 0.79     $ (0.05           $ (0.04   $ 0.00     $ 0.70     $ (0.96   $ 0.00     $ 0.00     $ (0.96

07/31/2017

    9.42       0.80       1.10               (0.03     0.00       1.87       (0.96     0.00       0.00       (0.96

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

 

^

A zero balance may reflect actual amounts rounding to less than $0.01 or 0.01%.

*

Annualized

(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, Distributions—Common Shares, in the Notes to Financial Statements for more information.

(c) 

See Note 14, Auction-Rate Preferred Shares, in the Notes to Financial Statements.

(d) 

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.

(e) 

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.

(f) 

Interest expense primarily relates to participation in borrowing and financing transactions. See Note 5, Borrowings and Other Financing Transactions, in the Notes to Financial Statements for more information.

(g) 

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

(h) 

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

(i) 

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

(j) 

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.

(k) 

The amount previously reported in the Funds’ 2016 Annual Report has been revised due to a misstatement. The misstatement was not considered material to the prior period Annual Report. In the Funds’ 2016 Annual Report, PIMCO Corporate & Income Strategy Fund and PIMCO High Income Fund reported amounts of (0.33) and (0.22), respectively.

(l) 

The amount previously reported in the Funds’ 2016 Annual Report has been revised due to a misstatement. The misstatement was not considered material to the prior period Annual Report. In the Funds’ 2016 Annual Report, PIMCO Corporate & Income Strategy Fund and PIMCO High Income Fund reported amounts of 0.90 and 0.52, respectively.

(m) 

The NAV presented may differ from the NAV reported for the same period in other Fund materials.

 

16   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


                        Common Share          

Ratios/Supplemental Data

 
                                                      Ratios to Average Net Assets              
Increase
resulting  from
at-the-market
Offering
    Offering Cost
Charged to
Paid in Capital
   

Increase
Resulting from
Tender and
Repurchase of
Auction-Rate
Preferred
Shares(c)

           Net Asset
Value End of
Year or
Period
    Market Price
End of Year
or Period
    Total
Investment
Return(d)
           Net Assets
Applicable
to Common
Shareholders
(000s)
    Expenses(e)(f)     Expenses
Excluding
Waivers(e)(f)
    Expenses
Excluding
Interest
Expense(e)
    Expenses
Excluding
Interest
Expense and
Waivers(e)
    Net
Investment
Income (Loss)
    Preferred
Shares
Asset
Coverage
Per Share
    Portfolio
Turnover
Rate
 
                             
$ 0.12     $ 0.00     $   0.00             $   14.80 (m)     $   17.95       16.78           $   1,219,515       1.26     1.26     0.81     0.81     8.73   $   153,072       19
    0.10         0.00       0.00               14.87       16.92       29.18               1,140,768       1.08       1.08       0.83       0.83       8.68       144,819       39  
  N/A       N/A       0.00               13.27       14.75       16.09               946,843       0.89       0.89       0.85       0.85       9.93       124,468       45  
  N/A       N/A       0.16               14.23       14.31       (13.61             1,006,484       0.91     0.91     0.90     0.90     7.01     130,743       34  
  N/A       N/A       0.00               15.41       18.50       26.04               1,082,000       0.91       0.91       0.91       0.91       7.36       108,229       44  
  N/A       N/A       0.00               16.62       17.75       (0.15             1,149,779       0.91       0.91       0.91       0.91       8.49       113,443       118  
                             
$ N/A     $ N/A     $ 0.00             $ 14.90 (m)     $ 18.09       9.61           $ 586,592       1.36     1.36     0.94     0.94     7.97   $ 289,023       20
  N/A       N/A       0.00               15.32       17.92       30.63               599,266       1.17       1.17       0.93       0.93       7.65       294,755       38  
  N/A       N/A       0.51               14.28       15.43       24.21               553,569       1.10       1.10       1.02       1.02       8.91       274,223       43  
  N/A       N/A       0.00               14.75       13.71       (7.12             570,122       1.07     1.07     1.07     1.07     6.51     109,336       40  
  N/A       N/A       0.00               15.60       16.18       8.84               599,980       1.09       1.09       1.09       1.09       6.32       113,753       48  
  N/A       N/A       0.00               16.04       17.15       3.48               612,225       1.10       1.10       1.09       1.09       7.91       115,565       108  
                             
$ N/A     $ N/A     $ 0.00             $ 6.54 (m)     $ 8.67       13.13           $ 847,052       1.48     1.48     0.90     0.90     9.30   $ 232,587       27
  N/A       N/A       0.00               6.90       8.71       (1.45             884,912       1.25       1.25       0.90       0.90       10.08       241,894       32  
  N/A       N/A       0.26               6.63       10.03       19.92               841,102       1.08       1.08       0.95       0.95       11.20       231,185       42  
  N/A       N/A       0.00               7.37       9.71       (18.40             925,598       1.05     1.05     1.03     1.03     8.14     104,245       8  
  N/A       N/A       0.00               7.59       12.48       12.30               949,880       1.18       1.18       1.02       1.02       11.53       106,324       58  
  N/A       N/A       0.00               8.23       12.56       15.51               1,021,120       1.14       1.14       1.03       1.03       10.14       112,424       159  
                             
$ N/A     $ N/A     $ 0.00             $ 11.14 (m)     $ 12.23       10.37           $ 284,677       1.48     1.48     1.17     1.17     7.67   $ 163,725       21
  N/A       N/A       0.00               11.60       12.17       28.11               294,525       1.35       1.35       1.17       1.17       8.01       168,552       40  
  N/A       N/A       0.00               10.53       10.48       12.41               266,347       1.17       1.17       1.13       1.13       8.49       154,837       38  
  N/A       N/A       0.11               11.46       10.39       (2.62             289,909       1.30       1.30       1.25       1.25       6.67       166,328       67  
  N/A       N/A       0.00               12.15       11.87       9.95               306,475       1.19       1.19       1.18       1.18       6.71       122,004       113  
                             
$ N/A     $ N/A     $ 0.00             $ 10.07 (m)     $ 10.70       9.19           $ 600,890       1.41     1.41     1.10     1.10     7.79   $ 187,429       18
  N/A       N/A       0.00               10.33       10.76       26.32               612,310       1.26       1.26       1.09       1.09       8.15       190,527       26  
  N/A       N/A       0.00               9.42       9.39       11.92               556,840       1.14       1.14       1.07       1.07       9.25       175,544       38  
  N/A       N/A       0.12               10.27       9.41       (0.12             606,974       1.16       1.16       1.13       1.13       6.58       189,105       63  
  N/A       N/A       0.00               10.88       10.50       12.39               642,119       1.14       1.14       1.14       1.14       6.79       124,695       119  

 

  ANNUAL REPORT   JULY 31, 2018   17


Statements of Assets and Liabilities

 

July 31, 2018

 

(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*

  $ 1,694,909     $ 717,931     $ 1,092,881     $ 365,046     $ 752,152  

Financial Derivative Instruments

                                       

Exchange-traded or centrally cleared

    1,471       679       2,064       381       815  

Over the counter

    4,656       871       1,852       463       1,097  

Cash

    0       0       0       2       1  

Deposits with counterparty

    38,379       9,315       32,046       5,916       12,695  

Foreign currency, at value

    3,358       1,909       2,147       1,142       2,167  

Receivable for investments sold

    14,742       4,826       40,777       3,491       4,524  

Receivable for Fund shares sold

    1,492       0       0       0       0  

Interest and/or dividends receivable

    16,153       6,143       11,477       3,173       6,721  

Other assets

    233       121       7       29       55  

Total Assets

    1,775,393       741,795       1,183,251       379,643       780,227  

Liabilities:

         

Borrowings & Other Financing Transactions

                                       

Payable for reverse repurchase agreements

  $ 238,412     $ 80,777     $ 193,340     $ 29,264     $ 57,560  

Financial Derivative Instruments

                                       

Exchange-traded or centrally cleared

    1,354       622       2,141       353       843  

Over the counter

    25,216       591       3,294       514       1,338  

Payable for investments purchased

    23,713       9,063       14,274       4,977       10,080  

Payable for unfunded loan commitments

    10,759       1,960       3,652       5,397       10,411  

Deposits from counterparty

    6,872       1,665       6,348       561       1,303  

Distributions payable to common shareholders

    10,615       4,429       10,458       2,301       4,775  

Distributions payable to preferred shareholders

    103       19       36       27       35  

Overdraft due to custodian

    49       88       23       0       0  

Accrued management fees

    766       424       588       256       512  

Accrued reimbursement to PIMCO

    0       0       0       0       (1

Other liabilities

    69       40       70       41       31  

Total Liabilities

    317,928       99,678       234,224       43,691       86,887  

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

  $ 1,219,515     $ 586,592     $ 847,052     $ 284,677     $ 600,890  

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

    1,204,391       579,446       986,459       293,931       611,553  

Undistributed (overdistributed) net investment income

    (7,885     (1,879     (18,534     (3,189     1,732  

Accumulated undistributed net realized gain (loss)

    (110,611     (40,201     (139,722     (26,330     (63,307

Net unrealized appreciation (depreciation)

    133,619       49,226       18,848       20,264       50,911  

Net Assets Applicable to Common Shareholders

  $ 1,219,515     $ 586,592     $ 847,052     $ 284,676     $ 600,890  

Net Asset Value Per Common Share:

  $ 14.80     $ 14.90     $ 6.54     $ 11.14     $ 10.07  

Common Shares Outstanding

    82,395       39,366       129,590       25,562       59,684  

Preferred Shares Issued and Outstanding

    10       2       4       2       4  

Cost of investments in securities

  $   1,646,016     $   689,900     $   1,062,006     $   356,044     $   731,361  

Cost of foreign currency held

  $ 3,348     $ 1,922     $ 2,162     $ 1,164     $ 2,199  

Cost or premiums of financial derivative instruments, net

  $ (18,057   $ 14,313     $ 144,662     $ 8,517     $ 18,416  

* Includes repurchase agreements of:

  $ 23,093     $ 9,080     $ 52,730     $ 17,004     $ 11,433  

 

  

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

 

18   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


Statements of Operations

 

Year Ended July 31, 2018                              
(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

  $   117,039     $ 54,232     $ 92,173     $ 26,072     $ 54,611  

Dividends

    2,237       969       953       363       1,165  

Total Income

    119,276       55,201       93,126       26,435       55,776  

Expenses:

         

Management fees

    9,295       5,247       7,347       3,211       6,359  

Trustee fees and related expenses

    165       78       117       42       84  

Interest expense

    5,410       2,497       5,007       886       1,891  

Auction agent fees and commissions

    233       96       148       54       105  

Auction rate preferred shares related expenses

    29       77       44       56       50  

Miscellaneous expense

    37       32       51       15       37  

Total Expenses

    15,169       8,027       12,714       4,264       8,526  

Net Investment Income (Loss)

    104,107       47,174       80,412       22,171       47,250  

Net Realized Gain (Loss):

         

Investments in securities

    25,673       5,505       14,717       4,529       7,505  

Exchange-traded or centrally cleared financial derivative instruments

    18,233       41,306       7,907       8,170       19,536  

Over the counter financial derivative instruments

    15,169       122       4,091       (821     (630

Foreign currency

    (1,502     (238     (457     (146     (180

Net Realized Gain (Loss)

    57,573       46,695       26,258       11,732,       26,231  

Net Change in Unrealized Appreciation (Depreciation):

         

Investments in securities

    (42,701     (10,629     (15,709     (9,296     (12,209

Exchange-traded or centrally cleared financial derivative instruments

    (8,070       (48,353     (13,194     (9,510     (20,755

Over the counter financial derivative instruments

    4,308       2,793       1,143       2,038       4,009  

Foreign currency assets and liabilities

    309       (138     (142     (106     (276

Net Change in Unrealized Appreciation (Depreciation)

    (46,154     (56,327     (27,902     (16,874     (29,231

Net Increase (Decrease) in Net Assets Resulting from Operations

  $ 115,526     $ 37,542     $ 78,768     $ 17,029     $ 44,250  

Distributions on Preferred Shares from Net Investment Income

  $ (6,886   $ (1,205   $ (2,361   $ (1,409   $ (2,540

Net Increase (Decrease) in Net Assets Applicable to Common Shareholders Resulting from Operations

  $ 108,640     $ 36,337     $ 76,407     $ 15,620     $ 41,710  

 

  

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

 

  ANNUAL REPORT   JULY 31, 2018   19


Statements of Changes in Net Assets

 

    PIMCO
Corporate & Income Opportunity Fund
    PIMCO
Corporate & Income Strategy Fund
 
(Amounts in thousands)   Year Ended
July 31, 2018
    Year Ended
July 31, 2017
    Year Ended
July 31, 2018
    Year Ended
July 31, 2017
 

Increase (Decrease) in Net Assets from:

       

Operations:

       

Net investment income (loss)

  $ 104,107     $ 87,904     $ 47,174     $ 43,690  

Net realized gain (loss)

    57,573       92,938       46,695       15,010  

Net change in unrealized appreciation (depreciation)

    (46,154     56,494       (56,327     51,352  

Net Increase (Decrease) in Net Assets Resulting from Operations

    115,526       237,336       37,542       110,052  

Distributions on preferred shares from net investment income

    (6,886     (3,233     (1,205     (567

Net Increase (Decrease) in Net Assets Applicable to Common Shareholders Resulting from Operations

    108,640       234,103       36,337       109,485  

Distributions to Common Shareholders:

       

From net investment income

    (125,322     (114,836     (52,992     (68,101

Tax basis return of capital

    0       (10,356     0       (834

Total Distributions to Common Shareholders(a)

    (125,322     (125,192     (52,992     (68,935

Common Share Transactions**:

       

Net proceeds from at-the-market offering

    83,648       74,138       0       0  

Net at-the-market offering costs

    16       103       0       0  

Issued as reinvestment of distributions

    11,765       10,773       3,981       5,147  

Total increase (decrease) in net assets applicable to common shareholders

    95,429       85,014       3,981       5,147  

Total increase (decrease) in Net Assets

    78,747       193,925       (12,674     45,697  

Net Assets Applicable to Common Shareholders:

       

Beginning of year

    1,140,768       946,843       599,266       553,569  

End of year*

  $   1,219,515     $   1,140,768     $   586,592     $   599,266  

* Including undistributed (overdistributed) net investment income of:

  $ (7,885   $ (11,726   $ (1,879   $ (5,855

** Common Share Transactions:

       

Shares sold

    4,971       4,606       0       0  

Shares issued as reinvestment of distributions

    731       748       245       346  

 

  

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

(a) 

The tax characterization of distributions is determined in accordance with Federal income tax regulations. See Note 2, Distributions—Common Shares, in the Notes to Financial Statements for more information.

 

20   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

PIMCO
High Income Fund
    PIMCO
Income Strategy Fund
    PIMCO
Income Strategy Fund II
 
Year Ended
July 31, 2018
    Year Ended
July 31, 2017
    Year Ended
July 31, 2018
    Year Ended
July 31, 2017
    Year Ended
July 31, 2018
    Year Ended
July 31, 2017
 
         
         
$ 80,412     $ 85,665     $ 22,171     $ 22,314     $ 47,250     $ 47,461  
         
  26,258       67,117       11,732       24,162       26,231       52,874  
  (27,902     21,235       (16,874     9,143       (29,231     11,835  
         
  78,768       174,017       17,029       55,619       44,250       112,170  
  (2,361     (1,109     (1,409     (1,018     (2,540     (1,835
         

 

76,407

 

    172,908       15,620       54,601       41,710       110,335  
         
         
  (107,631     (116,768     (27,170     (27,356     (57,119     (56,792
  (17,226     (24,148     (345     0       0       0  
         
    (124,857       (140,916     (27,515     (27,356     (57,119     (56,792
         
         
  0       0       0       0       0       0  
  0       0       0       0       0       0  
         
  10,590       11,818       2,047       933       3,989       1,927  
  10,590       11,818       2,047       933       3,989       1,927  
         
  (37,860     43,810       (9,848     28,178       (11,420     55,470  
         
         
  884,912       841,102       294,525       266,347       612,310       556,840  
$   847,052     $   884,912     $   284,677     $   294,525     $   600,890     $   612,310  
         
$ (18,534   $ (13,517   $ (3,189   $ (1,141   $ 1,732     $ 3,791  
         
         
  0       0       0       0       0       0  
  1,409       1,346       179       83       390       191  
         

 

  ANNUAL REPORT   JULY 31, 2018   21


Statements of Cash Flows

 

Year Ended July 31, 2018                  
(Amounts in thousands)   PIMCO
Corporate &
Income
Opportunity
Fund
    PIMCO
Corporate &
Income
Strategy
Fund
    PIMCO High
Income Fund
 

Cash Flows Provided by (Used for) Operating Activities:

     

Net increase (decrease) in net assets resulting from operations

  $ 115,526     $ 37,542     $ 78,768  

Adjustments to Reconcile Net Increase (Decrease) in Net Assets from Operations to Net Cash Provided by (Used for) Operating Activities:

     

Purchases of long-term securities

    (555,761     (167,640     (325,461

Proceeds from sales of long-term securities

    391,949       174,449       341,709  

(Purchases) Proceeds from sales of short-term portfolio investments, net

    39,497       (183     12,637  

(Increase) decrease in deposits with counterparty

    (7,869     3,626       (6,426

(Increase) decrease in receivable for investments sold

    (5,969     9,916       (17,870

(Increase) decrease in interest and/or dividends receivable

    (2,137     (13     167  

Proceeds from (Payments on) exchange-traded or centrally cleared financial derivative instruments

    10,367       (7,097     (5,418

Proceeds from (Payments on) over the counter financial derivative instruments

    8,885       (109     4,508  

(Increase) decrease in other assets

    (49     (119     0  

Increase (decrease) in payable for investments purchased

    (12,841     (10,717     (4,211

Increase (decrease) in payable for unfunded loan commitments

    10,759       1,960       3,652  

Increase (decrease) in deposits from counterparty

    5,070       1,455       493  

Increase (decrease) in accrued management fees

    67       6       (4

Proceeds from (Payments on) foreign currency transactions

    (1,269     (376     (800

Increase (decrease) in other liabilities

    (320     (16     (57

Net Realized (Gain) Loss

                       

Investments in securities

    (25,673     (5,505     (14,717

Exchange-traded or centrally cleared financial derivative instruments

    (18,233     (41,306     (7,907

Over the counter financial derivative instruments

    (15,169     (122     (4,091

Foreign currency

    1,502       238       457  

Net Change in Unrealized (Appreciation) Depreciation

                       

Investments in securities

   
42,701
 
    10,629       15,709  

Exchange-traded or centrally cleared financial derivative instruments

    8,070       48,353       13,194  

Over the counter financial derivative instruments

    (4,308     (2,793     (1,143

Foreign currency assets and liabilities

    (309     138       142  

Non Cash Payment in Kind

    (632     (316     (1,080

Net amortization (accretion) on investments

    (9,528     (6,019     (9,291

Net Cash Provided by (Used for) Operating Activities

    (25,674     45,981       72,960  

Cash Flows Received from (Used for) Financing Activities:

     

Proceeds from shares sold

    86,027       0       0  

Net at-the-market offering costs

    16       0       0  

Increase (decrease) in overdraft due to custodian

    49       87       3  

Cash distributions paid to common shareholders*

    (112,781     (48,983     (114,153

Cash distributions paid to preferred shareholders

    (6,852     (1,199     (2,348

Proceeds from reverse repurchase agreements

    1,595,319       610,080       953,286  

Payments on reverse repurchase agreements

      (1,534,746       (604,881       (909,448

Net Cash Received from (Used for) Financing Activities

    27,032       (44,896     (72,660

Net Increase (Decrease) in Cash and Foreign Currency

    1,358       1,085       300  

Cash and Foreign Currency:

     

Beginning of year

    2,000       824       1,847  

End of year

  $ 3,358     $ 1,909     $ 2,147  

* Reinvestment of distributions

  $ 11,765     $ 3,981     $ 10,590  

Supplemental Disclosure of Cash Flow Information:

     

Interest expense paid during the year

  $ 5,247     $ 2,416     $ 4,947  

 

 

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

A Statement of Cash Flows is presented when a Fund has a significant amount of borrowing during the year, based on the average total borrowing outstanding in relation to total assets or when substantially all of a Fund’s investments are not classified as Level 1 or 2 in the fair value hierarchy.

 

22   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


Schedule of Investments PIMCO Corporate & Income Opportunity Fund

 

July 31, 2018

 

(Amounts in thousands*, except number of shares, contracts and units, if any)

 

        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 
INVESTMENTS IN SECURITIES 139.0%

 

LOAN PARTICIPATIONS AND ASSIGNMENTS 8.0%

 

Alphabet Holding Co., Inc.

 

5.577% (LIBOR03M + 3.500%) due 09/26/2024 ~

  $     99     $     94  

Altice France S.A.

 

TBD% due 07/13/2026

      500         490  

Avantor, Inc.

 

6.077% (LIBOR03M + 4.000%) due 11/21/2024 ~

      109         110  

Avolon Holdings Ltd.

 

3.836% (LIBOR03M + 1.750%) due 09/30/2020 ~

      397         397  

4.086% (LIBOR03M + 2.000%) due 01/15/2025 ~

      5,697         5,665  

Axalta Coating Systems U.S. Holdings, Inc.

 

4.084% (LIBOR03M + 1.750%) due 06/01/2024 ~

      379         379  

Banff Merger Sub, Inc.

 

TBD% due 06/21/2019

      10,400         10,361  

BMC Software Finance, Inc.

 

5.327% (LIBOR03M + 3.250%) due 09/10/2022 ~

      12,855           12,874  

BWAY Holding Co.

 

5.581% - 7.250% (LIBOR03M + 3.250%) due 04/03/2024 ~

      1,059         1,058  

Caesars Entertainment Operating Co.

 

4.077% (LIBOR03M + 2.000%) due 10/06/2024 ~

      100         100  

California Resources Corp.

 

6.831% (LIBOR03M + 4.750%) due 12/31/2022 «~

      50         51  

CenturyLink, Inc.

 

4.827% (LIBOR03M + 2.750%) due 01/31/2025 ~

      995         981  

Charter Communications Operating LLC

 

4.080% (LIBOR03M + 2.000%) due 04/30/2025 ~

      365         366  

Cheniere Energy Partners LP

 

4.327% (LIBOR03M + 2.250%) due 02/25/2020 «~

      1,030         1,030  

Community Health Systems, Inc.

 

5.557% (LIBOR03M + 3.250%) due 01/27/2021 ~

      2,889         2,846  

Diamond Resorts Corp.

 

5.827% (LIBOR03M + 3.750%) due 09/02/2023 ~

      5,134         5,144  

Drillship Kithira Owners, Inc.

 

TBD% due 09/20/2024

      510         536  

Dubai World

 

1.750% - 2.000% (LIBOR03M + 2.000%) due 09/30/2022 ~

      1,009         949  

Energizer Holdings. Inc.

 

TBD% due 05/18/2019

      200         200  

Forbes Energy Services LLC

 

5.000% - 7.000% due 04/13/2021

      856         866  

Frontier Communications Corp.

 

5.830% (LIBOR03M + 3.750%) due 06/15/2024 ~

      1,191         1,177  

Genworth Financial, Inc.

 

6.578% (LIBOR03M + 4.500%) due 03/07/2023 ~

      50         51  

iHeartCommunications, Inc.

 

TBD% due 01/30/2019 ^(e)

      19,645         15,283  

Ineos U.S. Finance LLC

 

2.500% (EUR003M + 2.000%) due 03/31/2024 ~

  EUR     5,075         5,898  

IRB Holding Corp.

 

5.347% (LIBOR03M + 3.250%) due 02/05/2025 ~

  $     100         101  

Klockner-Pentaplast of America, Inc.

 

4.750% (EUR003M + 4.750%) due 06/30/2022 ~

  EUR     100         109  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Lightstone Generation LLC

 

5.827% (LIBOR03M + 3.750%) due 01/30/2024 ~

  $     2,794     $     2,810  

McDermott Technology Americas, Inc.

 

7.077% (LIBOR03M + 5.000%) due 05/10/2025 ~

      3,691         3,718  

MH Sub LLC

 

5.829% (LIBOR03M + 3.750%) due 09/13/2024 ~

      218         219  

Ministry of Finance of Tanzania

 

7.825% (LIBOR03M + 5.500%) due 12/10/2019 «~

      200         200  

Multi Color Corp.

 

4.327% (LIBOR03M + 2.250%) due 10/31/2024 ~

      32         32  

Parexel International Corp.

 

4.827% (LIBOR03M + 2.750%) due 09/27/2024 ~

      99         99  

PetSmart, Inc.

 

5.100% (LIBOR03M + 3.000%) due 03/11/2022 ~

      269         224  

Ply Gem Industries, Inc.

 

6.087% (LIBOR03M + 3.750%) due 04/12/2025 ~

      300         301  

Prestige Brands, Inc.

 

4.077% (LIBOR03M + 2.000%) due 01/26/2024 ~

      129         130  

SBA Senior Finance LLC

 

4.080% (LIBOR03M + 2.000%) due 04/11/2025 ~

      500         500  

Sequa Mezzanine Holdings LLC

 

7.067% (LIBOR03M + 5.000%) due 11/28/2021 «~

      2,325         2,325  

11.072% (LIBOR03M + 9.000%) due 04/28/2022 «~

      5,070         5,089  

Sprint Communications, Inc.

 

4.625% (LIBOR03M + 2.500%) due 02/02/2024 ~

      2,765         2,769  

Stars Group Holdings BV

 

5.831% (LIBOR03M + 3.500%) due 07/10/2025 ~

      200         202  

State of Rio de Janeiro

 

6.024% (LIBOR03M + 3.250%) due 12/20/2020 «~

      5,373         5,183  

Syniverse Holdings, Inc.

 

7.078% (LIBOR03M + 5.000%) due 03/09/2023 ~

      140         140  

TransDigm, Inc.

 

4.577% (LIBOR03M + 2.500%) due 08/22/2024 ~

      594         595  

Traverse Midstream Partners LLC

 

6.340% (LIBOR03M + 4.000%) due 09/27/2024 ~

      91         91  

Univision Communications, Inc.

 

4.827% (LIBOR03M + 2.750%) due 03/15/2024 ~

      1,732         1,684  

UPC Financing Partnership

 

2.750% (EUR003M + 2.750%) due 10/15/2026 ~

  EUR     900         1,051  

Valeant Pharmaceuticals International, Inc.

 

5.092% (LIBOR03M + 3.000%) due 06/01/2025 ~

  $     325         326  

West Corp.

 

6.077% (LIBOR03M + 4.000%) due 10/10/2024 ~

      53         53  

Westmoreland Coal Co.

 

TBD% due 12/16/2020 ^(e)

      5,880         1,542  

TBD% - 10.581% (LIBOR03M + 8.250%) due 05/31/2020 ~

      1,311         1,338  
       

 

 

 

Total Loan Participations and Assignments (Cost $104,494)

 

        97,737  
       

 

 

 
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 
CORPORATE BONDS & NOTES 64.2%

 

BANKING & FINANCE 28.0%

 

AGFC Capital Trust

 

4.089% (US0003M + 1.750%) due 01/15/2067 ~

  $     1,800     $     1,089  

Ally Financial, Inc.

 

8.000% due 11/01/2031 (n)

      20,103         24,325  

Ambac LSNI LLC

 

7.337% due 02/12/2023 •

      510         514  

Ardonagh Midco PLC

 

8.375% due 07/15/2023

  GBP     14,020           18,688  

Athene Holding Ltd.

 

4.125% due 01/12/2028

  $     106         99  

Avolon Holdings Funding Ltd.

 

5.500% due 01/15/2023

      351         350  

AXA Equitable Holdings, Inc.

 

4.350% due 04/20/2028

      252         247  

5.000% due 04/20/2048

      146         140  

Banco Bilbao Vizcaya Argentaria S.A.

 

6.750% due 02/18/2020 •(j)(k)(n)

  EUR     14,000         17,271  

7.000% due 02/19/2019 •(j)(k)(n)

      3,200         3,842  

8.875% due 04/14/2021 •(j)(k)(n)

      400         532  

Banco Espirito Santo S.A.

 

4.000% due 01/21/2019 ^(e)

      5,000         1,783  

Banco Santander S.A.

 

6.250% due 09/11/2021 •(j)(k)(n)

      2,600         3,245  

Bank of Ireland

 

7.375% due 06/18/2020 •(j)(k)

      1,200         1,528  

Barclays PLC

 

3.250% due 02/12/2027

  GBP     200         260  

3.250% due 01/17/2033

      400         490  

6.500% due 09/15/2019 •(j)(k)(n)

  EUR     4,200         5,121  

7.000% due 09/15/2019 •(j)(k)

  GBP     830         1,119  

7.250% due 03/15/2023 •(j)(k)

      10,405         14,214  

7.875% due 09/15/2022 •(j)(k)

      4,625         6,515  

8.000% due 12/15/2020 •(j)(k)(n)

  EUR     1,860         2,425  

Blackstone CQP Holdco LP

 

6.000% due 08/18/2021

  $     1,500         1,500  

6.500% due 03/20/2021

      8,700         8,754  

Brighthouse Holdings LLC

 

6.500% due 07/27/2037 (j)

      110         106  

Brookfield Finance, Inc.

 

3.900% due 01/25/2028

      196         186  

4.700% due 09/20/2047 (n)

      664         633  

Cantor Fitzgerald LP

 

6.500% due 06/17/2022 (n)

      10,000         10,588  

CBL & Associates LP

 

5.950% due 12/15/2026 (n)

      4,128         3,565  

Co-operative Group Holdings Ltd.

 

7.500% due 07/08/2026

  GBP     630         993  

Cooperatieve Rabobank UA

 

6.625% due 06/29/2021 •(j)(k)

  EUR     2,000         2,662  

Credit Agricole S.A.

 

7.875% due 01/23/2024 •(j)(k)

  $     1,400         1,494  

Credit Suisse AG

 

6.500% due 08/08/2023 (k)

      200         214  

Credit Suisse Group AG

 

7.500% due 07/17/2023 •(j)(k)

      600         620  

7.500% due 12/11/2023 •(j)(k)

      2,336         2,497  

Emerald Bay S.A.

 

0.000% due 10/08/2020 (h)

  EUR     1,162         1,276  

EPR Properties

 

4.750% due 12/15/2026 (n)

  $     5,400         5,285  

Equinix, Inc.

 

2.875% due 03/15/2024

  EUR     300         352  

2.875% due 10/01/2025

      100         114  

2.875% due 02/01/2026

      300         342  

Flagstar Bancorp, Inc.

 

6.125% due 07/15/2021

  $     6,000         6,260  

Fortress Transportation & Infrastructure Investors LLC

 

6.750% due 03/15/2022

      1,258         1,313  

Freedom Mortgage Corp.

 

8.250% due 04/15/2025

      128         125  
 

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2018   23


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

 

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

Growthpoint Properties International Pty. Ltd.

 

5.872% due 05/02/2023

  $     200     $     207  

GSPA Monetization Trust

 

6.422% due 10/09/2029

      6,644         7,536  

High Street Funding Trust

 

4.682% due 02/15/2048

      100         100  

Howard Hughes Corp.

 

5.375% due 03/15/2025

      220         216  

HSBC Holdings PLC

 

6.000% due 09/29/2023 •(j)(k)

  EUR     4,977         6,597  

6.500% due 03/23/2028 •(j)(k)

  $     1,000         982  

Hunt Cos., Inc.

 

6.250% due 02/15/2026

      50         46  

Intesa Sanpaolo SpA

 

7.700% due 09/17/2025 •(j)(k)(n)

      10,000         9,575  

iStar, Inc.

 

4.625% due 09/15/2020

      26         26  

5.250% due 09/15/2022

      93         91  

Jefferies Finance LLC

 

6.875% due 04/15/2022

      3,900         3,949  

7.250% due 08/15/2024

      200         197  

7.375% due 04/01/2020 (n)

      10,625           10,864  

7.500% due 04/15/2021

      2,391         2,451  

Kennedy-Wilson, Inc.

 

5.875% due 04/01/2024

      134         131  

Life Storage LP

 

3.875% due 12/15/2027

      56         53  

Lloyds Bank PLC

 

12.000% due 12/16/2024 •(j)

      3,100         3,786  

Lloyds Banking Group PLC

 

7.000% due 06/27/2019 •(j)(k)

  GBP     2,710         3,682  

7.625% due 06/27/2023 •(j)(k)

      4,410         6,403  

7.875% due 06/27/2029 •(j)(k)

      6,015         9,222  

LoanCore Capital Markets LLC

 

6.875% due 06/01/2020 (n)

  $     11,610         11,791  

Meiji Yasuda Life Insurance Co.

 

5.100% due 04/26/2048 •

      600         611  

MetLife, Inc.

 

5.875% due 03/15/2028 •(j)

      142         146  

Nationstar Mortgage LLC

 

6.500% due 07/01/2021

      1,452         1,459  

Nationwide Building Society

 

10.250% ~(j)

  GBP     117         23,380  

Navient Corp.

 

4.875% due 06/17/2019

  $     395         399  

5.625% due 08/01/2033

      98         84  

5.875% due 03/25/2021

      710         723  

6.500% due 06/15/2022

      558         570  

6.625% due 07/26/2021 (n)

      4,170         4,316  

7.250% due 01/25/2022

      80         84  

8.000% due 03/25/2020

      1,540         1,629  

Omega Healthcare Investors, Inc.

 

4.500% due 01/15/2025

      310         305  

4.500% due 04/01/2027 (n)

      310         296  

4.750% due 01/15/2028

      400         387  

5.250% due 01/15/2026

      550         559  

Oppenheimer Holdings, Inc.

 

6.750% due 07/01/2022

      2,844         2,894  

Physicians Realty LP

 

4.300% due 03/15/2027

      130         125  

Provident Funding Associates LP

 

6.375% due 06/15/2025

      47         46  

Royal Bank of Scotland Group PLC

 

7.500% due 08/10/2020 •(j)(k)(n)

      5,840         6,044  

8.000% due 08/10/2025 •(j)(k)(n)

      13,625         14,505  

8.625% due 08/15/2021 •(j)(k)

      6,330         6,847  

Santander UK Group Holdings PLC

 

6.750% due 06/24/2024 •(j)(k)(n)

  GBP     9,605         13,109  

7.375% due 06/24/2022 •(j)(k)

      1,440         1,988  

Sberbank of Russia Via SB Capital S.A.

 

6.125% due 02/07/2022

  $     500         526  

Societe Generale S.A.

 

6.750% due 04/06/2028 •(j)(k)

      400         383  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Spirit Realty LP

 

4.450% due 09/15/2026 (n)

  $     2,600     $     2,503  

Springleaf Finance Corp.

 

5.625% due 03/15/2023

      2,400         2,412  

6.000% due 06/01/2020

      641         663  

6.125% due 05/15/2022

      1,214         1,247  

6.875% due 03/15/2025

      572         582  

7.125% due 03/15/2026

      408         416  

7.750% due 10/01/2021

      90         98  

Stearns Holdings LLC

 

9.375% due 08/15/2020

      600         603  

Stichting AK Rabobank Certificaten

 

6.500% (j)

  EUR     4,773         6,781  

Tesco Property Finance PLC

 

5.411% due 07/13/2044

  GBP     1,124         1,659  

5.661% due 10/13/2041

      610         921  

5.744% due 04/13/2040

      554         842  

5.801% due 10/13/2040

      1,673         2,565  

6.052% due 10/13/2039

      1,299         2,013  

TP ICAP PLC

 

5.250% due 01/26/2024

      3,200         4,258  

Unigel Luxembourg S.A.

 

10.500% due 01/22/2024

  $     1,140         1,191  

WeWork Cos., Inc.

 

7.875% due 05/01/2025

      148         145  
       

 

 

 
            340,895  
       

 

 

 
INDUSTRIALS 29.4%

 

AA Bond Co. Ltd.

 

4.249% due 07/31/2043

  GBP     220         299  

Air Canada Pass-Through Trust

 

3.700% due 07/15/2027

  $     46         44  

Altice Financing S.A.

 

6.625% due 02/15/2023

      1,700         1,723  

7.500% due 05/15/2026 (n)

      6,100         5,954  

Altice France S.A.

 

5.375% due 05/15/2022

  EUR     1,690         2,034  

5.875% due 02/01/2027

      2,000         2,390  

6.250% due 05/15/2024 (n)

  $     12,500         12,469  

7.375% due 05/01/2026

      3,600         3,589  

Altice Luxembourg S.A.

 

7.250% due 05/15/2022 (n)

  EUR     4,370         5,251  

7.750% due 05/15/2022 (n)

  $     6,800         6,792  

Ashtead Capital, Inc.

 

5.250% due 08/01/2026

      200         202  

Associated Materials LLC

 

9.000% due 01/01/2024

      1,086         1,148  

Bacardi Ltd.

 

4.450% due 05/15/2025

      200         200  

4.700% due 05/15/2028

      200         199  

Baffinland Iron Mines Corp.

 

8.750% due 07/15/2026

      2,700         2,710  

BMC Software Finance, Inc.

 

8.125% due 07/15/2021

      3,195         3,275  

Caesars Resort Collection LLC

 

5.250% due 10/15/2025

      14         14  

Centene Corp.

 

5.375% due 06/01/2026

      167         171  

Charles River Laboratories International, Inc.

 

5.500% due 04/01/2026

      52         53  

Charter Communications Operating LLC

 

4.200% due 03/15/2028

      260         250  

Cheniere Corpus Christi Holdings LLC

 

5.875% due 03/31/2025

      400         423  

Cheniere Energy Partners LP

 

5.250% due 10/01/2025

      65         65  

Chesapeake Energy Corp.

 

5.589% (US0003M + 3.250%) due 04/15/2019 ~

      157         158  

Clear Channel Worldwide Holdings, Inc.

 

6.500% due 11/15/2022

      1,279         1,311  

7.625% due 03/15/2020

      6,248         6,285  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Cleveland-Cliffs, Inc.

 

4.875% due 01/15/2024

  $     68     $     67  

Community Health Systems, Inc.

 

5.125% due 08/01/2021 (n)

      9,375         8,915  

6.250% due 03/31/2023 (n)

      11,782         11,016  

8.625% due 01/15/2024

      560         580  

CSN Islands Corp.

 

6.875% due 09/21/2019 (n)

      640         642  

CSN Resources S.A.

 

6.500% due 07/21/2020 (n)

      8,041         7,782  

DAE Funding LLC

 

4.500% due 08/01/2022

      190         188  

5.000% due 08/01/2024

      120         119  

Diamond Resorts International, Inc.

 

7.750% due 09/01/2023

      278         291  

10.750% due 09/01/2024

      4,300         4,504  

DriveTime Automotive Group, Inc.

 

8.000% due 06/01/2021

      12,818         13,074  

EI Group PLC

 

6.375% due 09/26/2031

  GBP     1,000         1,462  

Exela Intermediate LLC

 

10.000% due 07/15/2023 (n)

  $     217         225  

Ferroglobe PLC

 

9.375% due 03/01/2022 (n)

      2,500         2,578  

First Quantum Minerals Ltd.

 

6.500% due 03/01/2024

      3,088         3,019  

6.875% due 03/01/2026

      3,382         3,314  

7.000% due 02/15/2021

      1,188         1,202  

Ford Motor Co.

 

7.700% due 05/15/2097 (n)

      29,796         34,598  

Fresh Market, Inc.

 

9.750% due 05/01/2023 (n)

      12,200         8,662  

Frontier Finance PLC

 

8.000% due 03/23/2022

  GBP     8,800         11,984  

Full House Resorts, Inc.

 

8.575% due 01/31/2024 «

  $     696         681  

General Electric Co.

 

5.000% due 01/21/2021 •(j)

      1,153         1,134  

Greene King Finance PLC

 

5.702% due 12/15/2034

  GBP     350         433  

Hadrian Merger Sub, Inc.

 

8.500% due 05/01/2026

  $     70         67  

Hampton Roads PPV LLC

 

6.171% due 06/15/2053 (n)

      1,800         1,891  

Harland Clarke Holdings Corp.

 

8.375% due 08/15/2022

      106         102  

HCA, Inc.

 

4.500% due 02/15/2027

      1,550         1,511  

7.500% due 11/15/2095 (n)

      4,800         4,740  

Hilton Domestic Operating Co., Inc.

 

5.125% due 05/01/2026

      270         271  

iHeartCommunications, Inc.

 

9.000% due 03/01/2021 ^(e)

      3,070         2,364  

9.000% due 09/15/2022 ^(e)

      5,810         4,488  

10.625% due 03/15/2023 ^(e)

      5,600         4,354  

11.250% due 03/01/2021 ^(e)

      2,920         2,270  

IHS Markit Ltd.

 

4.000% due 03/01/2026

      9         9  

Intelsat Jackson Holdings S.A.

 

5.500% due 08/01/2023

      2,220         2,051  

7.250% due 10/15/2020

      8,558         8,633  

9.750% due 07/15/2025

      217         233  

Intelsat Luxembourg S.A.

 

7.750% due 06/01/2021

      18,643           17,804  

8.125% due 06/01/2023

      1,939         1,672  

Intrepid Aviation Group Holdings LLC

 

6.875% due 02/15/2019

      22,531         22,570  

8.500% due 08/15/2021

      18,330         18,513  

Kinder Morgan, Inc.

 

7.750% due 01/15/2032 (n)

      3,100         3,844  

7.800% due 08/01/2031 (n)

      6,000         7,410  

Mallinckrodt International Finance S.A.

 

5.500% due 04/15/2025

      1,858         1,505  
 

 

24   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2018

 

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

Matterhorn Merger Sub LLC

 

8.500% due 06/01/2026

  $     18     $     17  

Metinvest BV

 

7.750% due 04/23/2023

      300         291  

8.500% due 04/23/2026

      2,000         1,938  

Odebrecht Oil & Gas Finance Ltd.

 

0.000% due 08/30/2018 (h)(j)

      536         10  

0.000% due 08/31/2018 (h)(j)

      744         14  

Park Aerospace Holdings Ltd.

 

3.625% due 03/15/2021

      908         883  

4.500% due 03/15/2023

      1,000         958  

5.250% due 08/15/2022

      322         323  

5.500% due 02/15/2024

      790         782  

Pelabuhan Indonesia Persero PT

 

4.500% due 05/02/2023

      200         200  

Petroleos Mexicanos

 

6.500% due 03/13/2027

      310         315  

6.750% due 09/21/2047

      90         83  

PetSmart, Inc.

 

5.875% due 06/01/2025

      199         159  

Pisces Midco, Inc.

 

8.000% due 04/15/2026

      342         354  

Pitney Bowes, Inc.

 

4.700% due 04/01/2023

      66         60  

Platin 1426 GmbH

 

6.875% due 06/15/2023 «(c)

  EUR     900         1,020  

Prime Security Services Borrower LLC

 

9.250% due 05/15/2023

  $     2,610         2,799  

QVC, Inc.

 

5.450% due 08/15/2034

      1,650         1,482  

5.950% due 03/15/2043 (n)

      6,770         6,317  

Radiate Holdco LLC

 

6.875% due 02/15/2023

      130         126  

Rockpoint Gas Storage Canada Ltd.

 

7.000% due 03/31/2023

      16         16  

Russian Railways via RZD Capital PLC

 

7.487% due 03/25/2031

  GBP     1,500         2,458  

Sabine Pass Liquefaction LLC

 

5.875% due 06/30/2026 (n)

  $     4,300         4,685  

Safeway, Inc.

 

7.250% due 02/01/2031

      9,392         9,228  

Scientific Games International, Inc.

 

5.000% due 10/15/2025

      23         22  

Shelf Drilling Holdings Ltd.

 

8.250% due 02/15/2025

      73         74  

Sigma Holdco BV

 

5.750% due 05/15/2026

  EUR     100         111  

SoftBank Group Corp.

 

4.000% due 04/20/2023

      9,300           11,379  

Spirit Issuer PLC

 

3.368% (BP0003M + 2.700%) due 12/28/2031 ~

  GBP     1,855         2,392  

6.582% due 12/28/2027 (n)

      1,750         2,354  

Sunoco LP

 

4.875% due 01/15/2023

  $     130         128  

Syngenta Finance NV

 

4.441% due 04/24/2023

      200         200  

4.892% due 04/24/2025

      200         199  

5.182% due 04/24/2028

      200         194  

T-Mobile USA, Inc.

 

4.750% due 02/01/2028

      40         37  

Telenet Finance Luxembourg Notes SARL

 

5.500% due 03/01/2028

      200         184  

Teva Pharmaceutical Finance BV

 

1.500% due 10/25/2018

  CHF     200         203  

Teva Pharmaceutical Finance Netherlands BV

 

0.375% due 07/25/2020

  EUR     300         346  

3.250% due 04/15/2022

      700         855  

Time Warner Cable LLC

 

8.250% due 04/01/2019

  $     140         145  

Transocean Pontus Ltd.

 

6.125% due 08/01/2025

      300         306  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

UAL Pass-Through Trust

 

7.336% due 01/02/2021

  $     1,505     $     1,550  

Unique Pub Finance Co. PLC

 

5.659% due 06/30/2027

  GBP     6,375         9,250  

United Group BV

 

4.375% due 07/01/2022

  EUR     8,200         9,872  

4.875% due 07/01/2024

      200         240  

UPCB Finance Ltd.

 

3.625% due 06/15/2029

      350         406  

ViaSat, Inc.

 

5.625% due 09/15/2025

  $     178         169  

Virgin Media Secured Finance PLC

 

5.000% due 04/15/2027

  GBP     1,780         2,296  

VOC Escrow Ltd.

 

5.000% due 02/15/2028

  $     148         142  

Wind Tre SpA

 

2.625% due 01/20/2023

  EUR     400         445  

2.750% due 01/20/2024 •

      400         440  

3.125% due 01/20/2025

      200         219  

5.000% due 01/20/2026

  $     200         181  

Wynn Macau Ltd.

 

4.875% due 10/01/2024

      200         191  

5.500% due 10/01/2027

      200         192  
       

 

 

 
            359,021  
       

 

 

 
UTILITIES 6.8%

 

AT&T, Inc.

 

4.900% due 08/15/2037 (n)

      678         656  

5.150% due 02/15/2050

      814         783  

5.300% due 08/15/2058 (n)

      1,717         1,626  

5.450% due 03/01/2047

      100         101  

DTEK Finance PLC (10.750% Cash or 10.750% PIK)

 

10.750% due 12/31/2024 (d)

      8,889         9,194  

Enable Midstream Partners LP

 

4.950% due 05/15/2028

      123         124  

Gazprom OAO Via Gaz Capital S.A.

 

9.250% due 04/23/2019

      11,200         11,655  

Mountain States Telephone & Telegraph Co.

 

7.375% due 05/01/2030

      15,730         16,325  

Odebrecht Drilling Norbe Ltd.

 

6.350% due 12/01/2021

      170         168  

Odebrecht Drilling Norbe Ltd. (6.350% Cash or 7.350% PIK)

 

7.350% due 12/01/2026 (d)

      298         163  

Odebrecht Offshore Drilling Finance Ltd.

 

6.720% due 12/01/2022

      6,183         5,905  

Odebrecht Offshore Drilling Finance Ltd. (6.720% Cash or 7.720% PIK)

 

7.720% due 12/01/2026 (d)

      7,198         2,142  

Petrobras Global Finance BV

 

5.999% due 01/27/2028

      302         286  

6.125% due 01/17/2022

      239         248  

6.250% due 12/14/2026 (n)

  GBP     6,100         8,329  

6.625% due 01/16/2034

      800         1,058  

7.375% due 01/17/2027

  $     1,362         1,418  

Plains All American Pipeline LP

 

6.650% due 01/15/2037

      150         167  

Rio Oil Finance Trust

 

8.200% due 04/06/2028

      4,060         4,176  

9.250% due 07/06/2024 (n)

      4,392         4,745  

9.250% due 07/06/2024

      4,175         4,510  

9.750% due 01/06/2027

      566         617  

Sprint Corp.

 

7.625% due 03/01/2026

      557         578  

Transcanada Trust

 

5.300% due 03/15/2077 •

      5,000         4,819  

Transocean Phoenix 2 Ltd.

 

7.750% due 10/15/2024

      2,474         2,637  

Transocean Proteus Ltd.

 

6.250% due 12/01/2024

      340         348  
       

 

 

 
          82,778  
       

 

 

 

Total Corporate Bonds & Notes (Cost $762,854)

      782,694  
       

 

 

 
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 
CONVERTIBLE BONDS & NOTES 0.6%

 

INDUSTRIALS 0.6%

 

Caesars Entertainment Corp.

 

5.000% due 10/01/2024

  $     1,050     $     1,888  

DISH Network Corp.

 

3.375% due 08/15/2026

      5,900         5,375  
       

 

 

 

Total Convertible Bonds & Notes (Cost $7,859)

    7,263  
       

 

 

 
MUNICIPAL BONDS & NOTES 5.0%

 

CALIFORNIA 1.0%

 

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

 

7.500% due 10/01/2030

      3,425         3,748  

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

 

7.942% due 10/01/2038

      8,500         8,953  
       

 

 

 
          12,701  
       

 

 

 
ILLINOIS 2.4%

 

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

 

7.517% due 01/01/2040

      23,700         26,816  

Chicago, Illinois General Obligation Bonds, Series 2014

 

6.314% due 01/01/2044

      120         124  

Chicago, Illinois General Obligation Bonds, Series 2015

 

7.375% due 01/01/2033

      100         113  

7.750% due 01/01/2042

      300         327  

Chicago, Illinois General Obligation Bonds, Series 2017

 

7.045% due 01/01/2029

      200         215  

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

 

6.725% due 04/01/2035

      60         64  

7.350% due 07/01/2035

      40         45  

Illinois State General Obligation Bonds, Series 2003

 

5.100% due 06/01/2033

      1,035         1,006  
       

 

 

 
          28,710  
       

 

 

 
IOWA 0.0%

 

Iowa Tobacco Settlement Authority Revenue Bonds, Series 2005

 

6.500% due 06/01/2023

      465         474  
       

 

 

 
TEXAS 0.2%

 

Texas Public Finance Authority Revenue Notes, Series 2014

 

8.250% due 07/01/2024

      2,045         2,082  
       

 

 

 
VIRGINIA 0.1%

 

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

 

6.706% due 06/01/2046

      1,380         1,367  
       

 

 

 
WEST VIRGINIA 1.3%

 

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

 

0.000% due 06/01/2047 (h)

      78,700         4,872  

7.467% due 06/01/2047

      10,310         10,273  
       

 

 

 
          15,145  
       

 

 

 

Total Municipal Bonds & Notes (Cost $54,624)

      60,479  
       

 

 

 
U.S. GOVERNMENT AGENCIES 4.8%

 

Fannie Mae

 

3.000% due 01/25/2042 (a)

      1,055         101  

3.500% due 02/25/2033 (a)

      2,642         334  
 

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2018   25


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

 

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

4.036% (- 1.0*LIBOR01M + 6.100%) due 07/25/2040 ~(a)

  $     1,145     $     118  

5.614% (US0001M + 3.550%) due 07/25/2029 ~

      1,490         1,629  

7.814% (US0001M + 5.750%) due 07/25/2029 ~

      2,010         2,408  

Freddie Mac

 

0.000% due 04/25/2045 - 08/25/2046 (b)(h)

      32,331         26,252  

0.100% due 02/25/2046 - 08/25/2046 (a)

      250,692         584  

0.200% due 04/25/2045 (a)

      10,054         11  

2.557% due 11/25/2055 «~

      14,479         8,706  

4.452% (- 2.333*LIBOR01M + 9.333%) due 07/15/2039 ~

      2,207         1,916  

5.028% (- 1.0*LIBOR01M + 7.100%) due 02/15/2034 ~(a)

      2,122         336  

5.395% (- 2.5*LIBOR01M + 10.625%) due 03/15/2044 ~

      1,485         1,383  

6.421% (- 2.667*LIBOR01M + 12.000%) due 02/15/2036 ~

      5,228         5,092  

9.614% (US0001M + 7.550%) due 12/25/2027 ~

      4,432         5,514  

12.814% (US0001M + 10.750%) due 03/25/2025 ~

      2,332         3,165  

Ginnie Mae

 

3.000% due 12/20/2042 (a)

      74         11  

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

      1,510         229  

4.664% (- 1.0*LIBOR01M + 6.750%) due 01/20/2042 ~(a)

      2,381         335  
       

 

 

 

Total U.S. Government Agencies (Cost $57,477)

      58,124  
       

 

 

 
NON-AGENCY MORTGAGE-BACKED SECURITIES 21.8%

 

Adjustable Rate Mortgage Trust

 

2.404% due 05/25/2036 •

      1,986         1,184  

3.214% due 01/25/2035 •

      4,848         4,258  

Banc of America Alternative Loan Trust

 

6.000% due 01/25/2036 ^

      192         188  

6.000% due 04/25/2036 ^

      3,432         3,468  

Banc of America Funding Trust

 

5.500% due 01/25/2036

      228         198  

6.000% due 07/25/2037 ^

      588         559  

BCAP LLC Trust

 

3.616% due 03/27/2036 ~

      3,906         2,634  

3.832% due 07/26/2037 ~

      168         3  

4.945% due 03/26/2037

      1,636         1,708  

7.000% due 12/26/2036 ~

      4,607         4,195  

Bear Stearns ALT-A Trust

 

3.626% due 11/25/2036 ^~

      799         677  

3.642% due 08/25/2046 ~

      5,099         4,842  

3.830% due 08/25/2036 ^~

      3,264         2,252  

4.199% due 11/25/2034 ~

      332         328  

4.206% due 09/25/2035 ^~

      1,133         872  

Bear Stearns Asset-Backed Securities Trust

 

2.464% due 04/25/2037 •

      16,373         13,684  

Bear Stearns Commercial Mortgage Securities Trust

 

5.726% due 04/12/2038 ~

      370         370  

Bear Stearns Mortgage Funding Trust

 

7.500% due 08/25/2036

      1,790         1,619  

CD Mortgage Trust

 

5.398% due 12/11/2049 ~

      49         29  

5.688% due 10/15/2048

      13,922         7,239  

Chase Mortgage Finance Trust

 

3.537% due 12/25/2035 ^~

      20         19  

6.000% due 02/25/2037 ^

      1,858         1,469  

6.000% due 03/25/2037 ^

      469         397  

6.000% due 07/25/2037 ^

      1,681         1,442  

Citigroup Commercial Mortgage Trust

 

5.612% due 12/10/2049 ~

      648         445  

Citigroup Mortgage Loan Trust

 

3.612% due 04/25/2037 ^~

      3,388         2,951  

3.831% due 03/25/2037 ^~

      886         869  

4.350% due 11/25/2035 ~

      18,011         12,659  

6.000% due 11/25/2036 ~

      14,664         11,688  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

CitiMortgage Alternative Loan Trust

 

5.750% due 04/25/2037 ^

  $     2,813     $     2,664  

Commercial Mortgage Loan Trust

 

6.052% due 12/10/2049 ~

      4,632         2,868  

Countrywide Alternative Loan Resecuritization Trust

 

6.000% due 08/25/2037 ^~

      2,262         1,767  

Countrywide Alternative Loan Trust

 

2.296% due 03/20/2046 •

      5,379         4,942  

2.334% due 08/25/2035 •

      342         239  

3.186% due 04/25/2037 ^•(a)

      23,108         3,190  

3.796% due 06/25/2047 ~

      3,258         3,046  

5.250% due 05/25/2021 ^

      13         13  

5.500% due 03/25/2035

      586         442  

5.500% due 09/25/2035 ^

      5,132         4,685  

5.750% due 01/25/2035

      649         651  

5.750% due 02/25/2035

      751         732  

6.000% due 02/25/2035

      787         764  

6.000% due 04/25/2036

      1,999         1,546  

6.000% due 05/25/2036 ^

      2,181         1,735  

6.000% due 02/25/2037 ^

      718         484  

6.000% due 02/25/2037

      2,602         2,227  

6.000% due 04/25/2037 ^

      6,947         5,213  

6.000% due 08/25/2037 ^•

      10,237         8,294  

6.250% due 10/25/2036 ^

      2,761         2,376  

6.250% due 12/25/2036 ^•

      3,634         2,743  

6.500% due 08/25/2036 ^

      923         615  

6.500% due 09/25/2036 ^

      464         378  

14.067% due 02/25/2036 •

      1,981         2,195  

Countrywide Home Loan Mortgage Pass-Through Trust

 

5.500% due 07/25/2037 ^

      748         614  

6.000% due 04/25/2036 ^

      521         479  

Credit Suisse Mortgage Capital Mortgage-Backed Trust

 

5.750% due 04/25/2036 ^

      1,549         1,195  

Epic Drummond Ltd.

 

0.000% due 01/25/2022 •

  EUR     231         268  

Eurosail PLC

 

1.977% due 06/13/2045 •

  GBP     4,487         4,516  

4.627% due 06/13/2045 •

      1,394         1,618  

GS Mortgage Securities Corp.

 

4.591% due 10/10/2032 ~

  $     10,500         9,479  

GS Mortgage Securities Trust

 

5.622% due 11/10/2039

      1,640         1,416  

GSR Mortgage Loan Trust

 

3.756% due 11/25/2035 ^~

      1,658         1,551  

3.882% due 03/25/2037 ^~

      3,063         2,769  

5.500% due 05/25/2036 ^

      222         311  

HomeBanc Mortgage Trust

 

2.864% due 03/25/2035 •

      245         226  

IndyMac Mortgage Loan Trust

 

6.500% due 07/25/2037 ^

      6,602         4,262  

JPMorgan Alternative Loan Trust

 

3.547% due 03/25/2037 ~

      9,736         9,292  

JPMorgan Chase Commercial Mortgage Securities Trust

 

5.411% due 05/15/2047

      3,600         2,581  

5.623% due 05/12/2045

      2,126         1,863  

JPMorgan Mortgage Trust

 

3.686% due 10/25/2035 ~

      56         55  

3.689% due 02/25/2036 ^~

      2,045         1,739  

3.851% due 06/25/2036 ^~

      1,032         965  

3.878% due 01/25/2037 ^~

      1,252         1,199  

LB-UBS Commercial Mortgage Trust

 

5.407% due 11/15/2038

      6,670         5,152  

Lehman Mortgage Trust

 

6.000% due 07/25/2037 ^

      248         240  

18.075% due 11/25/2035 ^•

      263         326  

Lehman XS Trust

 

2.284% due 06/25/2047 •

      3,567         3,232  

MASTR Alternative Loan Trust

 

6.750% due 07/25/2036

      3,448         2,373  

Merrill Lynch Mortgage Investors Trust

 

3.564% due 03/25/2036 ^~

      3,774         2,911  

Morgan Stanley Capital Trust

 

6.120% due 06/11/2049 ~

      844         853  

Motel 6 Trust

 

8.998% due 08/15/2019 •

      15,209           15,476  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

RBSSP Resecuritization Trust

 

2.311% due 10/27/2036 •

  $     3,609     $     830  

2.331% due 08/27/2037 •

      8,000         3,379  

Residential Accredit Loans, Inc. Trust

 

2.254% due 08/25/2036 •

      1,179         1,100  

2.294% due 05/25/2037 ^•

      352         268  

6.000% due 08/25/2036 ^

      753         687  

6.000% due 05/25/2037 ^

      2,329         2,126  

Residential Asset Securitization Trust

 

5.750% due 02/25/2036 ^

      433         324  

6.000% due 02/25/2037 ^

      1,984         1,510  

6.250% due 09/25/2037 ^

      5,239         3,658  

Residential Funding Mortgage Securities, Inc. Trust

 

4.247% due 02/25/2037 ~

      3,092         2,439  

Structured Adjustable Rate Mortgage Loan Trust

 

3.668% due 11/25/2036 ^~

      5,036         4,900  

3.735% due 03/25/2037 ^~

      1,014         845  

3.834% due 07/25/2036 ^~

      992         861  

3.855% due 01/25/2036 ^~

      7,231         5,647  

4.210% due 07/25/2035 ^~

      2,330         2,173  

Structured Asset Mortgage Investments Trust

 

2.184% due 08/25/2036 •

      204         188  

Suntrust Adjustable Rate Mortgage Loan Trust

 

3.626% due 02/25/2037 ^~

      7,841         6,807  

3.675% due 02/25/2037 ^~

      677         612  

3.791% due 04/25/2037 ^~

      728         621  

WaMu Mortgage Pass-Through Certificates Trust

 

3.403% due 02/25/2037 ^~

      1,182         1,149  

3.405% due 10/25/2036 ^~

      1,715         1,577  

3.558% due 07/25/2037 ^~

      867         719  

3.898% due 07/25/2037 ^~

      1,962         1,828  

Washington Mutual Mortgage Pass-Through Certificates Trust

 

2.494% due 05/25/2047 ^•

      297         74  

6.000% due 10/25/2035 ^

      1,725         1,358  

6.000% due 03/25/2036 ^

      2,435         2,482  

6.000% due 02/25/2037

      5,696         5,121  
       

 

 

 

Total Non-Agency Mortgage-Backed Securities (Cost $246,684)

      266,299  
       

 

 

 
ASSET-BACKED SECURITIES 19.8%

 

Adagio CLO DAC

 

0.000% due 04/30/2031 ~

  EUR     1,800         1,761  

Airspeed Ltd.

 

2.342% due 06/15/2032 •

  $     5,503         5,127  

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

 

3.414% due 03/25/2033 •

      78         77  

Apidos CLO

 

0.000% due 01/20/2031 ~

      8,800         7,946  

Belle Haven ABS CDO Ltd.

 

2.587% due 07/05/2046 •

      324,260         2,270  

BlueMountain CLO Ltd.

 

7.787% due 04/13/2027 •

      1,000         1,007  

CIFC Funding Ltd.

 

0.000% due 05/24/2026 ~

      4,100         2,911  

0.000% due 07/22/2026 ~

      3,000         1,696  

Citigroup Mortgage Loan Trust

 

2.224% due 12/25/2036 •

      6,830         4,511  

2.464% due 11/25/2046 •

      7,142         6,995  

Cork Street CLO Designated Activity Co.

 

0.000% due 11/27/2028 ~

  EUR     2,667         3,178  

3.600% due 11/27/2028

      1,197         1,403  

4.500% due 11/27/2028

      1,047         1,229  

6.200% due 11/27/2028

      1,296         1,521  

Countrywide Asset-Backed Certificates

 

2.234% due 03/25/2037 •

  $     3,076         2,997  

2.264% due 06/25/2047 •

      17,176         15,324  

2.374% due 09/25/2037 ^•

      19,068         13,544  

4.539% due 08/25/2033 •

      307         289  

Credit-Based Asset Servicing & Securitization LLC

 

3.719% due 12/25/2035 ^

      46         47  

Emerald Aviation Finance Ltd.

 

6.350% due 10/15/2038

      758         768  
 

 

26   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2018

 

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

First Franklin Mortgage Loan Trust

 

2.224% due 10/25/2036 •

  $     5,013     $     3,770  

Fremont Home Loan Trust

 

2.214% due 01/25/2037 •

      6,943         4,111  

2.384% due 02/25/2036 •

      13,689         5,411  

Glacier Funding CDO Ltd.

 

2.633% due 08/04/2035 •

      7,990         2,030  

Grosvenor Place CLO BV

 

0.000% due 04/30/2029 ~

  EUR     750         705  

Hart, Inc.

 

0.010% due 12/15/2022 «

  $     7,010         6,256  

Home Equity Mortgage Loan Asset-Backed Trust

 

2.224% due 07/25/2037 •

      3,410         2,253  

JPMorgan Mortgage Acquisition Trust

 

5.830% due 07/25/2036 ^

      136         69  

Lehman XS Trust

 

6.290% due 06/24/2046

      3,264         3,307  

LNR CDO Ltd.

 

2.352% due 02/28/2043 •

      11,832         7,629  

Long Beach Mortgage Loan Trust

 

2.364% due 01/25/2036 •

      7,559         6,476  

Merrill Lynch Mortgage Investors Trust

 

5.895% due 03/25/2037

      7,351         2,247  

Morgan Stanley ABS Capital, Inc. Trust

 

2.214% due 10/25/2036 •

      7,821         5,106  

Morgan Stanley Mortgage Loan Trust

 

6.250% due 07/25/2047 ^~

      1,314         933  

N-Star REL CDO Ltd.

 

2.502% due 02/01/2041 •

      1,100         1,070  

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

 

3.039% due 07/25/2035 •

      6,000         5,557  

Renaissance Home Equity Loan Trust

 

5.612% due 04/25/2037

      11,559         5,666  

7.238% due 09/25/2037 ^

      9,365         5,683  

Residential Asset Securities Corp. Trust

 

2.644% due 08/25/2034 •

      9,226         7,648  

Securitized Asset-Backed Receivables LLC Trust

 

2.344% due 03/25/2036 •

      10,892         6,100  

SLM Student Loan EDC Repackaging Trust

 

0.000% due 10/28/2029 «(h)

      8         8,521  

SLM Student Loan Trust

 

0.000% due 01/25/2042 «(h)

      7         5,216  

SoFi Professional Loan Program LLC

 

0.000% due 05/25/2040 «(h)

      7,500         4,342  

0.000% due 07/25/2040 «(h)

      38         2,263  

0.000% due 09/25/2040 «(h)

      3,226         1,933  

Sound Point CLO Ltd.

 

7.197% due 01/23/2027 •

      1,000         1,001  

South Coast Funding Ltd.

 

2.953% due 08/10/2038 •

      20,059         3,913  

Symphony CLO Ltd.

 

6.939% due 07/14/2026 •

      3,600         3,577  

7.239% due 10/15/2025 •

      1,400         1,401  

Taberna Preferred Funding Ltd.

 

2.723% due 12/05/2036 •

      11,639         10,242  

2.749% due 08/05/2036 •

      720         612  

2.749% due 08/05/2036 ^•

      13,943         11,852  

2.763% due 02/05/2036 •

      7,449         6,927  

Tropic CDO Ltd.

 

3.239% due 04/15/2034 •

      25,000         23,375  
       

 

 

 

Total Asset-Backed Securities (Cost $230,056)

      241,803  
       

 

 

 
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 
SOVEREIGN ISSUES 4.8%

 

Argentina Government International Bond

 

2.260% due 12/31/2038

  EUR     7,755     $     5,589  

3.375% due 01/15/2023

      300         321  

3.875% due 01/15/2022

      300         338  

5.250% due 01/15/2028

      200         205  

6.250% due 11/09/2047

      200         191  

7.820% due 12/31/2033

      19,140         22,591  

30.131% (BADLARPP) due 10/04/2022 ~

  ARS     116         6  

35.842% (BADLARPP + 2.500%) due 03/11/2019 ~

      400         14  

36.087% (BADLARPP + 3.250%) due 03/01/2020 ~

      2,400         83  

36.495% (BADLARPP + 2.000%) due 04/03/2022 ~

      120,904         3,953  

40.000% (ARPP7DRR) due 06/21/2020 ~

      183,339         6,732  

Autonomous Community of Catalonia

 

4.900% due 09/15/2021

  EUR     2,650         3,376  

4.950% due 02/11/2020

      50         62  

Egypt Government International Bond

 

4.750% due 04/16/2026

      500         575  

5.625% due 04/16/2030

      600         676  

Ghana Government International Bond

 

10.750% due 10/14/2030

  $     600         779  

Peru Government International Bond

 

6.350% due 08/12/2028

  PEN     5,500         1,796  

Republic of Greece Government International Bond

 

4.750% due 04/17/2019

  EUR     600         721  

Ukraine Government International Bond

 

7.750% due 09/01/2022

  $     9,800         9,985  

Venezuela Government International Bond

 

6.000% due 12/09/2020 ^(e)

    490         131  

9.250% due 09/15/2027 ^(e)

      598         174  
       

 

 

 

Total Sovereign Issues (Cost $67,381)

      58,298  
       

 

 

 
        SHARES            
COMMON STOCKS 1.7%

 

CONSUMER DISCRETIONARY 0.7%

 

Caesars Entertainment Corp. (f)

    754,964         8,531  
       

 

 

 
ENERGY 0.6%

 

Forbes Energy Services Ltd. (f)(l)

    64,837         551  

Ocean Rig UDW, Inc. (f)

      237,175         6,651  
       

 

 

 
          7,202  
       

 

 

 
FINANCIALS 0.4%

 

TIG FinCo PLC «(l)

      3,315,033         5,221  
       

 

 

 

Total Common Stocks (Cost $20,373)

    20,954  
       

 

 

 
WARRANTS 0.0%

 

INDUSTRIALS 0.0%

 

Sequa Corp. - Exp. 04/28/2024 «

      1,355,000         340  
       

 

 

 

Total Warrants (Cost $0)

    340  
       

 

 

 
        SHARES         MARKET
VALUE
(000S)
 
PREFERRED SECURITIES 2.6%

 

BANKING & FINANCE 0.5%

 

Farm Credit Bank of Texas

 

10.000% due 12/15/2020 (j)(l)

    5,745     $     6,549  
       

 

 

 
INDUSTRIALS 2.1%

 

Sequa Corp.

 

9.000% «

      27,876         25,299  
       

 

 

 

Total Preferred Securities (Cost $31,460)

    31,848  
       

 

 

 
REAL ESTATE INVESTMENT TRUSTS 1.4%

 

REAL ESTATE 1.4%

 

VICI Properties, Inc.

      858,541         17,471  
       

 

 

 

Total Real Estate Investment Trusts
(Cost $10,754)

    17,471  
       

 

 

 
SHORT-TERM INSTRUMENTS 4.3%

 

REPURCHASE AGREEMENTS (m) 1.9%

 

          23,093  
       

 

 

 
        PRINCIPAL
AMOUNT
(000S)
           
ARGENTINA TREASURY BILLS 0.2%

 

21.114% due 08/15/2018 - 11/21/2018 (g)(h)

  ARS     44,128         1,615  

1.855% due 09/14/2018 (g)(i)

  $     116         115  
       

 

 

 
          1,730  
       

 

 

 
U.S. TREASURY BILLS 2.2%

 

1.928% due 09/06/2018 - 10/18/2018 (g)(h)(n)(p)(r)

      26,833         26,776  
       

 

 

 
Total Short-Term Instruments
(Cost $52,000)
        51,599  
       

 

 

 
Total Investments in Securities
(Cost $1,646,016)
        1,694,909  
       
Total Investments 139.0%
(Cost $1,646,016)
    $     1,694,909  

Preferred Shares (19.5)%

 

      (237,950

Financial Derivative Instruments (o)(q) (1.7)%

(Cost or Premiums, net $(18,057))

    (20,443
Other Assets and Liabilities, net (17.8)%     (217,001
       

 

 

 
Net Assets Applicable to Common Shareholders 100.0%

 

  $       1,219,515  
       

 

 

 
 

NOTES TO SCHEDULE OF INVESTMENTS:

 

*

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

^

Security is in default.

«

Security valued using significant unobservable inputs (Level 3).

~

Variable or Floating rate security. Rate shown is the rate in effect as of period end. Certain variable rate securities are not based on a published reference rate and spread, rather are determined by the issuer or agent and are based on current market conditions. Reference rate is as of reset date, which may vary by security. These securities may not indicate a reference rate and/or spread in their description.

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2018   27


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

 

Rate shown is the rate in effect as of period end. The rate may be based on a fixed rate, a capped rate or a floor rate and may convert to a variable or floating rate in the future. These securities do not indicate a reference rate and spread in their description.

 

All or a portion of this amount represent unfunded loan commitments. The interest rate for the unfunded portion will be determined at the time of funding. See Note 4, Securities and Other Investments, in the Notes to Financial Statements for more information regarding unfunded loan commitments.

(a)

Interest only security.

(b)

Principal only security.

(c)

When-issued security.

(d)

Payment in-kind security.

(e)

Security is not accruing income as of the date of this report.

(f)

Security did not produce income within the last twelve months.

(g)

Coupon represents a weighted average yield to maturity.

(h)

Zero coupon security.

(i)

Coupon represents a yield to maturity.

(j)

Perpetual maturity; date shown, if applicable, represents next contractual call date.

(k)

Contingent convertible security.

 

(l)  RESTRICTED SECURITIES:

 

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

Farm Credit Bank of Texas

10.000% due 12/15/2020

         12/03/2010 - 10/08/2013     $ 6,339     $ 6,549       0.54

Forbes Energy Services Ltd.

         10/09/2014 - 11/18/2016       2,472       551       0.04  

TIG FinCo PLC

         04/02/2015 - 07/20/2017       4,441       5,221       0.43  
        

 

 

   

 

 

   

 

 

 
  $     13,252     $     12,321       1.01
 

 

 

   

 

 

   

 

 

 

 

BORROWINGS AND OTHER FINANCING TRANSACTIONS

 

(m)  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)
 
FICC     1.500     07/31/2018       08/01/2018     $     6,593     U.S. Treasury Notes 2.625% due 11/15/2020   $ (6,726   $ 6,593     $ 6,593  
NOM     1.820       07/31/2018       08/01/2018       8,900     U.S. Treasury Bonds 3.750% due 11/15/2043     (9,077     8,900       8,900  
SAL     1.990       07/31/2018       08/01/2018       7,600     U.S. Treasury Notes 2.625% due 06/15/2021     (7,756     7,600       7,600  
           

 

 

   

 

 

   

 

 

 

Total Repurchase Agreements

 

    $     (23,559   $     23,093     $     23,093  
   

 

 

   

 

 

   

 

 

 

 

REVERSE REPURCHASE AGREEMENTS:

 

Counterparty   Borrowing
Rate(2)
    Settlement
Date
    Maturity
Date
    Amount
Borrowed(2)
    Payable for
Reverse
Repurchase
Agreements
 

BCY

    (0.500 )%      06/28/2018       TBD (3)     $     (2,214   $ (2,213
    (0.250     03/14/2018       TBD (3)         (289     (289
    0.950       06/18/2018       TBD (3)         (2,435     (2,438

BPS

    1.350       07/16/2018       TBD (3)         (298     (298
    1.600       07/16/2018       TBD (3)         (1,951     (1,952
    1.650       07/16/2018       TBD (3)         (4,965     (4,969

BRC

    0.000       11/29/2017       TBD (3)         (187     (187
    0.000       07/26/2018       TBD (3)         (405     (405

CFR

    (1.750     03/13/2018       TBD (3)     EUR     (2,536     (2,945

CIW

    2.450       07/13/2018       08/10/2018     $         (21,760     (21,788

FOB

    2.350       07/17/2018       08/07/2018         (3,806     (3,810

JML

    0.900       08/02/2018       09/03/2018     GBP     (8,525     (11,189

JPS

    2.480       07/18/2018       08/20/2018     $     (4,631     (4,635

NOM

    2.750       07/23/2018       08/23/2018         (5,449     (5,453

RDR

    2.540       06/08/2018       09/07/2018         (5,273     (5,293
    2.670       05/10/2018       08/10/2018         (4,499     (4,527

SOG

    2.790       05/21/2018       08/21/2018         (6,074     (6,108
    2.790       05/22/2018       08/21/2018         (5,575     (5,606
    2.810       06/12/2018       09/12/2018         (4,878     (4,897
    2.820       06/14/2018       09/14/2018         (15,595         (15,654
    2.850       07/16/2018       10/16/2018         (6,742     (6,751
    2.850       07/17/2018       10/17/2018             (10,996     (11,009

UBS

    0.150       07/06/2018       08/06/2018     EUR     (22,933     (26,819

 

28   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2018

 

Counterparty   Borrowing
Rate(2)
    Settlement
Date
    Maturity
Date
    Amount
Borrowed(2)
    Payable for
Reverse
Repurchase
Agreements
 
    1.000     07/05/2018       08/02/2018     GBP     (8,416   $ (11,055
    1.050       07/05/2018       08/06/2018         (5,412     (7,109
    1.300       07/05/2018       08/06/2018         (2,088     (2,744
    2.540       05/31/2018       08/31/2018     $     (14,714     (14,778
    2.560       06/11/2018       09/10/2018         (4,061     (4,076
    2.560       06/13/2018       09/13/2018         (11,292     (11,331
    2.560       07/11/2018       09/13/2018         (1,601     (1,603
    2.790       07/05/2018       10/05/2018         (3,924     (3,932
    2.860       05/31/2018       08/31/2018             (11,983     (12,042
    2.910       05/07/2018       08/07/2018         (10,906     (10,982
    2.910       05/14/2018       08/14/2018         (9,465     (9,525
           

 

 

 

Total Reverse Repurchase Agreements

 

  $     (238,412
           

 

 

 

 

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 pledged/(received) as of July 31, 2018:

 

Counterparty   Repurchase
Agreement
Proceeds
to be
Received(1)
    Payable for
Reverse
Repurchase
Agreements
    Payable for
Sale-Buyback
Transactions
     Total
Borrowings and
Other Financing
Transactions
    Collateral
Pledged/(Received)
    Net  Exposure(4)  

Global/Master Repurchase Agreement

 

BCY

  $ 0     $ (4,940   $ 0      $ (4,940   $ 5,549     $ 609  

BPS

    0       (7,219     0        (7,219     7,010       (209

BRC

    0       (592     0        (592     602       10  

CFR

    0       (2,945     0        (2,945     2,853       (92

CIW

    0       (21,788     0        (21,788     22,524       736  

FICC

    6,593       0       0        6,593       (6,726     (133

FOB

    0       (3,810     0        (3,810     3,932       122  

JML

    0       (11,189     0        (11,189     13,109       1,920  

JPS

    0       (4,635     0        (4,635     4,645       10  

NOM

    8,900       (5,453     0        3,447       (3,123     324  

RDR

    0       (9,820     0        (9,820     10,229       409  

SAL

    7,600       0       0        7,600       (7,756     (156

SOG

    0       (50,025     0        (50,025     54,555       4,530  

UBS

    0       (115,996     0            (115,996         130,681           14,685  
 

 

 

   

 

 

   

 

 

        

Total Borrowings and Other Financing Transactions

  $     23,093     $     (238,412   $     0         
 

 

 

   

 

 

   

 

 

        

 

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     $ (120,161   $ (91,366   $ (15,696   $ (227,223
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Borrowings

  $     0     $     (120,161   $     (91,366   $     (15,696   $ (227,223
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Payable for reverse repurchase agreements(5)

 

      $     (227,223
         

 

 

 

 

(n)

Securities with an aggregate market value of $262,012 have been pledged as collateral under the terms of the above master agreements as of July 31, 2018.

 

(1)

Includes accrued interest.

(2)

The average amount of borrowings outstanding during the period ended July 31, 2018 was $(226,117) at a weighted average interest rate of 1.902%. Average borrowings may include sale-buyback transactions and reverse repurchase agreements, if held during the period.

(3)

Open maturity reverse repurchase agreement.

(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 8, Master Netting Arrangements, in the Notes to Financial Statements for more information regarding master netting arrangements.

(5)

Unsettled reverse repurchase agreements liability of $(11,189) is outstanding at period end.

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2018   29


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

 

 

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

 

SWAP AGREEMENTS:

 

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

 

Reference Entity   Fixed
Receive Rate
    Payment
Frequency
    Maturity
Date
    Implied
Credit Spread at
July 31, 2018(2)
    Notional
Amount(3)
    Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
    Market
Value(4)
        Variation Margin  
  Asset     Liability  

Ally Financial, Inc.

    5.000     Quarterly       06/20/2022       0.939     $       4,040     $ 523     $ 98     $ 621     $ 8     $ 0  

Deutsche Bank AG

    1.000       Quarterly       06/20/2019       0.732       EUR       2,700       (8     19       11       1       0  

Frontier Communications Corp.

    5.000       Quarterly       06/20/2020       9.536       $       17,570       (724     (471         (1,195     28       0  

Frontier Communications Corp.

    5.000       Quarterly       06/20/2022       12.503         1,000       (135     (61     (196     2       0  

Navient Corp.

    5.000       Quarterly       12/20/2021       1.986         15,900       (30     1,634       1,604       0       (5

Navient Corp.

    5.000       Quarterly       06/20/2022       2.278         300       27       4       31       0       0  

Novo Banco S.A.

    5.000       Quarterly       09/20/2020       11.451       EUR       8,000       (2,531     2,103       (428     96       0  
             

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
            $     (2,878   $     3,326     $ 448     $     135     $     (5
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

Index/Tranches

 

Fixed
Receive Rate

 

Payment
Frequency

   

Maturity
Date

   

Notional
Amount(3)

    Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
    Market
Value(4)
    Variation Margin  
  Asset     Liability  

CDX.HY-30 5-Year Index

  5.000%     Quarterly       06/20/2023     $         18,600     $ 1,117     $ 296     $ 1,413     $ 18     $ 0  

CDX.IG-28 5-Year Index

  1.000     Quarterly       06/20/2022         6,000       101       22       123       2       0  

CDX.IG-30 5-Year Index

  1.000     Quarterly       06/20/2023         14,700       252       41       293       5       0  
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
          $     1,470     $     359     $     1,829     $     25     $     0  
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

INTEREST RATE SWAPS

 

Pay/Receive
Floating Rate
 

Floating Rate Index

    

Fixed Rate

   

Payment
Frequency

   

Maturity
Date

   

Notional
Amount

    Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
   

Market
Value

    Variation Margin  
  Asset     Liability  

Pay

 

1-Year BRL-CDI

       11.250     Maturity       01/04/2021       BRL       105,000     $ (1,280   $ 2,312     $ 1,032     $ 0     $ (5

Pay

 

1-Year BRL-CDI

       11.500       Maturity       01/04/2021         22,400       (224     515       291       0       (1

Receive

 

3-Month USD-LIBOR

       2.000       Semi-Annual       06/20/2023       $       110,000       4,029       985       5,014       2       0  

Receive(5)

 

3-Month USD-LIBOR

       2.750       Semi-Annual       12/19/2023         450,000       4,000       1,678       5,678       0       (32

Pay

 

3-Month USD-LIBOR

       2.750       Semi-Annual       06/17/2025         145,380       9,193       (11,531     (2,338     47       0  

Pay

 

3-Month USD-LIBOR

       2.250       Semi-Annual       06/15/2026         44,400       2,099       (4,545     (2,446     21       0  

Pay

 

3-Month USD-LIBOR

       2.500       Semi-Annual       12/20/2027         73,900       530       (3,874     (3,344     46       0  

Pay

 

3-Month USD-LIBOR

       3.500       Semi-Annual       06/19/2044         305,100       (9,953     33,197       23,244       775       0  

Receive

 

3-Month USD-LIBOR

       2.500       Semi-Annual       06/20/2048         486,200       18,618       39,071       57,689       0       (1,305

Pay

 

6-Month  AUD-BBR-BBSW

       3.500       Semi-Annual       06/17/2025       AUD       13,400       332       228       560       0       (6

Receive(5)

 

6-Month EUR-EURIBOR

       1.250       Annual       09/19/2028       EUR       38,000       (532     (657     (1,189     125       0  

Receive(5)

 

6-Month EUR-EURIBOR

       1.250       Annual       12/19/2028         4,100       (70     (32     (102     14       0  

Receive(5)

 

6-Month GBP-LIBOR

       1.500       Semi-Annual       09/19/2028       GBP       46,600       1,067       (427     640       281       0  
                

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
          $ 27,809     $ 56,920     $ 84,729     $ 1,311     $ (1,349
                

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Swap Agreements

 

  $     26,401     $     60,605     $     87,006     $     1,471     $     (1,354
                

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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, 2018:

 

    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     $     1,471     $     1,471       $     0     $     0     $     (1,354)     $     (1,354)  
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

 

(p)

Securities with an aggregate market value of $2,308 and cash of $38,379 have been pledged as collateral for exchange-traded and centrally cleared financial derivative instruments as of July 31, 2018. See Note 8, Master Netting Arrangements, in the Notes to Financial Statements for more information regarding master netting arrangements.

 

(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, securities or other deliverable obligations equal to the notional amount of the swap less the recovery value of the referenced obligation or underlying securities comprising the referenced index.

 

30   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2018

 

(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 indicators 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 indicators 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.

(5) 

This instrument has a forward starting effective date. See Note 2, Securities Transactions and Investment Income, in the Notes to Financial Statements for further information.

 

(q)  FINANCIAL DERIVATIVE INSTRUMENTS: OVER THE COUNTER

 

FORWARD FOREIGN CURRENCY CONTRACTS:

 

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

BOA

     08/2018     ARS     2,130     $     99     $ 22     $ 0  
     08/2018     BRL     7,559         1,994       0       (21
     08/2018     $     2,013     BRL     7,559       1       0  
     08/2018         109,078     EUR     93,846       662       0  
     09/2018     ARS     1,048     $     48       11       0  
     09/2018     EUR     93,846         109,339       0       (661

BPS

     08/2018     ARS     58,544         1,959       9       (136
     08/2018     CHF     342         345       0       0  
     08/2018     EUR     90,206         105,189       0       (294
     09/2018     PEN     6,366         1,932       0       (10

CBK

     08/2018     BRL     7,559         2,013       0       (1
     08/2018     EUR     4,540         5,305       0       (4
     08/2018     GBP     2,957         3,898       16       0  
     08/2018     $     1,962     BRL     7,559       52       0  
     08/2018         147,675     GBP     112,740       313       (12
     09/2018     BRL     7,559     $     1,955       0       (51
     09/2018     GBP     111,894         146,750       0       (313
     10/2018     $     98     ARS     2,940       2       0  

GLM

     08/2018         1,050     EUR     900       2       0  

HUS

     08/2018     ARS     540     $     25       6       0  
     08/2018     $     1,375     GBP     1,037       0       (14
     08/2018         10,957     RUB     689,379       62       (11
     10/2018         14     ARS     420       0       0  

JPM

     08/2018     AUD     377     $     278       0       (2
     08/2018     EUR     1,654         1,933       0       (1

UAG

     08/2018     GBP     110,820         146,739       1,283       0  
            

 

 

   

 

 

 

Total Forward Foreign Currency Contracts

 

  $   2,441     $   (1,531
 

 

 

   

 

 

 

 

SWAP AGREEMENTS:

 

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

 

Counterparty   Reference Entity   Fixed
Receive Rate
    Payment
Frequency
    Maturity
Date
    Implied
Credit Spread at
July 31, 2018(2)
    Notional
Amount(3)
    Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
    Swap Agreements,
at Value
 
  Asset      Liability  
BPS  

Petrobras Global Finance BV

    1.000     Quarterly       12/20/2024       3.275   $ 1,800     $ (352   $ 137     $ 0      $ (215
BRC  

Springleaf Finance Corp.

    5.000       Quarterly       12/20/2021       1.528       2,700       (40     354       314        0  
 

Ukraine Government International Bond

    5.000       Quarterly       12/20/2022       4.057           16,900           1,036           (336         700        0  
DUB  

Petroleos Mexicanos

    1.000       Quarterly       12/20/2021       1.730       100       (9     7       0        (2
GST  

Petrobras Global Finance BV

    1.000       Quarterly       09/20/2020       1.619       20       (3     3       0        0  
 

Petrobras Global Finance BV

    1.000       Quarterly       12/20/2024       3.275       2,400       (476     189       0            (287
 

Springleaf Finance Corp.

    5.000       Quarterly       06/20/2022       1.814       1,550       138       48       186        0  
HUS  

Petrobras Global Finance BV

    1.000       Quarterly       12/20/2019       1.324       500       (41     39       0        (2
 

Petrobras Global Finance BV

    1.000       Quarterly       09/20/2020       1.619       60       (9     8       0        (1
 

Petrobras Global Finance BV

    1.000       Quarterly       12/20/2024       3.275       3,000       (623     264       0        (359

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2018   31


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

 

Counterparty   Reference Entity   Fixed
Receive Rate
    Payment
Frequency
    Maturity
Date
    Implied
Credit Spread at
July 31, 2018(2)
    Notional
Amount(3)
    Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
    Swap Agreements,
at Value
 
  Asset      Liability  
JPM  

JBS Investments GmbH

    1.000 %       Quarterly       12/20/2018       3.796 %       $   15,000     $ (440   $ 295     $ 0      $ (145
 

Russia Government International Bond

    1.000       Quarterly       06/20/2019       0.702       28,600       (1,957     2,066       109        0  
 

Russia Government International Bond

    1.000       Quarterly       12/20/2020       0.891       1,300       (149     154       5        0  
 

Springleaf Finance Corp.

    5.000       Quarterly       06/20/2022       1.814       6,570       620       169       789        0  
MYC  

Novo Banco S.A.

    5.000       Quarterly       09/20/2020       11.451       EUR    3,000       (28     (133     0        (161
 

Petrobras Global Finance BV

    1.000       Quarterly       12/20/2019       1.324       $  14,500       (1,342     1,295       0        (47
UAG  

Park Aerospace Holdings Ltd. «

    5.000       Quarterly       07/01/2020       2.923       1,900       111       (31     80        0  
             

 

 

   

 

 

   

 

 

    

 

 

 
            $   (3,564   $   4,528     $   2,183      $   (1,219
             

 

 

   

 

 

   

 

 

    

 

 

 

 

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

 

Counterparty   Index/Tranches   Fixed
Receive Rate
    Payment
Frequency
  Maturity
Date
    Notional
Amount(3)
    Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
    Swap Agreements,
at  Value(4)
 
  Asset     Liability  
BRC  

ABX.HE.AAA.6-2 Index

    0.110   Monthly     05/25/2046     $     63,370     $ (12,915   $ 7,958     $ 0     $ (4,957
DUB  

CMBX.NA.BBB-.6 Index

    3.000     Monthly     05/11/2063       3,200       (195     (156     0       (351
 

CMBX.NA.BBB-.8 Index

    3.000     Monthly     10/17/2057       4,400       (507     81       0       (426
 

CMBX.NA.BBB-.9 Index

    3.000     Monthly     09/17/2058       2,800       (351     121       0       (230
FBF  

CMBX.NA.BBB-.10 Index

    3.000     Monthly     11/17/2059       100       (11     5       0       (6
 

CMBX.NA.BBB-.6 Index

    3.000     Monthly     05/11/2063       300       (36     3       0       (33
 

CMBX.NA.BBB-.7 Index

    3.000     Monthly     01/17/2047       400       (36     10       0       (26
 

CMBX.NA.BBB-.8 Index

    3.000     Monthly     10/17/2057       1,300       (203     77       0       (126
GST  

ABX.HE.AA.6-1 Index

    0.320     Monthly     07/25/2045       23,798       (1,131     (289     0       (1,420
 

ABX.HE.AAA.6-2 Index

    0.110     Monthly     05/25/2046       4,452       (941     593       0       (348
 

CMBX.NA.A.6 Index

    2.000     Monthly     05/11/2063       4,300       (219     172       0       (47
 

CMBX.NA.BB.6 Index

    5.000     Monthly     05/11/2063       2,900       (392     (174     0       (566
 

CMBX.NA.BBB-.6 Index

    3.000     Monthly     05/11/2063       6,500       (358     (354     0       (712
 

CMBX.NA.BBB-.7 Index

    3.000     Monthly     01/17/2047       1,100       (56     (16     0       (72
 

CMBX.NA.BBB-.9 Index

    3.000     Monthly     09/17/2058       6,400       (797     271       0       (526
MEI  

ABX.HE.AAA.6-2 Index

    0.110     Monthly     05/25/2046       61,335       (12,261     7,463       0       (4,798
 

CMBX.NA.BBB-.10 Index

    3.000     Monthly     11/17/2059       100       (10     4       0       (6
MYC  

ABX.HE.AAA.6-2 Index

    0.110     Monthly     05/25/2046       66,772       (8,737     3,514       0       (5,223
 

CMBX.NA.BBB-.10 Index

    3.000     Monthly     11/17/2059       6,850       (731     292       0       (439
 

CMBX.NA.BBB-.6 Index

    3.000     Monthly     05/11/2063       3,250       (176     (180     0       (356
 

CMBX.NA.BBB-.7 Index

    3.000     Monthly     01/17/2047       2,200       (97     (46     0       (143
 

CMBX.NA.BBB-.8 Index

    3.000     Monthly     10/17/2057       1,100       (127     21       0       (106
 

CMBX.NA.BBB-.9 Index

    3.000     Monthly     09/17/2058       3,100       (381     126       0       (255
           

 

 

   

 

 

   

 

 

   

 

 

 
          $   (40,668   $   19,496     $   0     $   (21,172
         

 

 

   

 

 

   

 

 

   

 

 

 

 

INTEREST RATE SWAPS

 

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

Pay

 

3-Month USD-LIBOR

    3.850   Semi-Annual   07/13/2022   $   600,000     $ 68     $ (1,189   $ 0     $ (1,121
MYC  

Pay

 

3-Month USD-LIBOR

    3.025     Semi-Annual   09/04/2023     360,000       (275     102       0       (173
             

 

 

   

 

 

   

 

 

   

 

 

 
    $   (207   $   (1,087   $   0     $   (1,294
   

 

 

   

 

 

   

 

 

   

 

 

 

 

TOTAL RETURN SWAPS ON INTEREST RATE INDICES

 

Counterparty   Pay/Receive(5)   Underlying Reference   # of Units     Financing Rate   Payment
Frequency
  Maturity
Date
  Notional
Amount
    Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
    Swap Agreements,
at Value
 
  Asset     Liability  

BOA

 

Receive

 

iBoxx USD Liquid High Yield Index

    N/A    

3-Month USD-LIBOR

  Maturity   09/20/2018   $   1,300     $ (7   $ 17     $ 10     $ 0  

BPS

 

Receive

 

iBoxx USD Liquid High Yield Index

    N/A    

3-Month USD-LIBOR

  Maturity   09/20/2018     400       (2     6       4       0  

FBF

 

Receive

 

iBoxx USD Liquid High Yield Index

    N/A    

3-Month USD-LIBOR

  Maturity   09/20/2018     300       (1     4       3       0  

GST

 

Receive

 

iBoxx USD Liquid High Yield Index

    N/A    

3-Month USD-LIBOR

  Maturity   09/20/2018     900       (5     12       7       0  

JPM

 

Receive

 

iBoxx USD Liquid High Yield Index

    N/A    

3-Month USD-LIBOR

  Maturity   09/20/2018     800       (4     12       8       0  
               

 

 

   

 

 

   

 

 

   

 

 

 
              $ (19   $ 51     $ 32     $ 0  
             

 

 

   

 

 

   

 

 

   

 

 

 

Total Swap Agreements

 

  $   (44,458   $   22,988     $   2,215     $   (23,685
 

 

 

   

 

 

   

 

 

   

 

 

 

 

32   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2018

 

 

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 pledged/(received) as of July 31, 2018:

 

    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
Pledged/
(Received)
    Net
Exposure(6)
 

BOA

  $ 696      $ 0      $ 10      $ 706       $ (682   $ 0      $ 0     $ (682   $ 24     $ 0     $ 24  

BPS

    9        0        4        13         (440     0        (215     (655     (642     823       181  

BRC

    0        0        1,014        1,014         0       0        (4,957     (4,957     (3,943     3,962       19  

CBK

    383        0        0        383         (381     0        0       (381     2       0       2  

DUB

    0        0        0        0         0       0        (2,130     (2,130     (2,130         (1,198         (3,328

FBF

    0        0        3        3         0       0        (191     (191     (188     140       (48

GLM

    2        0        0        2         0       0        0       0       2       0       2  

GST

    0        0        193        193         0       0        (3,978     (3,978         (3,785     4,109       324  

HUS

    68        0        0        68         (25     0        (362     (387     (319     347       28  

JPM

    0        0        911        911         (3     0        (145     (148     763       (572     191  

MEI

    0        0        0        0         0       0        (4,804     (4,804     (4,804     5,007       203  

MYC

    0        0        0        0         0       0        (6,903     (6,903     (6,903     5,763       (1,140

UAG

    1,283        0        80        1,363         0       0        0       0       1,363       (1,540     (177
 

 

 

    

 

 

    

 

 

    

 

 

     

 

 

   

 

 

    

 

 

   

 

 

       

Total Over the Counter

  $     2,441      $     0      $     2,215      $     4,656       $     (1,531   $     0      $     (23,685   $     (25,216      
 

 

 

    

 

 

    

 

 

    

 

 

     

 

 

   

 

 

    

 

 

   

 

 

       

 

(r)

Securities with an aggregate market value of $23,603 have been pledged as collateral for financial derivative instruments as governed by International Swaps and Derivatives Association, Inc. master agreements as of July 31, 2018.

 

(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, securities or other deliverable obligations 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 indicators 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 indicators 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.

(5)

Receive represents that the Fund receives payments for any positive net return on the underlying reference. The Fund makes payments for any negative net return on such underlying reference. Pay represents that the Fund receives payments for any negative net return on the underlying reference. The Fund makes payments for any positive net return on such underlying reference.

(6)

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 8, Master Netting Arrangements, 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, 2018:

 

    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     $ 160     $ 0     $ 0     $ 1,311     $ 1,471  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

 

Forward Foreign Currency Contracts

  $ 0     $ 0     $ 0     $ 2,441     $ 0     $ 2,441  

Swap Agreements

    0       2,183       0       0       32       2,215  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 2,183     $ 0     $ 2,441     $ 32     $ 4,656  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $     0     $     2,343     $     0     $     2,441     $     1,343     $     6,127  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2018   33


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

 

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

Financial Derivative Instruments - Liabilities

 

Exchange-traded or centrally cleared

 

Swap Agreements

  $ 0     $ 5     $ 0     $ 0     $ 1,349     $ 1,354  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

 

Forward Foreign Currency Contracts

  $ 0     $ 0     $ 0     $ 1,531     $ 0     $ 1,531  

Swap Agreements

    0       22,391       0       0       1,294       23,685  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 22,391     $ 0     $ 1,531     $ 1,294     $ 25,216  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $     0     $     22,396     $     0     $     1,531     $     2,643     $     26,570  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

The effect of Financial Derivative Instruments on the Statements of Operations for the period ended July 31, 2018:

 

    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     $ 3,805     $ 0     $ 0     $ 14,428     $ 18,233  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

 

Forward Foreign Currency Contracts

  $ 0     $ 0     $ 0     $ (1,432   $ 0     $ (1,432

Swap Agreements

    0       15,070       0       0       1,531       16,601  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 15,070     $ 0     $ (1,432   $ 1,531     $ 15,169  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $     18,875     $     0     $     (1,432   $ 15,959     $     33,402  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

Exchange-traded or centrally cleared

 

Swap Agreements

  $ 0     $ 1,095     $ 0     $ 0     $ (9,165   $ (8,070
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

 

Forward Foreign Currency Contracts

  $ 0     $ 0     $ 0     $ 6,640     $ 0     $ 6,640  

Swap Agreements

    0       (774     0       0       (1,558     (2,332
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ (774   $ 0     $ 6,640     $ (1,558   $ 4,308  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $     0     $ 321     $ 0     $ 6,640     $     (10,723   $ (3,762
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

FAIR VALUE MEASUREMENTS

 

The following is a summary of the fair valuations according to the inputs used as of July 31, 2018 in valuing the Fund’s assets and liabilities:

 

Category and Subcategory   Level 1     Level 2     Level 3     Fair
Value at
07/31/2018
 

Investments in Securities, at Value

 

Loan Participations and Assignments

  $ 0     $ 83,859     $ 13,878     $ 97,737  

Corporate Bonds & Notes

 

Banking & Finance

    0       340,895       0       340,895  

Industrials

    0       357,320       1,701       359,021  

Utilities

    0       82,778       0       82,778  

Convertible Bonds & Notes

 

Industrials

    0       7,263       0       7,263  

Municipal Bonds & Notes

 

California

    0       12,701       0       12,701  

Illinois

    0       28,710       0       28,710  

Iowa

    0       474       0       474  

Texas

    0       2,082       0       2,082  

Virginia

    0       1,367       0       1,367  

West Virginia

    0       15,145       0       15,145  

U.S. Government Agencies

    0       49,418       8,706       58,124  

Non-Agency Mortgage-Backed Securities

    0       266,299       0       266,299  

Asset-Backed Securities

    0           213,272           28,531           241,803  

Sovereign Issues

    0       58,298       0       58,298  

Common Stocks

 

Consumer Discretionary

        8,531       0       0       8,531  

Energy

    6,651       551       0       7,202  

Financials

    0       0       5,221       5,221  

Warrants

 

Industrials

    0       0       340       340  

Preferred Securities

 

Banking & Finance

    0       6,549       0       6,549  

Industrials

    0       0       25,299       25,299  
Category and Subcategory   Level 1     Level 2     Level 3     Fair
Value at
07/31/2018
 

Real Estate Investment Trusts

 

Real Estate

  $ 17,471     $ 0     $ 0     $ 17,471  

Short-Term Instruments

 

Repurchase Agreements

    0       23,093       0       23,093  

Argentina Treasury Bills

    0       1,730       0       1,730  

U.S. Treasury Bills

    0       26,776       0       26,776  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Investments

  $ 32,653     $ 1,578,580     $ 83,676     $ 1,694,909  
 

 

 

   

 

 

   

 

 

   

 

 

 

Financial Derivative Instruments - Assets

 

Exchange-traded or centrally cleared

    0       1,471       0       1,471  

Over the counter

    0       4,576       80       4,656  
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 6,047     $ 80     $ 6,127  
 

 

 

   

 

 

   

 

 

   

 

 

 

Financial Derivative Instruments - Liabilities

 

Exchange-traded or centrally cleared

    0       (1,354     0       (1,354

Over the counter

    0       (25,216     0       (25,216
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ (26,570   $ 0     $ (26,570
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Financial Derivative Instruments

  $ 0     $ (20,523   $ 80     $ (20,443
 

 

 

   

 

 

   

 

 

   

 

 

 

Totals

  $     32,653     $     1,558,057     $     83,756     $     1,674,266  
 

 

 

   

 

 

   

 

 

   

 

 

 
 

 

34   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2018

 

 

There were no significant transfers among Levels 1 and 2 during the period ended July 31, 2018.

 

The following is a reconciliation of the fair valuations using significant unobservable inputs (Level 3) for the Fund during the period ended July 31, 2018:

 

Category and Subcategory   Beginning
Balance
at 07/31/2017
    Net
Purchases(1)
    Net
Sales(1)
    Accrued
Discounts/
(Premiums)
    Realized
Gain/(Loss)
    Net Change in
Unrealized
Appreciation/
(Depreciation)(2)
    Transfers into
Level 3
    Transfers out
of Level 3
    Ending
Balance
at 07/31/2018
    Net Change in
Unrealized
Appreciation/
(Depreciation)
on Investments
Held at
07/31/2018(2)
 

Investments in Securities, at Value

 

Loan Participations and Assignments

  $ 1,842     $ 6,860     $ (1,181   $ 23     $ 14     $ (228   $ 7,414     $ (866   $ 13,878     $ (188

Corporate Bonds & Notes

 

Banking & Finance

    8,209       0       (479     4       23       (115     0       (7,642     0       0  

Industrials

    11,009       1,704       (11,013     1       112       (112     0       0       1,701       0  

U.S. Government Agencies

    8,360       0       (155     135       60       306       0       0       8,706       300  

Asset-Backed Securities

    22,346       7,010       0       158       0       (983     0       0       28,531       (983

Common Stocks

 

Financials

    4,374       0       0       0       0       847       0       0       5,221       847  

Warrants

 

Industrials

    635       0       0       0       0       (295     0       0       340       (295

Preferred Securities

 

Industrials

    24,504       2,690       0       0       0       (1,895     0       0       25,299       (1,895
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $     81,279     $     18,264     $     (12,828   $     321     $     209     $     (2,475   $     7,414     $     (8,508   $     83,676     $     (2,214
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial Derivative Instruments - Assets

 

Over the counter

  $ 0     $ 111     $ 0     $ 0     $ 0     $ (31   $ 0     $ 0     $ 80     $ (31
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals

  $ 81,279     $ 18,375     $ (12,828   $ 321     $ 209     $ (2,506   $ 7,414     $ (8,508   $ 83,756     $ (2,245
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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 07/31/2018
     Valuation
Technique
   Unobservable
Inputs
   Input Value(s)
(% Unless
Noted
Otherwise)
 

Investments in Securities, at Value

 

Loan Participations and Assignments

  $ 5,383      Proxy Pricing    Base Price      96.470-100.074  
    8,495      Third Party Vendor    Broker Quote      100.000-101.625  

Corporate Bonds & Notes

 

Industrials

    681      Other Valuation Techniques(3)          
    1,020      Proxy Pricing    Base Price      97.010  

U.S. Government Agencies

    8,706      Proxy Pricing    Base Price      60.341  

Asset-Backed Securities

    28,531      Proxy Pricing    Base Price      58.000-102,005.100  

Common Stocks

 

Financials

    5,221      Other Valuation Techniques(3)          

Warrants

 

Industrials

    340      Other Valuation Techniques(3)          

Preferred Securities

 

Industrials

    25,299      Indicative Market Quotation    Broker Quote    $ 900.000  

Financial Derivative Instruments - Assets

 

Over the counter

    80      Indicative Market Quotation    Broker Quote    $ 3.607  
 

 

 

          

Total

  $     83,756           
 

 

 

          

 

(1) 

Net Purchases and Sales for Financial Derivative Instruments may include payments made or received upon entering into swap agreements to compensate for differences between the stated terms of the swap agreement and prevailing market conditions.

(2)

Any difference between Net Change in Unrealized Appreciation/(Depreciation) and Net Change in Unrealized Appreciation/(Depreciation) on Investments Held at July 31, 2018 may be due to an investment no longer held or categorized as Level 3 at period end.

(3)

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, 2018   35


Schedule of Investments PIMCO Corporate & Income Strategy Fund

 

(Amounts in thousands*, except number of shares, contracts and units, if any)

 

        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 
INVESTMENTS IN SECURITIES 122.4%

 

LOAN PARTICIPATIONS AND ASSIGNMENTS 3.8%

 

Alphabet Holding Co., Inc.

 

5.577% (LIBOR03M + 3.500%) due 09/26/2024 ~

  $     99     $     94  

Altice France S.A.

 

TBD% due 07/13/2026

      300         294  

Avantor, Inc.

 

6.077% (LIBOR03M + 4.000%) due 11/21/2024 ~

      50         50  

Banff Merger Sub, Inc.

 

TBD% due 06/21/2019

      1,600           1,594  

California Resources Corp.

 

6.831% (LIBOR03M + 4.750%) due 12/31/2022 «~

      100         102  

CenturyLink, Inc.

 

4.827% (LIBOR03M + 2.750%) due 01/31/2025 ~

      995         981  

Community Health Systems, Inc.

 

5.557% (LIBOR03M + 3.250%) due 01/27/2021 ~

      1,267         1,248  

Dubai World

 

1.750% - 2.000% (LIBOR03M + 2.000%) due 09/30/2022 ~

      504         475  

Energizer Holdings. Inc.

 

TBD% due 05/18/2019

      100         100  

Forbes Energy Services LLC

 

5.000% - 7.000% due 04/13/2021

      150         152  

Frontier Communications Corp.

 

5.830% (LIBOR03M + 3.750%) due 06/15/2024 ~

      595         588  

iHeartCommunications, Inc.

 

TBD% due 01/30/2019 ^(e)

      14,300         11,124  

IRB Holding Corp.

 

5.347% (LIBOR03M + 3.250%) due 02/05/2025 ~

      100         101  

McDermott Technology Americas, Inc.

 

7.077% (LIBOR03M + 5.000%) due 05/10/2025 ~

      998         1,005  

MH Sub LLC

 

5.829% (LIBOR03M + 3.750%) due 09/13/2024 ~

      119         120  

Ministry of Finance of Tanzania

 

7.825% (LIBOR03M + 5.500%) due 12/10/2019 «~

      200         200  

Multi Color Corp.

 

4.327% (LIBOR03M + 2.250%) due 10/31/2024 ~

      16         16  

Parexel International Corp.

 

4.827% (LIBOR03M + 2.750%) due 09/27/2024 ~

      99         99  

PetSmart, Inc.

 

5.100% (LIBOR03M + 3.000%) due 03/11/2022 ~

      80         67  

Ply Gem Industries, Inc.

 

6.087% (LIBOR03M + 3.750%) due 04/12/2025 ~

      200         201  

Sequa Mezzanine Holdings LLC

 

7.067% (LIBOR03M + 5.000%) due 11/28/2021 «~

      218         218  

11.072% (LIBOR03M + 9.000%) due 04/28/2022 «~

      90         90  

Sprint Communications, Inc.

 

4.625% (LIBOR03M + 2.500%) due 02/02/2024 ~

      1,580         1,582  

Stars Group Holdings BV

 

5.831% (LIBOR03M + 3.500%) due 07/10/2025 ~

      100         101  

Syniverse Holdings, Inc.

 

7.078% (LIBOR03M + 5.000%) due 03/09/2023 ~

      20         20  

West Corp.

 

6.077% (LIBOR03M + 4.000%) due 10/10/2024 ~

      32         32  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Westmoreland Coal Co.

 

TBD% due 12/16/2020 ^(e)

  $     955     $     250  

TBD% - 10.581% (LIBOR03M + 8.250%) due 05/31/2020 ~

      1,499         1,529  
       

 

 

 

Total Loan Participations and Assignments (Cost $25,080)

            22,433  
       

 

 

 
CORPORATE BONDS & NOTES 49.0%

 

BANKING & FINANCE 21.6%

 

AGFC Capital Trust

 

4.089% (US0003M + 1.750%) due 01/15/2067 ~

      2,300         1,392  

Ally Financial, Inc.

 

8.000% due 11/01/2031 (m)

      6,492         7,856  

Ambac LSNI LLC

 

7.337% due 02/12/2023 •

      250         252  

Ardonagh Midco PLC

 

8.375% due 07/15/2023

  GBP     5,737         7,647  

Athene Holding Ltd.

 

4.125% due 01/12/2028

  $     52         49  

Avolon Holdings Funding Ltd.

 

5.500% due 01/15/2023

      175         175  

AXA Equitable Holdings, Inc.

 

4.350% due 04/20/2028

      124         121  

5.000% due 04/20/2048

      72         69  

Banco Bilbao Vizcaya Argentaria S.A.

 

6.750% due 02/18/2020 •(i)(j)

  EUR     600         740  

Banco Espirito Santo S.A.

 

4.000% due 01/21/2019 ^(e)

      4,300         1,534  

Banco Santander S.A.

 

6.250% due 09/11/2021 •(i)(j)

      500         624  

Barclays PLC

 

3.250% due 01/17/2033

  GBP     200         245  

6.500% due 09/15/2019 •(i)(j)

  EUR     2,200         2,682  

7.250% due 03/15/2023 •(i)(j)

  GBP     6,300         8,606  

8.000% due 12/15/2020 •(i)(j)

  EUR     2,100         2,738  

Blackstone CQP Holdco LP

 

6.000% due 08/18/2021

  $     900         900  

6.500% due 03/20/2021

      4,900         4,931  

Brighthouse Holdings LLC

 

6.500% due 07/27/2037 (i)

      70         68  

Brookfield Finance, Inc.

 

3.900% due 01/25/2028

      88         83  

4.700% due 09/20/2047

      196         187  

Cantor Fitzgerald LP

 

6.500% due 06/17/2022 (m)

      8,000         8,470  

Credit Agricole S.A.

 

7.875% due 01/23/2024 •(i)(j)(m)

      830         885  

Credit Suisse Group AG

 

7.500% due 07/17/2023 •(i)(j)

      200         207  

7.500% due 12/11/2023 •(i)(j)(m)

      7,105         7,593  

Emerald Bay S.A.

 

0.000% due 10/08/2020 (h)

  EUR     1,657         1,819  

EPR Properties

 

4.750% due 12/15/2026 (m)

  $     3,100         3,034  

Equinix, Inc.

 

2.875% due 03/15/2024

  EUR     100         117  

2.875% due 02/01/2026

      100         114  

Flagstar Bancorp, Inc.

 

6.125% due 07/15/2021 (m)

  $     3,500         3,652  

Fortress Transportation & Infrastructure Investors LLC

 

6.750% due 03/15/2022 (m)

      322         336  

Freedom Mortgage Corp.

 

8.250% due 04/15/2025

      61         60  

GSPA Monetization Trust

 

6.422% due 10/09/2029

      3,571         4,050  

HSBC Holdings PLC

 

6.000% due 09/29/2023 •(i)(j)

  EUR     3,193         4,232  

6.500% due 03/23/2028 •(i)(j)

  $     480         472  

Hunt Cos., Inc.

 

6.250% due 02/15/2026

      24         22  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

iStar, Inc.

 

4.625% due 09/15/2020

  $     13     $     13  

5.250% due 09/15/2022

      48         47  

Jefferies Finance LLC

 

6.875% due 04/15/2022

      1,000         1,013  

7.375% due 04/01/2020 (m)

      2,100         2,147  

7.500% due 04/15/2021

      1,444         1,480  

Kennedy-Wilson, Inc.

 

5.875% due 04/01/2024

      66         65  

Life Storage LP

 

3.875% due 12/15/2027

      28         27  

Lloyds Banking Group PLC

 

7.625% due 06/27/2023 •(i)(j)

  GBP     2,166         3,145  

7.875% due 06/27/2029 •(i)(j)

      1,500         2,300  

LoanCore Capital Markets LLC

 

6.875% due 06/01/2020 (m)

  $     6,100         6,195  

Meiji Yasuda Life Insurance Co.

 

5.100% due 04/26/2048 •

      200         204  

MetLife, Inc.

 

5.875% due 03/15/2028 •(i)

      66         68  

Nationstar Mortgage LLC

 

6.500% due 07/01/2021

      712         716  

Nationwide Building Society

 

10.250% ~(i)

  GBP     12         2,458  

Navient Corp.

 

5.625% due 08/01/2033 (m)

  $     914         786  

6.500% due 06/15/2022

      78         80  

Oppenheimer Holdings, Inc.

 

6.750% due 07/01/2022

      1,496         1,522  

Provident Funding Associates LP

 

6.375% due 06/15/2025

      27         26  

Royal Bank of Scotland Group PLC

 

7.500% due 08/10/2020 •(i)(j)

      3,070         3,177  

8.000% due 08/10/2025 •(i)(j)

      6,390         6,803  

8.625% due 08/15/2021 •(i)(j)

      2,700         2,920  

Santander UK Group Holdings PLC

 

6.750% due 06/24/2024 •(i)(j)

  GBP     3,795         5,179  

7.375% due 06/24/2022 •(i)(j)

      3,520         4,859  

Societe Generale S.A.

 

6.750% due 04/06/2028 •(i)(j)

  $     200         192  

Spirit Realty LP

 

4.450% due 09/15/2026 (m)

      1,600         1,541  

Springleaf Finance Corp.

 

5.625% due 03/15/2023

      1,200         1,206  

6.125% due 05/15/2022

      656         674  

6.875% due 03/15/2025

      198         201  

7.125% due 03/15/2026

      203         207  

8.250% due 10/01/2023

      170         188  

Tesco Property Finance PLC

 

7.623% due 07/13/2039

  GBP     411         720  

Unigel Luxembourg S.A.

 

10.500% due 01/22/2024

  $     560         585  

WeWork Cos., Inc.

 

7.875% due 05/01/2025

      72         70  
       

 

 

 
            126,776  
       

 

 

 
INDUSTRIALS 22.8%

 

Air Canada Pass-Through Trust

 

3.700% due 07/15/2027

      24         23  

Altice Financing S.A.

 

6.625% due 02/15/2023

      2,300         2,332  

7.500% due 05/15/2026 (m)

      1,600         1,562  

Altice France S.A.

 

7.375% due 05/01/2026

      5,340         5,323  

Associated Materials LLC

 

9.000% due 01/01/2024

      534         565  

Bacardi Ltd.

 

4.450% due 05/15/2025

      100         100  

4.700% due 05/15/2028

      100         99  

Baffinland Iron Mines Corp.

 

8.750% due 07/15/2026

      1,400         1,405  

BMC Software Finance, Inc.

 

8.125% due 07/15/2021 (m)

      2,748         2,817  
 

 

36   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2018

 

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

Caesars Resort Collection LLC

 

5.250% due 10/15/2025

  $     8     $     8  

Centene Corp.

 

5.375% due 06/01/2026

      82         84  

Charles River Laboratories International, Inc.

 

5.500% due 04/01/2026

      26         26  

Charter Communications Operating LLC

 

4.200% due 03/15/2028

      134         129  

Cheniere Energy Partners LP

 

5.250% due 10/01/2025

      31         31  

Chesapeake Energy Corp.

 

5.589% (US0003M + 3.250%) due 04/15/2019 ~

      115         115  

Clear Channel Worldwide Holdings, Inc.

 

6.500% due 11/15/2022

      640         656  

7.625% due 03/15/2020

      3,060         3,078  

Cleveland-Cliffs, Inc.

 

4.875% due 01/15/2024

      32         31  

Community Health Systems, Inc.

 

5.125% due 08/01/2021

      4,732         4,500  

6.250% due 03/31/2023 (m)

      5,695         5,325  

8.625% due 01/15/2024

      254         263  

Continental Airlines Pass-Through Trust

 

9.798% due 10/01/2022

      581         617  

CSN Islands Corp.

 

6.875% due 09/21/2019 (m)

      200         201  

CSN Resources S.A.

 

6.500% due 07/21/2020

      1,202         1,163  

DriveTime Automotive Group, Inc.

 

8.000% due 06/01/2021 (m)

      4,100         4,182  

Exela Intermediate LLC

 

10.000% due 07/15/2023 (m)

      117         121  

Ferroglobe PLC

 

9.375% due 03/01/2022

      1,550         1,598  

First Quantum Minerals Ltd.

 

6.500% due 03/01/2024

      1,414         1,382  

6.875% due 03/01/2026

      1,558         1,527  

7.000% due 02/15/2021

      582         589  

Ford Motor Co.

 

7.700% due 05/15/2097 (m)

      7,315         8,494  

Fresh Market, Inc.

 

9.750% due 05/01/2023 (m)

      5,650         4,011  

Frontier Finance PLC

 

8.000% due 03/23/2022

  GBP     4,600         6,264  

Full House Resorts, Inc.

 

8.575% due 01/31/2024 «

  $     298         292  

General Electric Co.

 

5.000% due 01/21/2021 •(i)

      155         152  

Hadrian Merger Sub, Inc.

 

8.500% due 05/01/2026

      40         38  

Harland Clarke Holdings Corp.

 

8.375% due 08/15/2022

      52         50  

HCA, Inc.

 

7.500% due 11/15/2095

      1,200         1,185  

Hilton Domestic Operating Co., Inc.

 

5.125% due 05/01/2026

      131         132  

iHeartCommunications, Inc.

 

9.000% due 09/15/2022 ^(e)

      3,815         2,947  

11.250% due 03/01/2021 ^(e)

      375         292  

IHS Markit Ltd.

 

4.000% due 03/01/2026

      4         4  

Intelsat Jackson Holdings S.A.

 

7.250% due 10/15/2020 (m)

      3,740         3,773  

9.750% due 07/15/2025

      115         123  

Intelsat Luxembourg S.A.

 

7.750% due 06/01/2021 (m)

      10,492           10,020  

8.125% due 06/01/2023

      1,121         967  

Intrepid Aviation Group Holdings LLC

 

6.875% due 02/15/2019

      7,895         7,909  

8.500% due 08/15/2021

      6,420         6,484  

Kinder Morgan, Inc.

 

7.800% due 08/01/2031 (m)

      3,580         4,421  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Mallinckrodt International Finance S.A.

 

5.500% due 04/15/2025

  $     474     $     384  

Matterhorn Merger Sub LLC

 

8.500% due 06/01/2026

      8         8  

Metinvest BV

 

8.500% due 04/23/2026

      1,000         969  

New Albertson’s LP

 

6.570% due 02/23/2028 (m)

      5,600           3,815  

Odebrecht Oil & Gas Finance Ltd.

 

0.000% due 08/30/2018 (h)(i)

      345         6  

0.000% due 08/31/2018 (h)(i)

      407         7  

Park Aerospace Holdings Ltd.

 

3.625% due 03/15/2021

      80         78  

4.500% due 03/15/2023

      159         152  

5.250% due 08/15/2022

      13         13  

5.500% due 02/15/2024

      36         36  

Pelabuhan Indonesia Persero PT

 

4.500% due 05/02/2023

      200         200  

Petroleos Mexicanos

 

6.500% due 03/13/2027

      190         193  

6.750% due 09/21/2047

      50         46  

PetSmart, Inc.

 

5.875% due 06/01/2025

      108         86  

Pisces Midco, Inc.

 

8.000% due 04/15/2026

      170         176  

Pitney Bowes, Inc.

 

4.700% due 04/01/2023

      34         31  

Platin 1426 GmbH

 

6.875% due 06/15/2023 «(c)

  EUR     400         453  

Prime Security Services Borrower LLC

 

9.250% due 05/15/2023

  $     1,280         1,373  

QVC, Inc.

 

5.450% due 08/15/2034

      900         808  

5.950% due 03/15/2043 (m)

      3,682         3,436  

Radiate Holdco LLC

 

6.875% due 02/15/2023

      70         68  

Rockpoint Gas Storage Canada Ltd.

 

7.000% due 03/31/2023

      8         8  

Russian Railways via RZD Capital PLC

 

7.487% due 03/25/2031

  GBP     1,000         1,639  

Safeway, Inc.

 

7.250% due 02/01/2031

  $     1,345         1,321  

Scientific Games International, Inc.

 

5.000% due 10/15/2025

      11         11  

Shelf Drilling Holdings Ltd.

 

8.250% due 02/15/2025

      35         36  

Sigma Holdco BV

 

5.750% due 05/15/2026

  EUR     100         111  

SoftBank Group Corp.

 

4.000% due 04/20/2023

      4,600         5,628  

Spirit Issuer PLC

 

3.368% (BP0003M + 2.700%) due 12/28/2031 ~

  GBP     1,000         1,290  

6.582% due 12/28/2027

      980         1,318  

Sunoco LP

 

4.875% due 01/15/2023

  $     64         63  

T-Mobile USA, Inc.

 

4.750% due 02/01/2028

      19         18  

Telenet Finance Luxembourg Notes SARL

 

5.500% due 03/01/2028

      200         184  

Teva Pharmaceutical Finance Netherlands BV

 

3.250% due 04/15/2022

  EUR     300         367  

Times Square Hotel Trust

 

8.528% due 08/01/2026

  $     1,550         1,804  

Transocean Pontus Ltd.

 

6.125% due 08/01/2025

      146         149  

Unique Pub Finance Co. PLC

 

5.659% due 06/30/2027

  GBP     3,415         4,955  

6.542% due 03/30/2021

      1,143         1,583  

United Group BV

 

4.375% due 07/01/2022

  EUR     100         120  

4.875% due 07/01/2024

      100         120  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Univision Communications, Inc.

 

5.125% due 02/15/2025

  $     400     $     372  

UPCB Finance Ltd.

 

3.625% due 06/15/2029

  EUR     190         221  

ViaSat, Inc.

 

5.625% due 09/15/2025

  $     92         87  

Virgin Media Secured Finance PLC

 

5.000% due 04/15/2027

  GBP     300         387  

VOC Escrow Ltd.

 

5.000% due 02/15/2028

  $     72         69  

Westmoreland Coal Co.

 

8.750% due 01/01/2022 ^(e)

      5,765         1,629  

Wind Tre SpA

 

2.625% due 01/20/2023

  EUR     200         223  

2.750% due 01/20/2024 •

      200         220  
       

 

 

 
            133,681  
       

 

 

 
UTILITIES 4.6%

 

AT&T, Inc.

 

4.900% due 08/15/2037 (m)

  $     358         346  

5.150% due 02/15/2050

      434         417  

5.300% due 08/15/2058 (m)

      904         856  

5.450% due 03/01/2047

      50         50  

DTEK Finance PLC (10.750% Cash or 10.750% PIK)

 

10.750% due 12/31/2024 (d)

      2,713         2,806  

Enable Midstream Partners LP

 

4.950% due 05/15/2028

      60         60  

Mountain States Telephone & Telegraph Co.

 

7.375% due 05/01/2030

      8,200         8,510  

Odebrecht Drilling Norbe Ltd.

 

6.350% due 12/01/2021

      97         96  

Odebrecht Drilling Norbe Ltd. (6.350% Cash or 7.350% PIK)

 

7.350% due 12/01/2026 (d)

      170         93  

Odebrecht Offshore Drilling Finance Ltd.

 

6.720% due 12/01/2022

      1,318         1,259  

Odebrecht Offshore Drilling Finance Ltd. (6.720% Cash or 7.720% PIK)

 

7.720% due 12/01/2026 (d)

      4,252         1,265  

Petrobras Global Finance BV

 

5.999% due 01/27/2028

      154         146  

6.250% due 12/14/2026

  GBP     4,800         6,554  

6.625% due 01/16/2034

      100         132  

7.375% due 01/17/2027

  $     36         38  

Rio Oil Finance Trust

 

8.200% due 04/06/2028

      250         257  

9.250% due 07/06/2024

      366         396  

9.250% due 07/06/2024 (m)

      2,663         2,877  

9.750% due 01/06/2027 (m)

      189         206  

9.750% due 01/06/2027

      226         247  

Sprint Corp.

 

7.625% due 03/01/2026

      183         190  
       

 

 

 
          26,801  
       

 

 

 

Total Corporate Bonds & Notes
(Cost $281,974)

 

        287,258  
       

 

 

 
CONVERTIBLE BONDS & NOTES 0.8%

 

INDUSTRIALS 0.8%

 

Caesars Entertainment Corp.

 

5.000% due 10/01/2024

      994         1,788  

DISH Network Corp.

 

3.375% due 08/15/2026

      3,400         3,097  
       

 

 

 

Total Convertible Bonds & Notes
(Cost $5,254)

 

      4,885  
       

 

 

 
MUNICIPAL BONDS & NOTES 4.9%

 

CALIFORNIA 0.8%

 

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

 

7.750% due 10/01/2037

      1,220         1,342  
 

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2018   37


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

 

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

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

 

7.942% due 10/01/2038

  $     3,400     $     3,581  
       

 

 

 
          4,923  
       

 

 

 
ILLINOIS 2.5%

 

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

 

7.517% due 01/01/2040

      12,700         14,370  

Chicago, Illinois General Obligation Bonds, Series 2014

 

6.314% due 01/01/2044

      60         62  

Chicago, Illinois General Obligation Bonds, Series 2017

 

7.045% due 01/01/2029

      110         118  

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

 

6.725% due 04/01/2035

      35         38  

7.350% due 07/01/2035

      20         22  

Illinois State General Obligation Bonds, Series 2003

 

5.100% due 06/01/2033

      270         262  
       

 

 

 
            14,872  
       

 

 

 
VIRGINIA 0.1%

 

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

 

6.706% due 06/01/2046

      770         763  
       

 

 

 
WEST VIRGINIA 1.5%

 

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

 

0.000% due 06/01/2047 (h)

      44,400         2,748  

7.467% due 06/01/2047

      5,775         5,755  
       

 

 

 
          8,503  
       

 

 

 

Total Municipal Bonds & Notes
(Cost $25,970)

 

        29,061  
       

 

 

 
U.S. GOVERNMENT AGENCIES 6.4%

 

Fannie Mae

 

3.000% due 02/25/2043 (a)

      53,748         10,791  

5.614% (US0001M + 3.550%) due 07/25/2029 ~

      850         929  

7.814% (US0001M + 5.750%) due 07/25/2029 ~

      1,150         1,377  

Freddie Mac

 

0.000% due 04/25/2045 - 08/25/2046 (b)(h)

      17,300         14,069  

0.100% due 02/25/2046 - 08/25/2046 (a)

      130,261         308  

0.200% due 04/25/2045 (a)

      5,683         6  

2.557% due 11/25/2055 «~

      8,162         4,908  

9.614% (US0001M + 7.550%) due 12/25/2027 ~

      3,287         4,089  

12.814% (US0001M + 10.750%) due 03/25/2025 ~

      729         989  
       

 

 

 

Total U.S. Government Agencies (Cost $35,100)

 

      37,466  
       

 

 

 
NON-AGENCY MORTGAGE-BACKED SECURITIES 23.8%

 

Banc of America Alternative Loan Trust

 

5.500% due 10/25/2035 ^

      4,039         3,744  

6.000% due 01/25/2036 ^

      103         101  

Banc of America Funding Trust

 

6.000% due 07/25/2037 ^

      304         289  

Banc of America Mortgage Trust

 

3.905% due 03/25/2035 ~

      83         81  

6.000% due 03/25/2037 ^

      325         309  

BCAP LLC Trust

 

3.616% due 03/27/2036 ~

      2,257         1,522  

3.864% due 08/28/2037 ~

      7,019         6,825  

4.945% due 03/26/2037

      856         893  

6.566% due 07/26/2036 ~

      1,626         1,706  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Bear Stearns ALT-A Trust

 

2.564% due 01/25/2036 ^•

  $     1,357     $     1,419  

3.626% due 11/25/2036 ^~

      4,080         3,459  

3.683% due 09/25/2047 ^~

      6,436         5,323  

3.687% due 11/25/2035 ^~

      5,548         5,224  

3.830% due 08/25/2036 ^~

      910         628  

4.206% due 09/25/2035 ^~

      586         451  

Bear Stearns Commercial Mortgage Securities Trust

 

5.726% due 04/12/2038 ~

      210         210  

Bear Stearns Mortgage Funding Trust

 

7.500% due 08/25/2036

      964         872  

CD Mortgage Trust

 

5.398% due 12/11/2049 ~

      28         17  

5.688% due 10/15/2048

      7,768         4,039  

Chase Mortgage Finance Trust

 

3.537% due 12/25/2035 ^~

      10         10  

6.000% due 07/25/2037 ^

      865         742  

Citigroup Mortgage Loan Trust

 

3.612% due 04/25/2037 ^~

      250         218  

3.756% due 09/25/2037 ^~

      1,361         1,182  

Commercial Mortgage Loan Trust

 

6.052% due 12/10/2049 ~

      2,542         1,574  

Countrywide Alternative Loan Resecuritization Trust

 

6.000% due 08/25/2037 ^~

      1,148         897  

Countrywide Alternative Loan Trust

 

5.500% due 03/25/2035

      302         228  

5.750% due 01/25/2035

      353         354  

5.750% due 02/25/2035

      407         397  

5.750% due 03/25/2037 ^

      731         640  

6.000% due 02/25/2035

      1,105         1,073  

6.000% due 04/25/2036

      1,137         879  

6.000% due 02/25/2037 ^

      5,705         3,893  

6.000% due 04/25/2037 ^

      1,210         908  

6.000% due 07/25/2037 ^

      187         183  

6.250% due 12/25/2036 ^•

      1,566         1,182  

6.500% due 08/25/2036 ^

      517         344  

Countrywide Home Loan Mortgage Pass-Through Trust

 

3.801% due 09/20/2036 ^~

      262         228  

6.000% due 07/25/2037

      1,695         1,378  

Credit Suisse Mortgage Capital Certificates

 

4.040% due 10/26/2036 ~

      7,478         5,014  

Epic Drummond Ltd.

 

0.000% due 01/25/2022 •

  EUR     135         157  

GS Mortgage Securities Corp.

 

4.591% due 10/10/2032 ~

  $     5,300         4,783  

GS Mortgage Securities Trust

 

5.622% due 11/10/2039

      911         786  

GSR Mortgage Loan Trust

 

4.211% due 08/25/2034 ~

      317         306  

5.500% due 05/25/2036 ^

      333         467  

6.000% due 02/25/2036 ^

      2,761         2,203  

HarborView Mortgage Loan Trust

 

2.562% due 01/19/2036 ^•

      3,855         3,193  

3.794% due 06/19/2036 ^~

      7,048         4,957  

IndyMac Mortgage Loan Trust

 

6.500% due 07/25/2037 ^

      3,395         2,192  

Jefferies Resecuritization Trust

 

6.000% due 05/26/2036

      13,430           10,639  

JPMorgan Alternative Loan Trust

 

3.415% due 03/25/2037 ^~

      1,643         1,554  

6.000% due 12/25/2035 ^

      1,789         1,744  

JPMorgan Chase Commercial Mortgage Securities Trust

 

5.623% due 05/12/2045

      1,224         1,073  

JPMorgan Mortgage Trust

 

3.689% due 02/25/2036 ^~

      2,469         2,099  

3.835% due 04/25/2037 ~

      9         8  

3.878% due 01/25/2037 ^~

      651         623  

LB-UBS Commercial Mortgage Trust

 

5.407% due 11/15/2038

      849         656  

5.562% due 02/15/2040 ~

      866         547  

Lehman Mortgage Trust

 

6.000% due 07/25/2037 ^

      170         165  

Lehman XS Trust

 

2.284% due 06/25/2047 •

      2,100         1,903  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

MASTR Alternative Loan Trust

 

6.750% due 07/25/2036

  $     1,773     $     1,220  

Merrill Lynch Mortgage Investors Trust

 

3.564% due 03/25/2036 ^~

      779         601  

Motel 6 Trust

 

8.998% due 08/15/2019 •

      7,800         7,937  

Residential Accredit Loans, Inc. Trust

 

2.294% due 05/25/2037 ^•

      174         132  

4.729% due 12/26/2034 ^~

      1,870         1,487  

6.000% due 08/25/2036 ^

      362         330  

Residential Asset Mortgage Products Trust

 

6.500% due 12/25/2031

      139         137  

Residential Asset Securitization Trust

 

6.000% due 11/25/2036 ^

      2,713         1,774  

6.250% due 09/25/2037 ^

      2,710         1,892  

6.250% due 06/25/2046 ~

      1,278         1,220  

Residential Funding Mortgage Securities, Inc. Trust

 

4.247% due 02/25/2037 ~

      1,637         1,292  

6.500% due 03/25/2032

      147         152  

Sequoia Mortgage Trust

 

3.548% due 02/20/2047 ~

      362         340  

5.416% due 07/20/2037 ^~

      723         635  

Structured Adjustable Rate Mortgage Loan Trust

 

3.668% due 11/25/2036 ^~

      2,633         2,562  

3.735% due 03/25/2037 ^~

      3,005         2,504  

3.834% due 07/25/2036 ^~

      523         455  

3.855% due 01/25/2036 ^~

      2,276         1,777  

3.958% due 07/25/2036 ^~

      8,072         7,415  

4.210% due 07/25/2035 ^~

      805         750  

Suntrust Adjustable Rate Mortgage Loan Trust

 

3.675% due 02/25/2037 ^~

      353         319  

3.791% due 04/25/2037 ^~

      554         473  

WaMu Mortgage Pass-Through Certificates Trust

 

3.403% due 02/25/2037 ^~

      591         574  

3.405% due 10/25/2036 ^~

      2,286         2,103  

3.558% due 07/25/2037 ^~

      454         377  

3.898% due 07/25/2037 ^~

      1,041         970  

Washington Mutual Mortgage Pass-Through Certificates Trust

 

2.494% due 05/25/2047 ^•

      147         36  

6.000% due 10/25/2035 ^

      1,816         1,429  

Wells Fargo Mortgage-Backed Securities Trust

 

3.908% due 07/25/2036 ^~

      336         340  

4.324% due 05/25/2036 ^~

      60         62  
       

 

 

 

Total Non-Agency Mortgage-Backed Securities (Cost $130,908)

      139,786  
       

 

 

 
ASSET-BACKED SECURITIES 20.4%

 

ACE Securities Corp. Home Equity Loan Trust

 

2.454% due 02/25/2036 •

      26,477         18,455  

Adagio CLO DAC

 

0.000% due 04/30/2031 ~

  EUR     1,800         1,761  

Airspeed Ltd.

 

2.342% due 06/15/2032 •

  $     3,061         2,852  

Apidos CLO

 

0.000% due 01/20/2031 ~

      4,500         4,063  

Argent Securities Trust

 

2.254% due 03/25/2036 •

      3,852         2,381  

Bear Stearns Asset-Backed Securities Trust

 

2.204% due 10/25/2036 ^~

      4,720         4,943  

6.500% due 10/25/2036 ^

      362         281  

Belle Haven ABS CDO Ltd.

 

2.587% due 07/05/2046 •

      175,347         1,227  

BlueMountain CLO Ltd.

 

7.787% due 04/13/2027 •

      1,000         1,007  

CIFC Funding Ltd.

 

0.000% due 05/24/2026 ~

      2,300         1,633  

0.000% due 07/22/2026 ~

      1,500         848  

Citigroup Mortgage Loan Trust

 

2.224% due 12/25/2036 •

      4,014         2,651  

Countrywide Asset-Backed Certificates

 

2.204% due 06/25/2047 ^•

      1,658         1,529  

2.234% due 03/25/2037 •

      1,817         1,770  
 

 

38   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2018

 

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

First Franklin Mortgage Loan Trust

 

3.009% due 09/25/2035 •

  $     3,613     $     2,813  

3.039% due 05/25/2036 •

      7,105         3,764  

Fremont Home Loan Trust

 

2.994% due 06/25/2035 ^•

      6,000         5,690  

Grosvenor Place CLO BV

 

0.000% due 04/30/2029 ~

  EUR     500         470  

Home Equity Mortgage Loan Asset-Backed Trust

 

2.224% due 07/25/2037 •

  $     10,514         6,947  

HSI Asset Securitization Corp. Trust

 

0.000% due 10/25/2036 (h)

      3,251         1,316  

JPMorgan Mortgage Acquisition Trust

 

4.752% due 10/25/2030 ^

      5,857         4,173  

Lehman XS Trust

 

5.170% due 08/25/2035 ^

      177         176  

LNR CDO Ltd.

 

2.352% due 02/28/2043 •

      5,919         3,816  

Long Beach Mortgage Loan Trust

 

2.364% due 01/25/2036 •

      4,685         4,217  

Magnetite Ltd.

 

7.489% due 04/15/2027 •

      1,000         1,001  

Merrill Lynch Mortgage Investors Trust

 

2.224% due 04/25/2037 •

      550         350  

Morgan Stanley ABS Capital, Inc. Trust

 

2.214% due 06/25/2036 •

      744         641  

Morgan Stanley Mortgage Loan Trust

 

6.250% due 07/25/2047 ^~

      701         498  

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

 

2.584% due 08/25/2035 •

      5,000         4,502  

3.834% due 10/25/2034 •

      573         533  

Residential Asset Mortgage Products Trust

 

3.264% due 01/25/2035 ^•

      2,788         2,201  

SLM Student Loan EDC Repackaging Trust

 

0.000% due 10/28/2029 «(h)

      3         3,469  

SLM Student Loan Trust

 

0.000% due 01/25/2042 «(h)

      4         2,981  

SoFi Professional Loan Program LLC

 

0.000% due 05/25/2040 «(h)

      4,300         2,490  

0.000% due 07/25/2040 «(h)

      21         1,232  

0.000% due 09/25/2040 «(h)

      1,718         1,030  

Soundview Home Loan Trust

 

2.314% due 08/25/2037 •

      2,000         1,778  

South Coast Funding Ltd.

 

2.953% due 08/10/2038 •

      10,198         1,990  

Symphony CLO Ltd.

 

6.939% due 07/14/2026 •

      2,000         1,988  

Taberna Preferred Funding Ltd.

 

2.749% due 08/05/2036 •

      427         363  

2.749% due 08/05/2036 ^•

      7,891         6,708  

2.807% due 07/05/2035 •

      7,470         7,022  
       

 

 

 

Total Asset-Backed Securities
(Cost $107,916)

            119,560  
       

 

 

 
SOVEREIGN ISSUES 4.6%

 

Argentina Government International Bond

 

2.260% due 12/31/2038

  EUR     3,970         2,861  

3.375% due 01/15/2023

      200         214  

3.875% due 01/15/2022

      200         225  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

5.250% due 01/15/2028

  EUR     200     $     205  

6.250% due 11/09/2047

      100         96  

7.820% due 12/31/2033

      9,275         10,950  

30.131% (BADLARPP) due 10/04/2022 ~

  ARS     58         3  

36.087% (BADLARPP + 3.250%) due 03/01/2020 ~

      800         28  

36.495% (BADLARPP + 2.000%) due 04/03/2022 ~

      60,426         1,976  

40.000% (ARPP7DRR) due 06/21/2020 ~

      84,082         3,088  

Autonomous Community of Catalonia

 

4.900% due 09/15/2021

  EUR     1,500         1,911  

Egypt Government International Bond

 

4.750% due 04/16/2026

      300         345  

5.625% due 04/16/2030

      300         338  

Peru Government International Bond

 

6.350% due 08/12/2028

  PEN     2,700         882  

Republic of Greece Government International Bond

 

3.000% due 02/24/2023

  EUR     142         167  

3.000% due 02/24/2024

      142         167  

3.000% due 02/24/2025

      142         165  

3.000% due 02/24/2026

      142         164  

3.000% due 02/24/2027

      142         163  

3.000% due 02/24/2028

      142         161  

3.000% due 02/24/2029

      142         160  

3.000% due 02/24/2030

      142         157  

3.000% due 02/24/2031

      142         155  

3.000% due 02/24/2032

      142         153  

3.000% due 02/24/2033

      142         151  

3.000% due 02/24/2034

      142         150  

3.000% due 02/24/2035

      142         149  

3.000% due 02/24/2036

      142         148  

3.000% due 02/24/2037

      142         147  

3.000% due 02/24/2038

      142         146  

3.000% due 02/24/2039

      142         146  

3.000% due 02/24/2040

      142         145  

3.000% due 02/24/2041

      142         145  

3.000% due 02/24/2042

      142         145  

4.750% due 04/17/2019

      400         480  

Venezuela Government International Bond

 

6.000% due 12/09/2020 ^(e)

  $     240         64  

9.250% due 09/15/2027 ^(e)

      308         90  
       

 

 

 

Total Sovereign Issues (Cost $29,810)

 

        26,840  
       

 

 

 
        SHARES            
COMMON STOCKS 1.3%

 

CONSUMER DISCRETIONARY 0.9%

 

Caesars Entertainment Corp. (f)

      466,592         5,272  
       

 

 

 
ENERGY 0.2%

 

Forbes Energy Services Ltd. (f)(k)

    11,400         97  

Ocean Rig UDW, Inc. (f)

      41,602         1,166  
       

 

 

 
          1,263  
       

 

 

 
FINANCIALS 0.2%

 

TIG FinCo PLC «(k)

      761,602         1,200  
       

 

 

 

Total Common Stocks (Cost $7,583)

 

      7,735  
       

 

 

 
        SHARES         MARKET
VALUE
(000S)
 
WARRANTS 0.0%

 

INDUSTRIALS 0.0%

 

Sequa Corp. - Exp. 04/28/2024 «

    775,000     $     194  
       

 

 

 

Total Warrants (Cost $0)

          194  
       

 

 

 
PREFERRED SECURITIES 3.7%

 

BANKING & FINANCE 1.2%

 

Farm Credit Bank of Texas

 

10.000% due 12/15/2020 (i)(k)

      6,250         7,125  
       

 

 

 
INDUSTRIALS 2.5%

 

Sequa Corp.

 

9.000% «

      15,928         14,456  
       

 

 

 

Total Preferred Securities (Cost $22,042)

 

      21,581  
       

 

 

 
REAL ESTATE INVESTMENT TRUSTS 1.5%

 

REAL ESTATE 1.5%

 

VICI Properties, Inc.

      416,263         8,471  
       

 

 

 

Total Real Estate Investment Trusts (Cost $5,426)

    8,471  
       

 

 

 
SHORT-TERM INSTRUMENTS 2.2%

 

REPURCHASE AGREEMENTS (l) 1.6%

 

          9,080  
       

 

 

 
        PRINCIPAL
AMOUNT
(000S)
           
ARGENTINA TREASURY BILLS 0.2%

 

25.454% due 08/15/2018 - 11/21/2018 (g)(h)

  ARS     23,767         861  

1.498% due 08/24/2018 - 09/14/2018 (g)(h)

  $     156         156  
       

 

 

 
          1,017  
       

 

 

 
U.S. TREASURY BILLS 0.4%

 

1.980% due 09/27/2018 - 10/18/2018 (g)(h)(o)(q)

      2,574         2,564  
       

 

 

 
Total Short-Term Instruments (Cost $12,837)         12,661  
       

 

 

 
       
Total Investments in Securities (Cost $689,900)           717,931  
       
Total Investments 122.4% (Cost $689,900)     $     717,931  

Financial Derivative Instruments (n)(p) 0.1%

(Cost or Premiums, net $14,313)

 

 

      337  
Preferred Shares (9.5)%

 

      (55,525
Other Assets and Liabilities, net (13.0)%

 

      (76,151
       

 

 

 
Net Assets Applicable to Common Shareholders 100.0%

 

  $       586,592  
       

 

 

 
 

NOTES TO SCHEDULE OF INVESTMENTS:

 

*

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

^

Security is in default.

«

Security valued using significant unobservable inputs (Level 3).

~

Variable or Floating rate security. Rate shown is the rate in effect as of period end. Certain variable rate securities are not based on a published reference rate and spread, rather are determined by the issuer or agent and are based on current market conditions. Reference rate is as of reset date, which may vary by security. These securities may not indicate a reference rate and/or spread in their description.

Rate shown is the rate in effect as of period end. The rate may be based on a fixed rate, a capped rate or a floor rate and may convert to a variable or floating rate in the future. These securities do not indicate a reference rate and spread in their description.

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2018   39


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

 

 

All or a portion of this amount represent unfunded loan commitments. The interest rate for the unfunded portion will be determined at the time of funding. See Note 4, Securities and Other Investments, in the Notes to Financial Statements for more information regarding unfunded loan commitments.

(a)

Interest only security.

(b)

Principal only security.

(c)

When-issued security.

(d)

Payment in-kind security.

(e)

Security is not accruing income as of the date of this report.

(f)

Security did not produce income within the last twelve months.

(g)

Coupon represents a weighted average yield to maturity.

(h)

Zero coupon security.

(i)

Perpetual maturity; date shown, if applicable, represents next contractual call date.

(j)

Contingent convertible security.

 

(k)  RESTRICTED SECURITIES:

 

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

Farm Credit Bank of Texas 10.000% due 12/15/2020

     05/20/2014     $ 7,688     $ 7,125       1.22

Forbes Energy Services Ltd.

     10/09/2014 - 11/18/2016       370       97       0.02  

TIG FinCo PLC

     04/02/2015 - 07/20/2017       1,020       1,200       0.20  
    

 

 

   

 

 

   

 

 

 
     $     9,078     $     8,422       1.44
    

 

 

   

 

 

   

 

 

 

 

BORROWINGS AND OTHER FINANCING TRANSACTIONS

 

(l)  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)
 
FICC     1.500     07/31/2018       08/01/2018     $     3,580     U.S. Treasury Notes 2.625% due 11/15/2020   $ (3,652   $ 3,580     $ 3,580  
SAL     1.990       07/31/2018       08/01/2018       5,500     U.S. Treasury Notes 2.625% due 06/15/2021     (5,612     5,500       5,500  
           

 

 

   

 

 

   

 

 

 

Total Repurchase Agreements

 

        $     (9,264   $     9,080     $     9,080  
           

 

 

   

 

 

   

 

 

 

 

REVERSE REPURCHASE AGREEMENTS:

 

Counterparty   Borrowing
Rate(2)
    Settlement
Date
    Maturity
Date
    Amount
Borrowed(2)
    Payable for
Reverse
Repurchase
Agreements
 

BRC

    0.000     07/26/2018       TBD (3)     $ (202   $ (202

FOB

    2.350       07/17/2018       08/07/2018           (11,056         (11,067

NOM

    2.750       07/18/2018       08/20/2018       (7,089     (7,097

RDR

    2.490       06/19/2018       09/19/2018       (4,226     (4,239

RTA

    2.821       06/07/2018       09/07/2018       (3,322     (3,336
    2.837       03/14/2018       09/14/2018       (7,072     (7,150

SOG

    2.600       07/17/2018       10/17/2018       (8,094     (8,103
    2.810       06/07/2018       09/07/2018       (3,496     (3,511
    2.810       06/12/2018       09/12/2018       (5,071     (5,091

UBS

    2.540       05/31/2018       08/31/2018       (1,452     (1,458
    2.560       06/13/2018       09/13/2018       (333     (334
    2.560       07/11/2018       09/13/2018       (843     (844
    2.760       06/05/2018       09/05/2018       (3,505     (3,520
    2.780       06/13/2018       09/13/2018       (187     (188
    2.860       05/31/2018       08/31/2018       (2,142     (2,153
    2.860       06/05/2018       09/05/2018       (1,205     (1,210
    2.910       05/07/2018       08/07/2018       (12,482     (12,569
    2.910       05/14/2018       08/14/2018       (5,353     (5,387
    2.910       06/21/2018       08/07/2018       (3,307     (3,318
         

 

 

 

Total Reverse Repurchase Agreements

 

      $     (80,777
         

 

 

 

 

40   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2018

 

 

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 pledged/(received) as of July 31, 2018:

 

Counterparty   Repurchase
Agreement
Proceeds
to be
Received(1)
    Payable for
Reverse
Repurchase
Agreements
    Payable for
Sale-Buyback
Transactions
     Total
Borrowings and
Other Financing
Transactions
    Collateral
Pledged/(Received)
    Net  Exposure(4)  

Global/Master Repurchase Agreement

 

BRC

  $ 0     $ (202   $ 0      $ (202   $ 201     $ (1

FICC

    3,580       0       0        3,580       (3,652     (72

FOB

    0       (11,067     0        (11,067     11,258       191  

NOM

    0       (7,097     0        (7,097     7,514       417  

RDR

    0       (4,239     0        (4,239     4,421       182  

RTA

    0       (10,486     0        (10,486         11,641           1,155  

SAL

    5,500       0       0        5,500       (5,612     (112

SOG

    0       (16,705     0        (16,705     17,841       1,136  

UBS

    0       (30,981     0            (30,981     34,570       3,589  
 

 

 

   

 

 

   

 

 

        

Total Borrowings and Other Financing Transactions

  $     9,080     $     (80,777   $     0         
 

 

 

   

 

 

   

 

 

        

 

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     $ (39,437   $ (41,137   $ (203   $ (80,777
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Borrowings

  $     0     $     (39,437   $     (41,137   $     (203   $     (80,777
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Payable for reverse repurchase agreements

 

  $ (80,777
 

 

 

 

 

(m)

Securities with an aggregate market value of $89,735 and cash of $163 have been pledged as collateral under the terms of the above master agreements as of July 31, 2018.

 

(1)

Includes accrued interest.

(2)

The average amount of borrowings outstanding during the period ended July 31, 2018 was $(94,014) at a weighted average interest rate of 2.162%. Average borrowings may include sale-buyback transactions and reverse repurchase agreements, if held during the period.

(3)

Open maturity reverse repurchase agreement.

(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 8, Master Netting Arrangements, in the Notes to Financial Statements for more information regarding master netting arrangements.

 

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

 

SWAP AGREEMENTS:

 

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

 

Reference Entity   Fixed
Receive Rate
    Payment
Frequency
    Maturity
Date
    Implied
Credit Spread at
July 31, 2018(2)
    Notional
Amount(3)
    Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
    Market
Value(4)
    Variation Margin  
  Asset     Liability  

Frontier Communications Corp.

    5.000     Quarterly       06/20/2020       9.536     $       5,500     $ (177   $ (197   $ (374   $ 9     $ 0  

Navient Corp.

    5.000       Quarterly       12/20/2021       1.986         600       21       39       60       0       0  

Novo Banco S.A.

    5.000       Quarterly       12/20/2021       10.074       EUR       100       (23     18       (5     1       0  
             

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
            $     (179   $     (140   $     (319   $     10     $     0  
             

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

Index/Tranches   Fixed
Receive Rate
  Payment
Frequency
  Maturity
Date
    Notional
Amount(3)
    Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
    Market
Value(4)
    Variation Margin  
  Asset     Liability  

CDX.HY-30 5-Year Index

  5.000%   Quarterly     06/20/2023     $     8,200     $     460     $     163     $     623     $     8     $     0  
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2018   41


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

 

 

INTEREST RATE SWAPS

 

Pay/Receive
Floating Rate
 

Floating Rate Index

 

Fixed Rate

   

Payment
Frequency

   

Maturity
Date

   

Notional
Amount

   

Premiums
Paid/(Received)

     Unrealized
Appreciation/
(Depreciation)
   

Market
Value

    Variation Margin  
  Asset     Liability  

Pay

 

3-Month USD-LIBOR

    2.000     Semi-Annual       12/16/2020     $     59,300     $ 1,546      $ (2,827   $ (1,281   $ 0     $ (2

Pay

 

3-Month USD-LIBOR

    2.000       Semi-Annual       06/15/2021         36,800       1,248        (2,229     (981     0       (3

Pay

 

3-Month USD-LIBOR

    2.250       Semi-Annual       12/20/2022         62,000       747        (2,635     (1,888     0       (5

Receive

 

3-Month USD-LIBOR

    2.000       Semi-Annual       06/20/2023         53,500       1,960        479       2,439       1       0  

Pay

 

3-Month USD-LIBOR

    2.750       Semi-Annual       06/17/2025         75,590       4,663        (5,878     (1,215     25       0  

Pay

 

3-Month USD-LIBOR

    2.500       Semi-Annual       12/20/2027         44,900       325        (2,357     (2,032     28       0  

Pay

 

3-Month USD-LIBOR

    3.500       Semi-Annual       06/19/2044         169,400       (5,526      18,432       12,906       430       0  

Receive

 

3-Month USD-LIBOR

    2.500       Semi-Annual       06/20/2048         226,900       9,562        17,360       26,922       0       (609

Pay

 

6-Month  AUD-BBR-BBSW

    3.500       Semi-Annual       06/17/2025     AUD     7,600       188        129       317       0       (3

Receive(5)

 

6-Month EUR-EURIBOR

    1.250       Annual       09/19/2028     EUR     13,000       (182      (225     (407     43       0  

Receive(5)

 

6-Month EUR-EURIBOR

    1.250       Annual       12/19/2028         2,000       (34      (16     (50     7       0  

Receive(5)

 

6-Month GBP-LIBOR

    1.500       Semi-Annual       09/19/2028     GBP     21,100       486        (196     290       127       0  
 

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 
          $ 14,983      $ 20,037     $ 35,020     $ 661     $ (622
 

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total Swap Agreements

 

  $     15,264      $     20,060     $     35,324     $     679     $     (622
 

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

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, 2018:

 

    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     $     679     $     679       $     0     $     0     $     (622)     $     (622)  
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

 

(o)

Securities with an aggregate market value of $642 and cash of $9,152 have been pledged as collateral for exchange-traded and centrally cleared financial derivative instruments as of July 31, 2018. See Note 8, Master Netting Arrangements, in the Notes to Financial Statements for more information regarding master netting arrangements.

 

(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, securities or other deliverable obligations 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 indicators 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 indicators 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.

(5)

This instrument has a forward starting effective date. See Note 2, Securities Transactions and Investment Income, in the Notes to Financial Statements for further information.

 

(p)  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  

BOA

     08/2018     $     47,431     EUR     40,702     $     165     $ 0  
     09/2018     EUR     40,703     $     47,544       0           (165

BPS

     08/2018     ARS     22,951         775       9       (52
     08/2018     $     659     GBP     497       0       (6
     09/2018     PEN     2,303     $     702       0       0  

CBK

     08/2018     EUR     2,529         2,955       0       (3
     08/2018     $     61,017     GBP     46,587       131       0  
     09/2018     GBP     46,587     $     61,099       0       (130
     10/2018     $     48     ARS     1,450       1       0  

 

42   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2018

 

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

GLM

     08/2018     $     422     EUR     362     $ 1     $ 0  
     08/2018         1,023     GBP     773       0       (9

HUS

     08/2018         5,406     RUB     338,263       5       (10
     10/2018         7     ARS     200       0       0  

SSB

     08/2018     EUR     38,536     $     44,959       0       (103

UAG

     08/2018     GBP     47,857         63,369       554       0  
            

 

 

   

 

 

 

Total Forward Foreign Currency Contracts

 

  $     866     $     (478
 

 

 

   

 

 

 

 

SWAP AGREEMENTS:

 

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

 

Counterparty   Reference Entity   Fixed
Receive Rate
    Payment
Frequency
  Maturity
Date
    Implied
Credit Spread at
July 31, 2018(2)
    Notional
Amount(3)
    Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
    Swap Agreements,
at Value
 
  Asset     Liability  
BPS  

Petrobras Global Finance BV

    1.000   Quarterly     12/20/2019       1.324   $         2,400     $ (247   $ 239     $ 0     $ (8
GST  

Petrobras Global Finance BV

    1.000     Quarterly     12/20/2019       1.324         5,300       (543     526       0       (17
 

Petrobras Global Finance BV

    1.000     Quarterly     09/20/2020       1.619         10       (1     1       0       0  
 

Petrobras Global Finance BV

    1.000     Quarterly     12/20/2021       2.165         100       (16     12       0       (4
HUS  

Petrobras Global Finance BV

    1.000     Quarterly     09/20/2020       1.619         40       (6     6       0       0  
               

 

 

   

 

 

   

 

 

   

 

 

 
              $     (813   $     784     $     0     $     (29
             

 

 

   

 

 

   

 

 

   

 

 

 

 

INTEREST RATE SWAPS

 

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

Pay

 

3-Month USD-LIBOR

    3.025%       Semi-Annual     09/04/2023   $         175,000     $     (134   $     50     $     0     $     (84
               

 

 

   

 

 

   

 

 

   

 

 

 

 

TOTAL RETURN SWAPS ON INTEREST RATE INDICES

 

Counterparty   Pay/Receive(4)   Underlying Reference   # of Units     Financing Rate   Payment
Frequency
  Maturity
Date
  Notional
Amount
    Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
    Swap Agreements,
at Value
 
  Asset     Liability  

BOA

 

Receive

 

iBoxx USD Liquid High Yield Index

    N/A    

3-Month USD-LIBOR

  Maturity   09/20/2018   $         400     $ (2   $ 4     $ 2     $ 0  

GST

 

Receive

 

iBoxx USD Liquid High Yield Index

    N/A    

3-Month USD-LIBOR

  Maturity   09/20/2018       400       (2     5       3       0  
                 

 

 

   

 

 

   

 

 

   

 

 

 
                $ (4   $ 9     $ 5     $ 0  
               

 

 

   

 

 

   

 

 

   

 

 

 

Total Swap Agreements

 

  $     (951   $     843     $     5     $     (113
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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 pledged/(received) as of July 31, 2018:

 

    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
Pledged/
(Received)
    Net
Exposure(5)
 

BOA

  $ 165      $ 0      $ 2      $ 167       $ (165   $ 0      $ 0     $ (165   $ 2     $ 0     $ 2  

BPS

    9        0        0        9         (58     0        (8     (66     (57     20       (37

CBK

    132        0        0        132         (133     0        0       (133     (1     0       (1

GLM

    1        0        0        1         (9     0        0       (9     (8     0       (8

GST

    0        0        3        3         0       0        (21     (21     (18     0       (18

HUS

    5        0        0        5         (10     0        0       (10     (5     0       (5

MYC

    0        0        0        0         0       0        (84     (84     (84     (514     (598

SSB

    0        0        0        0         (103     0        0       (103       (103     0         (103

UAG

    554        0        0        554         0       0        0       0       554         (630     (76
 

 

 

    

 

 

    

 

 

    

 

 

     

 

 

   

 

 

    

 

 

   

 

 

       

Total Over the Counter

  $   866      $   0      $   5      $   871       $   (478   $   0      $   (113   $   (591      
 

 

 

    

 

 

    

 

 

    

 

 

     

 

 

   

 

 

    

 

 

   

 

 

       

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2018   43


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

 

 

(q)

Securities with an aggregate market value of $106 have been pledged as collateral for financial derivative instruments as governed by International Swaps and Derivatives Association, Inc. master agreements as of July 31, 2018.

 

(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, securities or other deliverable obligations 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 indicators 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)

Receive represents that the Fund receives payments for any positive net return on the underlying reference. The Fund makes payments for any negative net return on such underlying reference. Pay represents that the Fund receives payments for any negative net return on the underlying reference. The Fund makes payments for any positive net return on such underlying reference.

(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 8, Master Netting Arrangements, 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, 2018:

 

    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     $ 18     $ 0     $ 0     $ 661     $ 679  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

 

Forward Foreign Currency Contracts

  $ 0     $ 0     $ 0     $ 866     $ 0     $ 866  

Swap Agreements

    0       0       0       0       5       5  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 0     $ 0     $ 866     $ 5     $ 871  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 18     $ 0     $ 866     $ 666     $ 1,550  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial Derivative Instruments - Liabilities

 

Exchange-traded or centrally cleared

 

Swap Agreements

  $ 0     $ 0     $ 0     $ 0     $ 622     $ 622  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

 

Forward Foreign Currency Contracts

  $ 0     $ 0     $ 0     $ 478     $ 0     $ 478  

Swap Agreements

    0       29       0       0       84       113  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 29     $ 0     $ 478     $ 84     $ 591  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $     0     $     29     $     0     $     478     $     706     $     1,213  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

The effect of Financial Derivative Instruments on the Statements of Operations for the period ended July 31, 2018:

 

    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     $ 525     $ 0     $ 0     $ 40,781     $ 41,306  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

 

Forward Foreign Currency Contracts

  $ 0     $ 0     $ 0     $ (359   $ 0     $ (359

Swap Agreements

    0       468       0       0       13       481  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 468     $ 0     $ (359   $ 13     $ 122  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $     0     $     993     $     0     $     (359   $     40,794     $     41,428  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

44   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2018

 

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

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

 

Exchange-traded or centrally cleared

 

Swap Agreements

  $ 0     $ (20   $ 0     $ 0     $ (48,333   $ (48,353
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

 

Forward Foreign Currency Contracts

  $ 0     $ 0     $ 0     $ 3,031     $ 0     $ 3,031  

Swap Agreements

    0       (297     0       0       59       (238
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ (297   $ 0     $ 3,031     $ 59     $ 2,793  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $     0     $     (317   $     0     $     3,031     $     (48,274   $     (45,560
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

FAIR VALUE MEASUREMENTS

 

The following is a summary of the fair valuations according to the inputs used as of July 31, 2018 in valuing the Fund’s assets and liabilities:

 

Category and Subcategory   Level 1     Level 2     Level 3     Fair
Value at
07/31/2018
 

Investments in Securities, at Value

 

Loan Participations and Assignments

  $ 0     $ 21,823     $ 610     $ 22,433  

Corporate Bonds & Notes

 

Banking & Finance

    0       126,776       0       126,776  

Industrials

    0       132,936       745       133,681  

Utilities

    0       26,801       0       26,801  

Convertible Bonds & Notes

 

Industrials

    0       4,885       0       4,885  

Municipal Bonds & Notes

 

California

    0       4,923       0       4,923  

Illinois

    0       14,872       0       14,872  

Virginia

    0       763       0       763  

West Virginia

    0       8,503       0       8,503  

U.S. Government Agencies

    0       32,558       4,908       37,466  

Non-Agency Mortgage-Backed Securities

    0       139,786       0       139,786  

Asset-Backed Securities

    0           108,358           11,202           119,560  

Sovereign Issues

    0       26,840       0       26,840  

Common Stocks

 

Consumer Discretionary

        5,272       0       0       5,272  

Energy

    1,166       97       0       1,263  

Financials

    0       0       1,200       1,200  

Warrants

 

Industrials

    0       0       194       194  

Preferred Securities

 

Banking & Finance

    0       7,125       0       7,125  

Industrials

    0       0       14,456       14,456  
Category and Subcategory   Level 1     Level 2     Level 3     Fair
Value at
07/31/2018
 

Real Estate Investment Trusts

 

Real Estate

  $ 8,471     $ 0     $ 0     $ 8,471  

Short-Term Instruments

 

Repurchase Agreements

    0       9,080       0       9,080  

Argentina Treasury Bills

    0       1,017       0       1,017  

U.S. Treasury Bills

    0       2,564       0       2,564  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Investments

  $     14,909     $     669,707     $     33,315     $     717,931  
 

 

 

   

 

 

   

 

 

   

 

 

 

Financial Derivative Instruments - Assets

 

Exchange-traded or centrally cleared

    0       679       0       679  

Over the counter

    0       871       0       871  
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 1,550     $ 0     $ 1,550  
 

 

 

   

 

 

   

 

 

   

 

 

 

Financial Derivative Instruments - Liabilities

 

Exchange-traded or centrally cleared

    0       (622     0       (622

Over the counter

    0       (591     0       (591
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ (1,213   $ 0     $ (1,213
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Financial Derivative Instruments

  $ 0     $ 337     $ 0     $ 337  
 

 

 

   

 

 

   

 

 

   

 

 

 

Totals

  $ 14,909     $ 670,044     $ 33,315     $ 718,268  
 

 

 

   

 

 

   

 

 

   

 

 

 
 

 

There were no significant transfers among Levels 1 and 2 during the period ended July 31, 2018.

 

The following is a reconciliation of the fair valuations using significant unobservable inputs (Level 3) for the Fund during the period ended July 31, 2018:

 

Category and Subcategory   Beginning
Balance
at 07/31/2017
    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 07/31/2018
    Net Change in
Unrealized
Appreciation/
(Depreciation)
on Investments
Held at
07/31/2018(1)
 

Investments in Securities, at Value

 

Loan Participations and Assignments

  $ 739     $ 310     $ (600   $ 5     $ 6     $ (6   $     308     $ (152   $ 610     $ 3  

Corporate Bonds & Notes

 

Banking & Finance

    4,451       0       (288     2       15       (62     0           (4,118     0       0  

Industrials

    6,060           746           (6,062     1       62       (62     0       0       745       0  

U.S. Government Agencies

    4,713       0       (88         133           34       116       0       0       4,908       113  

Asset-Backed Securities

        11,281       0       0       89       0           (168     0       0           11,202           (168

Common Stocks

 

Financials

    1,005       0       0       0       0       195       0       0       1,200       195  

Warrants

 

Industrials

    363       0       0       0       0       (169     0       0       194       (169

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2018   45


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

 

July 31, 2018

 

Category and Subcategory   Beginning
Balance
at 07/31/2017
    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 07/31/2018
    Net Change in
Unrealized
Appreciation/
(Depreciation)
on Investments
Held at
07/31/2018(1)
 

Preferred Securities

 

Industrials

  $ 14,002     $ 1,537     $ 0     $ 0     $ 0     $ (1,083   $ 0     $ 0     $ 14,456     $ (1,083
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals

  $     42,614     $     2,593     $     (7,038   $     230     $     117     $     (1,239   $     308     $     (4,270   $     33,315     $     (1,109
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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 07/31/2018
     Valuation
Technique
   Unobservable
Inputs
   Input Value(s)
(% Unless
Noted
Otherwise)
 

Investments in Securities, at Value

 

Loan Participations and Assignments

  $ 200      Proxy Pricing    Base Price      100.074  
    410      Third Party Vendor    Broker Quote      100.000-101.625  

Corporate Bonds & Notes

 

Industrials

    292      Other Valuation Techniques(2)    —        —    
    453      Proxy Pricing    Base Price      97.010  

U.S. Government Agencies

    4,908      Proxy Pricing    Base Price      60.341  

Asset-Backed Securities

    11,202      Proxy Pricing    Base Price      58.000-102,005.100  

Common Stocks

 

Financials

    1,200      Other Valuation Techniques(2)    —        —    

Warrants

 

Industrials

    194      Other Valuation Techniques(2)    —        —    

Preferred Securities

 

Industrials

    14,456      Indicative Market Quotation    Broker Quote    $     900.000  
 

 

 

          

Total

  $     33,315           
 

 

 

          

 

(1) 

Any difference between Net Change in Unrealized Appreciation/(Depreciation) and Net Change in Unrealized Appreciation/(Depreciation) on Investments Held at July 31, 2018 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.

 

46   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


Schedule of Investments PIMCO High Income Fund

 

July 31, 2018

 

(Amounts in thousands*, except number of shares, contracts and units, if any)

 

        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 
INVESTMENTS IN SECURITIES 129.0%

 

LOAN PARTICIPATIONS AND ASSIGNMENTS 3.3%

 

Alphabet Holding Co., Inc.

 

5.577% (LIBOR03M + 3.500%) due 09/26/2024 ~

  $     99     $     94  

Altice France S.A.

 

TBD% due 07/13/2026

      400         392  

Avantor, Inc.

 

6.077% (LIBOR03M + 4.000%) due 11/21/2024 ~

      50         50  

Banff Merger Sub, Inc.

 

TBD% due 06/21/2019

      3,100         3,088  

California Resources Corp.

 

6.831% (LIBOR03M + 4.750%) due 12/31/2022 «~

      50         51  

Community Health Systems, Inc.

 

5.557% (LIBOR03M + 3.250%) due 01/27/2021 ~

      1,576           1,553  

Dubai World

 

1.750% - 2.000% (LIBOR03M + 2.000%) due 09/30/2022 ~

      706         664  

Energizer Holdings. Inc.

 

TBD% due 05/18/2019

      100         100  

Forbes Energy Services LLC

 

5.000% - 7.000% due 04/13/2021

      873         883  

Frontier Communications Corp.

 

5.830% (LIBOR03M + 3.750%) due 06/15/2024 ~

      893         883  

Genworth Financial, Inc.

 

6.578% (LIBOR03M + 4.500%) due 03/07/2023 ~

      50         51  

iHeartCommunications, Inc.

 

TBD% due 01/30/2019 ^(e)

      17,200         13,380  

IRB Holding Corp.

 

5.347% (LIBOR03M + 3.250%) due 02/05/2025 ~

      100         101  

Klockner-Pentaplast of America, Inc.

 

4.750% (EUR003M + 4.750%) due 06/30/2022 ~

  EUR     100         109  

McDermott Technology Americas, Inc.

 

7.077% (LIBOR03M + 5.000%) due 05/10/2025 ~

  $     1,397         1,407  

MH Sub LLC

 

5.829% (LIBOR03M + 3.750%) due 09/13/2024 ~

      169         169  

Ministry of Finance of Tanzania

 

7.825% (LIBOR03M + 5.500%) due 12/10/2019 «~

      200         200  

Multi Color Corp.

 

4.327% (LIBOR03M + 2.250%) due 10/31/2024 ~

      24         24  

Parexel International Corp.

 

4.827% (LIBOR03M + 2.750%) due 09/27/2024 ~

      99         99  

PetSmart, Inc.

 

5.100% (LIBOR03M + 3.000%) due 03/11/2022 ~

      339         283  

Ply Gem Industries, Inc.

 

6.087% (LIBOR03M + 3.750%) due 04/12/2025 ~

      200         201  

Sequa Mezzanine Holdings LLC

 

7.067% (LIBOR03M + 5.000%) due 11/28/2021 «~

      327         327  

11.072% (LIBOR03M + 9.000%) due 04/28/2022 «~

      140         141  

Stars Group Holdings BV

 

5.831% (LIBOR03M + 3.500%) due 07/10/2025 ~

      200         202  

Syniverse Holdings, Inc.

 

7.078% (LIBOR03M + 5.000%) due 03/09/2023 ~

      30         30  

Traverse Midstream Partners LLC

 

6.340% (LIBOR03M + 4.000%) due 09/27/2024 ~

      91         91  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

West Corp.

 

6.077% (LIBOR03M + 4.000%) due 10/10/2024 ~

  $     58     $     58  

Westmoreland Coal Co.

 

TBD% due 12/16/2020 ^(e)

      1,455         382  

TBD% - 10.581% (LIBOR03M + 8.250%) due 05/31/2020 ~

      2,620         2,672  
       

 

 

 

Total Loan Participations and Assignments (Cost $31,303)

 

        27,685  
       

 

 

 
CORPORATE BONDS & NOTES 61.9%

 

BANKING & FINANCE 22.6%

 

AGFC Capital Trust

 

4.089% (US0003M + 1.750%) due 01/15/2067 ~

      27,410         16,583  

Ally Financial, Inc.

 

8.000% due 11/01/2031

      6         7  

8.000% due 11/01/2031 (n)

      2,765         3,346  

Ambac LSNI LLC

 

7.337% due 02/12/2023 •

      112         113  

Ardonagh Midco PLC

 

8.375% due 07/15/2023 (n)

  GBP     2,700         3,599  

8.375% due 07/15/2023

      11,535         15,375  

Athene Holding Ltd.

 

4.125% due 01/12/2028 (n)

  $     76         71  

Atlantic Marine Corps Communities LLC

 

5.383% due 02/15/2048 (n)

      4,521         4,233  

Avolon Holdings Funding Ltd.

 

5.500% due 01/15/2023

      248         247  

AXA Equitable Holdings, Inc.

 

4.350% due 04/20/2028

      180         176  

5.000% due 04/20/2048

      104         100  

Banco Espirito Santo S.A.

 

4.000% due 01/21/2019 ^(e)

  EUR     5,800         2,069  

Banco Santander S.A.

 

6.250% due 09/11/2021 •(j)(k)(n)

      500         624  

Barclays PLC

 

6.500% due 09/15/2019 •(j)(k)(n)

      2,600         3,170  

7.875% due 09/15/2022 •(j)(k)

  GBP     7,210         10,156  

Brighthouse Holdings LLC

 

6.500% due 07/27/2037 (j)

  $     70         68  

Brookfield Finance, Inc.

 

3.900% due 01/25/2028

      128         121  

4.700% due 09/20/2047

      290         276  

Cantor Fitzgerald LP

 

6.500% due 06/17/2022 (n)

      13,100         13,870  

CBL & Associates LP

 

5.950% due 12/15/2026 (n)

      3,324         2,870  

Co-operative Group Holdings Ltd.

 

7.500% due 07/08/2026

  GBP     2,800         4,413  

Credit Agricole S.A.

 

7.875% due 01/23/2024 •(j)(k)(n)

  $     250         267  

Credit Suisse Group AG

 

7.500% due 07/17/2023 •(j)(k)

      400         413  

Doctors Co.

 

6.500% due 10/15/2023 (n)

      10,000         10,624  

Emerald Bay S.A.

 

0.000% due 10/08/2020 (h)

  EUR     2,738         3,006  

Equinix, Inc.

 

2.875% due 03/15/2024

      200         234  

2.875% due 10/01/2025

      100         114  

2.875% due 02/01/2026

      200         228  

Flagstar Bancorp, Inc.

 

6.125% due 07/15/2021 (n)

  $     3,000         3,130  

Fortress Transportation & Infrastructure Investors LLC

 

6.750% due 03/15/2022 (n)

      478         499  

Freedom Mortgage Corp.

 

8.250% due 04/15/2025

      88         86  

Growthpoint Properties International Pty. Ltd.

 

5.872% due 05/02/2023

      200         207  

GSPA Monetization Trust

 

6.422% due 10/09/2029

      5,896         6,688  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

HSBC Holdings PLC

 

6.000% due 09/29/2023 •(j)(k)

  EUR     2,600     $     3,446  

6.500% due 03/23/2028 •(j)(k)

  $     700         688  

Hunt Cos., Inc.

 

6.250% due 02/15/2026

      36         34  

International Lease Finance Corp.

 

6.980% due 10/15/2018 ~

      18,000         18,124  

iStar, Inc.

 

4.625% due 09/15/2020

      20         20  

5.250% due 09/15/2022

      70         68  

Jefferies Finance LLC

 

7.250% due 08/15/2024

      200         197  

7.375% due 04/01/2020 (n)

      1,200         1,227  

Kennedy-Wilson, Inc.

 

5.875% due 04/01/2024

      96         94  

Life Storage LP

 

3.875% due 12/15/2027

      42         40  

Lloyds Bank PLC

 

12.000% due 12/16/2024 •(j)(n)

      8,400         10,260  

Lloyds Banking Group PLC

 

7.875% due 06/27/2029 •(j)(k)

  GBP     200         307  

LoanCore Capital Markets LLC

 

6.875% due 06/01/2020 (n)

  $     7,000         7,109  

Meiji Yasuda Life Insurance Co.

 

5.100% due 04/26/2048 •

      400         408  

MetLife, Inc.

 

5.875% due 03/15/2028 •(j)

      108         111  

Midwest Family Housing LLC

 

6.631% due 01/01/2051

      4,910         4,394  

Nationstar Mortgage LLC

 

6.500% due 07/01/2021

      1,030         1,035  

Nationwide Building Society

 

10.250% ~(j)

  GBP     36         7,154  

Navient Corp.

 

5.625% due 08/01/2033 (n)

  $     10,734         9,231  

6.500% due 06/15/2022

      114         116  

Oppenheimer Holdings, Inc.

 

6.750% due 07/01/2022

      68         69  

Provident Funding Associates LP

 

6.375% due 06/15/2025

      37         36  

Royal Bank of Scotland Group PLC

 

7.500% due 08/10/2020 •(j)(k)(n)

      5,840         6,044  

8.625% due 08/15/2021 •(j)(k)

      3,700         4,002  

Santander UK Group Holdings PLC

 

7.375% due 06/24/2022 •(j)(k)

  GBP     6,363         8,784  

Societe Generale S.A.

 

6.750% due 04/06/2028 •(j)(k)

  $     200         192  

Springleaf Finance Corp.

 

7.125% due 03/15/2026

      286         291  

Unigel Luxembourg S.A.

 

10.500% due 01/22/2024 (n)

      810         846  

WeWork Cos., Inc.

 

7.875% due 05/01/2025

      104         102  
       

 

 

 
            191,412  
       

 

 

 
INDUSTRIALS 30.7%

 

Air Canada Pass-Through Trust

 

3.700% due 07/15/2027

      34         32  

Altice Financing S.A.

 

6.625% due 02/15/2023 (n)

      5,600         5,677  

Altice France S.A.

 

5.375% due 05/15/2022

  EUR     2,930         3,526  

5.875% due 02/01/2027

      3,100         3,704  

Altice Luxembourg S.A.

 

7.250% due 05/15/2022 (n)

      3,040         3,653  

7.750% due 05/15/2022 (n)

  $     4,900         4,894  

Associated Materials LLC

 

9.000% due 01/01/2024

      772         816  

Bacardi Ltd.

 

4.450% due 05/15/2025

      200         200  

4.700% due 05/15/2028

      200         199  
 

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2018   47


Schedule of Investments PIMCO High Income Fund (Cont.)

 

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

Baffinland Iron Mines Corp.

 

8.750% due 07/15/2026 (n)

  $     8,400     $     8,431  

Bausch Health Cos., Inc.

 

7.000% due 03/15/2024

      235         250  

BMC Software Finance, Inc.

 

8.125% due 07/15/2021 (n)

      13,320         13,653  

Caesars Resort Collection LLC

 

5.250% due 10/15/2025

      12         12  

Centene Corp.

 

5.375% due 06/01/2026

      131         134  

Charter Communications Operating LLC

 

4.200% due 03/15/2028

      198         190  

Cheniere Energy Partners LP

 

5.250% due 10/01/2025

      49         49  

Chesapeake Energy Corp.

 

5.589% (US0003M + 3.250%) due 04/15/2019 ~

      120         120  

Clear Channel Worldwide Holdings, Inc.

 

6.500% due 11/15/2022

      910         933  

7.625% due 03/15/2020

      4,420         4,446  

Cleveland-Cliffs, Inc.

 

4.875% due 01/15/2024

      48         47  

Community Health Systems, Inc.

 

5.125% due 08/01/2021 (n)

      4,832         4,595  

6.250% due 03/31/2023 (n)

      11,281         10,548  

8.625% due 01/15/2024

      350         363  

CSN Islands Corp.

 

6.875% due 09/21/2019 (n)

      300         301  

CSN Resources S.A.

 

6.500% due 07/21/2020

      1,896         1,835  

DriveTime Automotive Group, Inc.

 

8.000% due 06/01/2021 (n)

      11,130         11,353  

EI Group PLC

 

6.000% due 10/06/2023

  GBP     500         712  

6.875% due 05/09/2025

      6,600         9,528  

Exela Intermediate LLC

 

10.000% due 07/15/2023 (n)

  $     172         178  

Ferroglobe PLC

 

9.375% due 03/01/2022 (n)

      2,250         2,320  

First Quantum Minerals Ltd.

 

6.500% due 03/01/2024

      2,240         2,190  

6.875% due 03/01/2026

      2,448         2,399  

7.000% due 02/15/2021

      838         848  

Ford Motor Co.

 

7.700% due 05/15/2097 (n)

      15,515         18,015  

Fresh Market, Inc.

 

9.750% due 05/01/2023 (n)

      9,300         6,603  

Frontier Finance PLC

 

8.000% due 03/23/2022

  GBP     6,600         8,988  

Full House Resorts, Inc.

 

8.575% due 01/31/2024 «

  $     498         487  

General Electric Co.

 

5.000% due 01/21/2021 •(j)

      222         218  

General Shopping Finance Ltd.

 

10.000% due 08/31/2018 (j)

      5,300         5,009  

General Shopping Investments Ltd.

 

0.000% due 03/20/2022 ^(e)(j)

      1,500         1,035  

12.000% due 03/20/2022 ^(e)(j)

      1,000         690  

Hadrian Merger Sub, Inc.

 

8.500% due 05/01/2026

      40         38  

Hampton Roads PPV LLC

 

6.621% due 06/15/2053

      20,069           20,456  

Harland Clarke Holdings Corp.

 

8.375% due 08/15/2022

      76         73  

HCA, Inc.

 

7.500% due 11/15/2095

      3,462         3,419  

iHeartCommunications, Inc.

 

9.000% due 03/01/2021 ^(e)

      2,162         1,665  

9.000% due 09/15/2022 ^(e)

      6,800         5,253  

IHS Markit Ltd.

 

4.000% due 03/01/2026

      6         6  

Intelsat Jackson Holdings S.A.

 

5.500% due 08/01/2023

      2,300         2,125  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

7.250% due 10/15/2020

  $     997     $     1,006  

9.750% due 07/15/2025

      175         187  

Intelsat Luxembourg S.A.

 

7.750% due 06/01/2021

      5,615         5,362  

8.125% due 06/01/2023 (n)

      15,504         13,372  

Intrepid Aviation Group Holdings LLC

 

6.875% due 02/15/2019

      8,003         8,017  

8.500% due 08/15/2021

      6,510         6,575  

Mallinckrodt International Finance S.A.

 

5.500% due 04/15/2025

      108         87  

Matterhorn Merger Sub LLC

 

8.500% due 06/01/2026

      12         11  

Metinvest BV

 

7.750% due 04/23/2023

      200         194  

8.500% due 04/23/2026

      1,400         1,357  

New Albertson’s LP

 

6.570% due 02/23/2028

      4,021         2,739  

Odebrecht Oil & Gas Finance Ltd.

 

0.000% due 08/31/2018 (h)(j)

      3,371         62  

Park Aerospace Holdings Ltd.

 

3.625% due 03/15/2021

      118         115  

4.500% due 03/15/2023

      234         224  

5.250% due 08/15/2022

      19         19  

5.500% due 02/15/2024

      54         53  

Pelabuhan Indonesia Persero PT

 

4.500% due 05/02/2023

      200         200  

Petroleos Mexicanos

 

6.500% due 03/13/2027

      270         275  

6.750% due 09/21/2047

      70         65  

PetSmart, Inc.

 

5.875% due 06/01/2025

      161         128  

Pisces Midco, Inc.

 

8.000% due 04/15/2026

      246         255  

Pitney Bowes, Inc.

 

4.700% due 04/01/2023

      49         44  

Platin 1426 GmbH

 

6.875% due 06/15/2023 «(c)

  EUR     600         680  

Prime Security Services Borrower LLC

 

9.250% due 05/15/2023

  $     1,840         1,973  

QVC, Inc.

 

5.950% due 03/15/2043 (n)

      5,000         4,666  

Radiate Holdco LLC

 

6.875% due 02/15/2023

      100         97  

Rockpoint Gas Storage Canada Ltd.

 

7.000% due 03/31/2023

      12         12  

Russian Railways via RZD Capital PLC

 

7.487% due 03/25/2031

  GBP     13,100           21,469  

Safeway, Inc.

 

7.250% due 02/01/2031

  $     5,348         5,254  

Scientific Games International, Inc.

 

5.000% due 10/15/2025

      16         15  

Shelf Drilling Holdings Ltd.

 

8.250% due 02/15/2025

      51         52  

Sigma Holdco BV

 

5.750% due 05/15/2026

  EUR     100         111  

SoftBank Group Corp.

 

4.000% due 04/20/2023

      5,500         6,729  

Sunoco LP

 

4.875% due 01/15/2023

  $     94         93  

Syngenta Finance NV

 

5.182% due 04/24/2028

      200         194  

T-Mobile USA, Inc.

 

4.750% due 02/01/2028

      29         27  

Telenet Finance Luxembourg Notes SARL

 

5.500% due 03/01/2028

      200         184  

Teva Pharmaceutical Finance Netherlands BV

 

3.250% due 04/15/2022

  EUR     500         611  

Transocean Pontus Ltd.

 

6.125% due 08/01/2025

  $     214         219  

Unique Pub Finance Co. PLC

 

5.659% due 06/30/2027

  GBP     272         395  

United Group BV

 

4.375% due 07/01/2022

  EUR     100         120  

4.875% due 07/01/2024

      100         120  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

ViaSat, Inc.

 

5.625% due 09/15/2025

  $     136     $     129  

VOC Escrow Ltd.

 

5.000% due 02/15/2028

      106         102  

Westmoreland Coal Co.

 

8.750% due 01/01/2022 ^(e)

      10,290         2,907  

Wind Tre SpA

 

2.625% due 01/20/2023

  EUR     200         223  

2.750% due 01/20/2024 •

      200         220  

3.125% due 01/20/2025

      200         219  

5.000% due 01/20/2026

  $     200         181  

Wynn Macau Ltd.

 

5.500% due 10/01/2027

      200         192  
       

 

 

 
            259,757  
       

 

 

 
UTILITIES 8.6%

 

AT&T, Inc.

 

4.900% due 08/15/2037 (n)

      528         511  

5.150% due 02/15/2050

      632         608  

5.300% due 08/15/2058 (n)

      1,390         1,316  

5.450% due 03/01/2047

      80         81  

CenturyLink, Inc.

 

7.200% due 12/01/2025

      1,122         1,080  

DTEK Finance PLC (10.750% Cash or 10.750% PIK)

 

10.750% due 12/31/2024 (d)

      5,927         6,130  

Enable Midstream Partners LP

 

4.950% due 05/15/2028

      87         87  

Mountain States Telephone & Telegraph Co.

 

7.375% due 05/01/2030

      15,200         15,775  

Odebrecht Drilling Norbe Ltd.

 

6.350% due 12/01/2021

      1,557         1,532  

Odebrecht Drilling Norbe Ltd. (6.350% Cash or 7.350% PIK)

 

7.350% due 12/01/2026 (d)

      2,723         1,491  

Odebrecht Offshore Drilling Finance Ltd.

 

6.720% due 12/01/2022

      5,220         4,985  

Odebrecht Offshore Drilling Finance Ltd. (6.720% Cash or 7.720% PIK)

 

7.720% due 12/01/2026 (d)

      12,223         3,636  

Petrobras Global Finance BV

 

5.999% due 01/27/2028

      229         217  

6.125% due 01/17/2022

      110         114  

6.250% due 12/14/2026

  GBP     8,600         11,743  

6.625% due 01/16/2034

      200         264  

6.850% due 06/05/2115

  $     160         145  

7.375% due 01/17/2027 (n)

      2,511         2,614  

8.750% due 05/23/2026

      173         196  

Rio Oil Finance Trust

 

8.200% due 04/06/2028

      260         268  

9.250% due 07/06/2024

      18,843         20,356  
       

 

 

 
          73,149  
       

 

 

 

Total Corporate Bonds & Notes (Cost $507,891)

      524,318  
       

 

 

 
CONVERTIBLE BONDS & NOTES 0.5%

 

INDUSTRIALS 0.5%

 

DISH Network Corp.

 

3.375% due 08/15/2026

      5,100         4,646  
       

 

 

 

Total Convertible Bonds & Notes (Cost $5,100)

    4,646  
       

 

 

 
MUNICIPAL BONDS & NOTES 7.6%

 

CALIFORNIA 0.5%

 

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

 

6.506% due 02/01/2031

      2,000         2,290  

Sacramento County, California Revenue Bonds, Series 2013

 

7.250% due 08/01/2025

      1,500         1,765  
       

 

 

 
          4,055  
       

 

 

 
 

 

48   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2018

 

        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 
DISTRICT OF COLUMBIA 1.3%

 

District of Columbia Revenue Bonds, Series 2011

 

7.625% due 10/01/2035

  $     9,740     $     10,846  
       

 

 

 
ILLINOIS 2.7%

 

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

 

6.257% due 01/01/2040

      11,000         11,079  

7.517% due 01/01/2040

      9,805         11,094  

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

 

6.725% due 04/01/2035

      45         48  

7.350% due 07/01/2035

      30         34  

Illinois State General Obligation Bonds, Series 2003

 

5.100% due 06/01/2033

      365         355  
       

 

 

 
            22,610  
       

 

 

 
NEW YORK 0.2%

 

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

 

6.000% due 06/01/2028

      1,485         1,485  
       

 

 

 
TEXAS 1.2%

 

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

 

7.250% due 08/15/2043

      7,535         10,162  
       

 

 

 
VIRGINIA 0.1%

 

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

 

6.706% due 06/01/2046

      1,355         1,342  
       

 

 

 
WEST VIRGINIA 1.6%

 

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

 

0.000% due 06/01/2047 (h)

      66,200         4,098  

7.467% due 06/01/2047

      9,705         9,670  
       

 

 

 
          13,768  
       

 

 

 

Total Municipal Bonds & Notes (Cost $56,959)

 

        64,268  
       

 

 

 
U.S. GOVERNMENT AGENCIES 4.1%

 

Fannie Mae

 

3.500% due 09/25/2027 (a)

      411         43  

5.873% (- 2.0*LIBOR01M + 10.000%) due 10/25/2041 ~

      341         328  

7.745% (- 4.0*LIBOR01M + 16.000%) due 05/25/2043 ~

      422         424  

10.000% (- 5.405*LIBOR01M + 42.703%) due 01/25/2034 ~

      218         277  

Freddie Mac

 

0.000% due 02/25/2046 - 08/25/2046 (b)(h)

      21,772         17,226  

0.100% due 02/25/2046 - 08/25/2046 (a)

      191,741         451  

2.557% due 11/25/2055 «~

      14,090         8,473  

4.000% due 08/15/2020 (a)

      194         6  

4.028% (- 1.0*LIBOR01M + 6.100%) due 07/15/2035 ~(a)

      1,093         144  

4.128% (- 1.0*LIBOR01M + 6.200%) due 02/15/2042 ~(a)

      2,038         258  

4.500% due 10/15/2037 (a)

      660         46  

5.000% (LIBOR01M) due 06/15/2033 ~(a)

      1,476         295  

5.068% (- 1.0*LIBOR01M + 7.140%) due 08/15/2036 ~(a)

      659         124  

8.857% (- 2.0*LIBOR01M + 13.000%) due 05/15/2033 ~

      53         61  

11.264% (US0001M + 9.200%) due 10/25/2027 ~

      4,330         5,739  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Ginnie Mae

 

3.500% due 06/20/2042 - 03/20/2043 (a)

  $     2,848     $     467  

4.164% (- 1.0*LIBOR01M + 6.250%) due 02/20/2042 ~(a)

      7,872         589  

4.500% due 07/20/2042 (a)

      238         39  

5.000% due 09/20/2042 (a)

      415         80  
       

 

 

 

Total U.S. Government Agencies (Cost $35,392)

 

        35,070  
       

 

 

 
NON-AGENCY MORTGAGE-BACKED SECURITIES 19.2%

 

Adjustable Rate Mortgage Trust

 

2.404% due 05/25/2036 •

      4,224         2,517  

Banc of America Alternative Loan Trust

 

3.536% due 06/25/2046 ^•(a)

      6,244         520  

Banc of America Funding Trust

 

6.000% due 07/25/2037 ^

      527         501  

6.250% due 10/26/2036

      8,670         7,017  

Banc of America Mortgage Trust

 

3.686% due 02/25/2036 ^~

      20         19  

BCAP LLC Trust

 

4.945% due 03/26/2037

      1,609         1,679  

6.000% due 05/26/2037 ~

      6,781         4,718  

6.031% due 10/26/2036 ~

      6,893         6,790  

6.531% due 09/26/2036 ~

      6,453         6,299  

12.786% due 06/26/2036 ~

      2,373         1,229  

Bear Stearns Adjustable Rate Mortgage Trust

 

3.459% due 11/25/2034 ~

      69         62  

Bellemeade Re Ltd.

 

8.364% due 07/25/2025 •

      1,250         1,294  

CD Mortgage Trust

 

5.398% due 12/11/2049 ~

      1,882         1,124  

5.688% due 10/15/2048

      3,186         1,657  

Chase Mortgage Finance Trust

 

3.537% due 12/25/2035 ^~

      21         20  

3.861% due 09/25/2036 ^~

      111         105  

5.500% due 05/25/2036 ^

      3         3  

Citigroup Commercial Mortgage Trust

 

5.612% due 12/10/2049 ~

      5,629         3,872  

Citigroup Mortgage Loan Trust

 

3.613% due 08/25/2037 ^~

      411         354  

4.096% due 07/25/2037 ^~

      129         129  

4.350% due 11/25/2035 ~

      16,481         11,584  

6.500% due 09/25/2036

      4,284         3,512  

Commercial Mortgage Loan Trust

 

6.052% due 12/10/2049 ~

      2,572         1,593  

Countrywide Alternative Loan Trust

 

2.314% due 12/25/2046 •

      3,098         2,358  

2.936% due 04/25/2035 •(a)

      4,223         255  

2.994% due 07/25/2046 ^~

      22         22  

3.693% due 02/25/2037 ^~

      262         255  

4.939% due 07/25/2021 ^~

      242         237  

6.000% due 02/25/2037 ^

      5,936         4,078  

6.250% due 12/25/2036 ^•

      3,286         2,481  

6.500% due 06/25/2036 ^

      928         722  

Countrywide Home Loan Mortgage Pass-Through Trust

 

3.286% due 12/25/2036 •(a)

      3,160         324  

3.481% due 09/25/2047 ^~

      48         46  

3.801% due 09/20/2036 ^~

      463         403  

Credit Suisse Commercial Mortgage Trust

 

5.707% due 02/15/2039 ~

      897         906  

5.869% due 09/15/2040 ~

      3,161         3,070  

Credit Suisse First Boston Mortgage Securities Corp.

 

6.000% due 01/25/2036

      2,094         1,883  

Epic Drummond Ltd.

 

0.000% due 01/25/2022 •

  EUR     215         250  

Eurosail PLC

 

1.977% due 06/13/2045 •

  GBP     3,347         3,369  

4.627% due 06/13/2045 •

      988         1,147  

Grifonas Finance PLC

 

0.009% due 08/28/2039 •

  EUR     4,776         4,960  

HarborView Mortgage Loan Trust

 

3.978% due 08/19/2036 ^~

  $     423         344  

4.094% due 08/19/2036 ^~

      22         21  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

IM Pastor Fondo de Titluzacion Hipotecaria

 

0.000% due 03/22/2043 •

  EUR     6,295     $     6,575  

JPMorgan Alternative Loan Trust

 

3.415% due 03/25/2037 ^~

  $     6,451         6,104  

JPMorgan Chase Commercial Mortgage Securities Trust

 

5.411% due 05/15/2047

      5,100         3,656  

5.623% due 05/12/2045

      1,804         1,581  

JPMorgan Mortgage Trust

 

3.490% due 07/27/2037 ~

      4,991         2,572  

4.556% due 01/25/2037 ^•(a)

      19,496         3,874  

LB-UBS Commercial Mortgage Trust

 

5.407% due 11/15/2038

      1,307         1,009  

5.562% due 02/15/2040 ~

      1,342         848  

Lehman XS Trust

 

2.284% due 06/25/2047 •

      3,243         2,938  

Morgan Stanley Capital Trust

 

6.120% due 06/11/2049 ~

      703         711  

Motel 6 Trust

 

8.998% due 08/15/2019 •

      11,602         11,806  

Nomura Asset Acceptance Corp. Alternative Loan Trust

 

4.028% due 04/25/2036 ^~

      5,992         5,499  

Nomura Resecuritization Trust

 

5.733% due 07/26/2035 ~

      4,249         3,816  

RBSSP Resecuritization Trust

 

7.420% due 06/26/2037 ~

      4,392         3,855  

Residential Asset Securitization Trust

 

6.250% due 10/25/2036 ^

      501         477  

6.250% due 09/25/2037 ^

      5,113         3,570  

6.500% due 08/25/2036 ^

      852         487  

Structured Adjustable Rate Mortgage Loan Trust

 

3.827% due 04/25/2047 ~

      606         483  

3.855% due 01/25/2036 ^~

      181         142  

Structured Asset Mortgage Investments Trust

 

2.254% due 07/25/2046 ^•

      12,212         9,555  

WaMu Mortgage Pass-Through Certificates Trust

 

3.321% due 05/25/2037 ^~

      151         128  

Washington Mutual Mortgage Pass-Through Certificates Trust

 

4.616% due 04/25/2037 •(a)

      12,038         2,714  

6.500% due 03/25/2036 ^

      7,840         6,601  
       

 

 

 

Total Non-Agency Mortgage-Backed Securities (Cost $148,472)

 

        162,730  
       

 

 

 
ASSET-BACKED SECURITIES 11.8%

 

ACE Securities Corp. Home Equity Loan Trust

 

2.204% due 07/25/2036 •

      3,215         2,601  

Airspeed Ltd.

 

2.342% due 06/15/2032 •

      4,519         4,210  

Apidos CLO

 

0.000% due 07/22/2026 ~

      3,000         1,588  

Argent Securities Trust

 

2.254% due 03/25/2036 •

      5,943         3,674  

Belle Haven ABS CDO Ltd.

 

2.587% due 07/05/2046 •

      185,947         1,302  

Carlyle Global Market Strategies CLO Ltd.

 

1.000% due 10/15/2031 (c)

      4,200         3,675  

CIFC Funding Ltd.

 

0.000% due 05/24/2026 ~

      4,000         2,840  

0.000% due 07/22/2026 ~

      3,000         1,696  

Citigroup Mortgage Loan Trust

 

2.224% due 12/25/2036 •

      6,111         4,036  

Cork Street CLO Designated Activity Co.

 

0.000% due 11/27/2028 ~

  EUR     2,667         3,178  

3.600% due 11/27/2028

      1,197         1,403  

4.500% due 11/27/2028

      1,047         1,229  

6.200% due 11/27/2028

      1,296         1,521  

Countrywide Asset-Backed Certificates Trust

 

2.334% due 09/25/2046 •

  $     15,000         11,286  

Duke Funding Ltd.

 

3.003% due 08/07/2033 •

      17,010         6,799  

Glacier Funding CDO Ltd.

 

2.633% due 08/04/2035 •

      7,038         1,788  
 

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2018   49


Schedule of Investments PIMCO High Income Fund (Cont.)

 

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

Grosvenor Place CLO BV

 

0.000% due 04/30/2029 ~

  EUR     1,000     $     940  

Halcyon Loan Advisors European Funding BV

 

0.000% due 04/15/2030 ~

      1,100         1,099  

Long Beach Mortgage Loan Trust

 

2.254% due 02/25/2036 •

  $     1,397         1,181  

Man GLG Euro CLO

 

0.000% due 10/15/2030 ~

  EUR     4,150         4,860  

Merrill Lynch Mortgage Investors Trust

 

2.224% due 04/25/2037 •

  $     916         584  

5.953% due 03/25/2037

      3,902         1,192  

Morgan Stanley Mortgage Loan Trust

 

3.751% due 11/25/2036 ^•

      850         451  

5.965% due 09/25/2046 ^

      7,491         4,184  

People’s Financial Realty Mortgage Securities Trust

 

2.224% due 09/25/2036 •

      21,998         6,951  

Renaissance Home Equity Loan Trust

 

6.998% due 09/25/2037 ^

      7,852         4,767  

7.238% due 09/25/2037 ^

      6,622         4,019  

Sherwood Funding CDO Ltd.

 

2.251% due 11/06/2039 •

      35,264         10,932  

South Coast Funding Ltd.

 

2.953% due 08/10/2038 •

      26,526         5,175  

Specialty Underwriting & Residential Finance Trust

 

3.039% due 06/25/2036 •

      409         106  

Washington Mutual Asset-Backed Certificates Trust

 

2.214% due 05/25/2036 •

      253         220  
       

 

 

 

Total Asset-Backed Securities (Cost $103,901)

 

        99,487  
       

 

 

 
SOVEREIGN ISSUES 4.6%

 

Argentina Government International Bond

 

2.260% due 12/31/2038

  EUR     4,410         3,178  

3.375% due 01/15/2023

      200         214  

5.250% due 01/15/2028

      200         205  

6.250% due 11/09/2047

      200         191  

7.820% due 12/31/2033

      14,733         17,388  

30.131% (BADLARPP) due 10/04/2022 ~

  ARS     84         5  

35.842% (BADLARPP + 2.500%) due 03/11/2019 ~

      400         14  

36.087% (BADLARPP + 3.250%) due 03/01/2020 ~

      1,600         55  

36.495% (BADLARPP + 2.000%) due 04/03/2022 ~

      89,562         2,929  

40.000% (ARPP7DRR) due 06/21/2020 ~

      132,472         4,865  

Autonomous Community of Catalonia

 

4.900% due 09/15/2021

  EUR     2,350         2,994  

Egypt Government International Bond

 

4.750% due 04/16/2026

      400         460  

5.625% due 04/16/2030

      400         451  

Peru Government International Bond

 

6.350% due 08/12/2028

  PEN     4,000         1,306  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Republic of Greece Government International Bond

 

3.000% due 02/24/2023

  EUR     25     $     29  

3.000% due 02/24/2024

      25         29  

3.000% due 02/24/2025

      25         29  

3.000% due 02/24/2026

      25         29  

3.000% due 02/24/2027

      25         29  

3.000% due 02/24/2028

      25         28  

3.000% due 02/24/2029

      25         28  

3.000% due 02/24/2030

      25         28  

3.000% due 02/24/2031

      25         27  

3.000% due 02/24/2032

      25         27  

3.000% due 02/24/2033

      25         27  

3.000% due 02/24/2034

      25         26  

3.000% due 02/24/2035

      25         26  

3.000% due 02/24/2036

      25         26  

3.000% due 02/24/2037

      25         26  

3.000% due 02/24/2038

      25         26  

3.000% due 02/24/2039

      25         26  

3.000% due 02/24/2040

      25         26  

3.000% due 02/24/2041

      25         25  

3.000% due 02/24/2042

      25         26  

4.750% due 04/17/2019

      3,000         3,603  

Venezuela Government International Bond

 

6.000% due 12/09/2020 ^(e)

  $     365         98  

9.250% due 09/15/2027 ^(e)

      452         132  
       

 

 

 

Total Sovereign Issues (Cost $44,007)

 

        38,631  
       

 

 

 
        SHARES            
COMMON STOCKS 1.9%

 

CONSUMER DISCRETIONARY 0.8%

 

Caesars Entertainment Corp. (f)

    584,952         6,610  
       

 

 

 
ENERGY 0.5%

 

Forbes Energy Services Ltd. (f)(l)

    66,131         562  

Ocean Rig UDW, Inc. (f)

      138,675         3,889  
       

 

 

 
          4,451  
       

 

 

 
FINANCIALS 0.6%

 

TIG FinCo PLC «(l)

      3,457,270         5,445  
       

 

 

 

Total Common Stocks (Cost $16,066)

 

      16,506  
       

 

 

 
WARRANTS 0.1%

 

INDUSTRIALS 0.1%

 

Sequa Corp. - Exp. 04/28/2024 «

    1,795,000         450  
       

 

 

 

Total Warrants (Cost $0)

 

      450  
       

 

 

 
PREFERRED SECURITIES 5.0%

 

BANKING & FINANCE 1.1%

 

Farm Credit Bank of Texas

 

10.000% due 12/15/2020 (j)(l)

      1,840         2,098  
        SHARES         MARKET
VALUE
(000S)
 

OCP CLO Ltd.

 

0.000% due 04/26/2028 (h)

      8,700     $     7,341  
       

 

 

 
          9,439  
       

 

 

 
INDUSTRIALS 3.9%

 

Sequa Corp.

 

9.000% «

      36,935         33,520  
       

 

 

 

Total Preferred Securities (Cost $42,867)

 

        42,959  
       

 

 

 
REAL ESTATE INVESTMENT TRUSTS 2.2%

 

REAL ESTATE 2.2%

 

VICI Properties, Inc.

      934,782         19,023  
       

 

 

 

Total Real Estate Investment Trusts (Cost $12,650)

 

      19,023  
       

 

 

 

 

SHORT-TERM INSTRUMENTS 6.8%

 

REPURCHASE AGREEMENTS (m) 6.3%

 

          52,730  
       

 

 

 
        PRINCIPAL
AMOUNT
(000S)
           
ARGENTINA TREASURY BILLS 0.2%

 

27.466% due 08/15/2018 - 11/21/2018 (g)(h)

  ARS     43,262         1,560  

1.855% due 09/14/2018 (h)(i)

  $     82         82  
       

 

 

 
          1,642  
       

 

 

 
U.S. TREASURY BILLS 0.3%

 

1.972% due 10/04/2018 - 10/18/2018 (g)(h)(q)

      2,746         2,736  
       

 

 

 
Total Short-Term Instruments
(Cost $57,398)

 

      57,108  
       

 

 

 
       
Total Investments in Securities
(Cost $1,062,006)

 

        1,092,881  
       
Total Investments 129.0% (Cost $1,062,006)       $     1,092,881  

Financial Derivative
Instruments (o)(p) (0.2)%

(Cost or Premiums, net $144,662)

 

 

      (1,519
Preferred Shares (12.0)%           (101,975
Other Assets and Liabilities, net (16.8)%     (142,335
       

 

 

 
Net Assets Applicable to Common Shareholders 100.0%

 

  $     847,052  
       

 

 

 
 

NOTES TO SCHEDULE OF INVESTMENTS:

 

*

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

^

Security is in default.

«

Security valued using significant unobservable inputs (Level 3).

~

Variable or Floating rate security. Rate shown is the rate in effect as of period end. Certain variable rate securities are not based on a published reference rate and spread, rather are determined by the issuer or agent and are based on current market conditions. Reference rate is as of reset date, which may vary by security. These securities may not indicate a reference rate and/or spread in their description.

Rate shown is the rate in effect as of period end. The rate may be based on a fixed rate, a capped rate or a floor rate and may convert to a variable or floating rate in the future. These securities do not indicate a reference rate and spread in their description.

 

All or a portion of this amount represent unfunded loan commitments. The interest rate for the unfunded portion will be determined at the time of funding. See Note 4, Securities and Other Investments, in the Notes to Financial Statements for more information regarding unfunded loan commitments.

(a)

Interest only security.

(b)

Principal only security.

 

50   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2018

 

(c)

When-issued security.

(d)

Payment in-kind security.

(e)

Security is not accruing income as of the date of this report.

(f)

Security did not produce income within the last twelve months.

(g)

Coupon represents a weighted average yield to maturity.

(h)

Zero coupon security.

(i)

Coupon represents a yield to maturity.

(j)

Perpetual maturity; date shown, if applicable, represents next contractual call date.

(k)

Contingent convertible security.

 

(l)  RESTRICTED SECURITIES:

 

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

Farm Credit Bank of Texas 10.000% due 12/15/2020

         09/17/2013     $ 2,166     $ 2,098       0.25

Forbes Energy Services Ltd.

         10/09/2014 - 10/17/2016       2,028       562       0.07  

TIG FinCo PLC

         04/02/2015 - 07/20/2017       4,632       5,445       0.64  
        

 

 

   

 

 

   

 

 

 
  $     8,826     $     8,105       0.96
 

 

 

   

 

 

   

 

 

 

 

BORROWINGS AND OTHER FINANCING TRANSACTIONS

 

(m)  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)
 
FICC     1.500     07/31/2018       08/01/2018     $ 5,930     U.S. Treasury Notes 2.625% due 11/15/2020   $ (6,049   $ 5,930     $ 5,930  
NOM     1.990       07/31/2018       08/01/2018           46,800     U.S. Treasury Bonds 3.750% due 11/15/2043     (47,733     46,800       46,803  
           

 

 

   

 

 

   

 

 

 

Total Repurchase Agreements

 

    $     (53,782   $     52,730     $     52,733  
   

 

 

   

 

 

   

 

 

 

 

REVERSE REPURCHASE AGREEMENTS:

 

Counterparty   Borrowing
Rate(2)
    Settlement
Date
    Maturity
Date
    Amount
Borrowed(2)
    Payable for
Reverse
Repurchase
Agreements
 

BCY

    (0.500 )%      06/28/2018       TBD (3)     $     (1,476   $ (1,475
    0.950       06/18/2018       TBD (3)         (1,826     (1,828

BPS

    2.890       06/18/2018       08/29/2018         (9,758     (9,793

BRC

    0.000       07/26/2018       TBD (3)         (304     (304
    1.700       06/18/2018       TBD (3)         (8,181     (8,198

CFR

    (1.750     03/13/2018       TBD (3)     EUR     (1,756     (2,039

CIW

    2.450       07/06/2018       08/03/2018     $         (13,258         (13,282
    2.450       08/03/2018       08/31/2018         (13,269     (13,269

JML

    0.000       04/03/2018       TBD (3)     EUR     (1,041     (1,367

JPS

    2.480       07/18/2018       08/20/2018     $     (3,473     (3,476

NOM

    2.750       07/18/2018       08/20/2018         (4,766     (4,771

RTA

    2.819       03/12/2018       09/12/2018         (4,176     (4,222
    2.848       07/23/2018       10/23/2018         (2,772     (2,774

SOG

    2.740       05/01/2018       08/01/2018         (12,763     (12,852
    2.790       05/16/2018       08/16/2018         (2,386     (2,400
    2.790       05/21/2018       08/21/2018         (4,377     (4,401
    2.790       06/19/2018       08/16/2018         (473     (475
    2.810       06/12/2018       09/12/2018         (1,476     (1,482
    2.820       06/22/2018       09/24/2018         (5,718     (5,736
    2.850       07/10/2018       10/10/2018         (4,718     (4,726
    2.860       08/01/2018       11/01/2018         (12,903     (12,903
    2.887       07/12/2018       01/11/2019         (7,959     (7,972

UBS

    0.150       07/06/2018       08/06/2018     EUR     (2,714     (3,174
    2.540       06/05/2018       09/05/2018     $     (7,592     (7,623
    2.560       06/13/2018       09/13/2018         (491     (493
    2.560       07/11/2018       09/13/2018         (1,296     (1,298
    2.580       08/02/2018       11/02/2018         (6,598     (6,598
    2.660       05/02/2018       08/02/2018         (6,872     (6,918
    2.710       06/05/2018       09/05/2018         (9,743     (9,785
    2.720       06/07/2018       09/07/2018         (4,320     (4,338
    2.780       06/12/2018       09/12/2018         (16,973     (17,039

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2018   51


Schedule of Investments PIMCO High Income Fund (Cont.)

 

Counterparty   Borrowing
Rate(2)
    Settlement
Date
    Maturity
Date
    Amount
Borrowed(2)
    Payable for
Reverse
Repurchase
Agreements
 
    2.780 %       06/13/2018       09/13/2018     $     (280   $ (281
    2.790       07/11/2018       10/12/2018             (7,586     (7,598
    2.860       05/31/2018       08/31/2018         (8,185     (8,225
    2.860       06/05/2018       09/05/2018         (224     (225
           

 

 

 

Total Reverse Repurchase Agreements

 

  $     (193,340
           

 

 

 

 

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 pledged/(received) as of July 31, 2018:

 

Counterparty   Repurchase
Agreement
Proceeds
to be
Received(1)
    Payable for
Reverse
Repurchase
Agreements
    Payable for
Sale-Buyback
Transactions
     Total
Borrowings and
Other Financing
Transactions
    Collateral
Pledged/(Received)
    Net Exposure(4)  

Global/Master Repurchase Agreement

 

BCY

  $ 0     $ (3,303   $ 0      $ (3,303   $ 3,724     $ 421  

BPS

    0       (9,793     0        (9,793     10,877       1,084  

BRC

    0       (8,502     0        (8,502     9,481       979  

CFR

    0       (2,039     0        (2,039     2,163       124  

CIW

    0       (26,551     0            (26,551     13,870       (12,681

FICC

    5,930       0       0        5,930       (6,049     (119

JML

    0       (1,367     0        (1,367     1,333       (34

JPS

    0       (3,476     0        (3,476     3,483       7  

NOM

    46,803       (4,771     0        42,032           (42,553     (521

RTA

    0       (6,996     0        (6,996     7,796       800  

SOG

    0       (52,947     0        (52,947     44,567           (8,380

UBS

    0       (73,595     0        (73,595     73,381       (214
 

 

 

   

 

 

   

 

 

        

Total Borrowings and Other Financing Transactions

  $     52,733     $     (193,340   $     0         
 

 

 

   

 

 

   

 

 

        

 

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

  $ (12,852   $ (48,690   $ (75,845   $ (23,183   $ (160,570
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Borrowings

  $     (12,852   $     (48,690   $     (75,845   $     (23,183   $     (160,570
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Payable for reverse repurchase agreements(5)

 

      $     (160,570
         

 

 

 

 

(n)

Securities with an aggregate market value of $175,854 have been pledged as collateral under the terms of the above master agreements as of July 31, 2018.

 

(1)

Includes accrued interest.

(2)

The average amount of borrowings outstanding during the period ended July 31, 2018 was $(162,005) at a weighted average interest rate of 2.067%. Average borrowings may include sale-buyback transactions and reverse repurchase agreements, if held during the period.

(3)

Open maturity reverse repurchase agreement.

(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 8, Master Netting Arrangements, in the Notes to Financial Statements for more information regarding master netting arrangements.

(5)

Unsettled reverse repurchase agreements liability of $(32,770) is outstanding at period end.

 

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

 

SWAP AGREEMENTS:

 

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

 

Reference Entity   Fixed
Receive Rate
    Payment
Frequency
    Maturity
Date
    Implied
Credit Spread at
July 31, 2018(2)
    Notional
Amount(3)
    Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
    Market
Value
    Variation Margin  
  Asset     Liability  

Frontier Communications Corp.

    5.000     Quarterly       06/20/2020       9.536     $    9,600     $ (317   $     (336   $ (653   $ 15     $ 0  

Novo Banco S.A.

    5.000       Quarterly       09/20/2020       11.451       EUR    5,000       (978     710       (268     60       0  

Novo Banco S.A.

    5.000       Quarterly       12/20/2021       10.074       300       (71     55       (16     4       0  
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
          $     (1,366   $ 429     $     (937   $     79     $     0  
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

52   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2018

 

 

INTEREST RATE SWAPS

Pay/ Receive
Floating Rate
  Floating Rate Index   Fixed Rate     Payment
Frequency
    Maturity
Date
    Notional
Amount
   

Premiums
Paid/
(Received)

    Unrealized
Appreciation/
(Depreciation)
    Market
Value
    Variation Margin  
  Asset     Liability  

Pay

 

3-Month USD-LIBOR

    2.190%       Semi-Annual       12/28/2022     $     445,300     $ (929   $ (13,828   $ (14,757   $ 0     $ (40

Pay

 

3-Month USD-LIBOR

    2.860       Semi-Annual       04/26/2023         500,000       (1,369     2,123       754       0       (47

Receive

 

3-Month USD-LIBOR

    2.000       Semi-Annual       06/20/2023         155,200       5,684       1,390       7,074       3       0  

Receive(4)

 

3-Month USD-LIBOR

    2.750       Semi-Annual       12/19/2023         450,000       4,000       1,678       5,678       0       (31

Pay

 

3-Month USD-LIBOR

    2.500       Semi-Annual       12/20/2027         3,100       55       (188     (133     2       0  

Pay

 

3-Month USD-LIBOR

    3.500       Semi-Annual       06/19/2044         617,800       110,477       (63,409     47,068       1,569       0  

Receive

 

3-Month USD-LIBOR

    2.500       Semi-Annual       06/20/2048         753,500       28,854       60,551       89,405       0       (2,023

Receive(4)

 

6-Month EUR-EURIBOR

    1.250       Annual       09/19/2028     EUR     21,400       (300     (370     (670     71       0  

Receive(4)

 

6-Month EUR-EURIBOR

    1.250       Annual       12/19/2028         2,200       (38     (17     (55     7       0  

Receive(4)

 

6-Month GBP-LIBOR

    1.500       Semi-Annual       09/19/2028     GBP     55,200       1,264       (505     759       333       0  
             

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
              $ 147,698     $ (12,575   $ 135,123     $ 1,985     $ (2,141
             

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Swap Agreements

            $     146,332     $     (12,146   $     134,186     $     2,064     $     (2,141
             

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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, 2018:

 

    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     $     2,064     $     2,064       $     0     $     0     $     (2,141)     $     (2,141)  
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

 

Cash of $32,046 has been pledged as collateral for exchange-traded and centrally cleared financial derivative instruments as of July 31, 2018. See Note 8, Master Netting Arrangements, in the Notes to Financial Statements for more information regarding master netting arrangements.

 

(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, securities or other deliverable obligations 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 indicators 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)

This instrument has a forward starting effective date. See Note 2, Securities Transactions and Investment Income, in the Notes to Financial Statements for further information.

 

(p)  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  

BOA

     08/2018     $     82,126     EUR     70,659     $ 498     $ 0  
     08/2018         892     GBP     674       0       (8
     09/2018     EUR     70,659     $     82,323       0       (498

BPS

     08/2018     ARS     57,655         1,935       14       (133
     09/2018     PEN     4,622         1,409       0       (1

CBK

     08/2018     EUR     3,213         3,755       0       (2
     08/2018     $     2,103     EUR     1,802       5       0  
     08/2018         114,445     GBP     87,369       242       (11
     09/2018     GBP     86,559     $     113,523       0       (242
     10/2018     $     108     ARS     3,250       2       0  

GLM

     08/2018         982     EUR     842       2       0  

HUS

     08/2018         7,925     RUB     495,889       8       (15
     10/2018         15     ARS     460       0       0  

JPM

     08/2018     EUR     3,100     $     3,624       0       (1
     08/2018     $     501     EUR     428       0       0  
     08/2018         7,111     GBP     5,396       0       (28

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2018   53


Schedule of Investments PIMCO High Income Fund (Cont.)

 

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

SSB

     08/2018     EUR     70,518     $     82,272     $ 0     $ (188

UAG

     08/2018     GBP     93,440         123,725       1,081       0  
            

 

 

   

 

 

 

Total Forward Foreign Currency Contracts

 

      $     1,852     $     (1,127
            

 

 

   

 

 

 

 

SWAP AGREEMENTS:

 

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

 

Counterparty   Reference Entity   Fixed
Receive Rate
    Payment
Frequency
    Maturity
Date
    Implied
Credit Spread at
July 31, 2018(2)
    Notional
Amount(3)
    Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
    Swap Agreements,
at Value
 
  Asset     Liability  
BPS  

Petrobras Global Finance BV

    1.000     Quarterly       12/20/2024       3.275   $     1,700     $ (332   $ 128     $ 0     $ (204
GST  

Petrobras Global Finance BV

    1.000       Quarterly       12/20/2024       3.275       2,200       (437     174       0       (263
HUS  

Petrobras Global Finance BV

    1.000       Quarterly       12/20/2024       3.275       2,800       (581     246       0       (335
             

 

 

   

 

 

   

 

 

   

 

 

 
              $     (1,350   $     548     $     0     $     (802
             

 

 

   

 

 

   

 

 

   

 

 

 

 

INTEREST RATE SWAPS

 

Counterparty  

Pay/Receive

Floating Rate

  Floating Rate Index   Fixed Rate     Payment
Frequency
 

Maturity

Date

  Notional
Amount
    Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
    Swap Agreements,
at Value
 
  Asset     Liability  
DUB  

Pay

 

3-Month USD-LIBOR

    3.850   Semi-Annual   07/13/2022   $     600,000     $ 68     $ (1,189   $ 0     $ (1,121
MYC  

Pay

 

3-Month USD-LIBOR

    3.025     Semi-Annual   09/04/2023     508,000       (388     144       0       (244
             

 

 

   

 

 

   

 

 

   

 

 

 
    $ (320   $     (1,045   $ 0     $ (1,365
   

 

 

   

 

 

   

 

 

   

 

 

 

Total Swap Agreements

    $     (1,670   $ (497   $     0     $     (2,167
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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 pledged/(received) as of July 31, 2018:

 

    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
Pledged/
(Received)
    Net
Exposure(4)
 

BOA

  $ 498      $ 0      $ 0      $ 498       $ (506   $ 0      $ 0     $ (506   $ (8   $ 0     $ (8

BPS

    14        0        0        14         (134     0        (204     (338     (324     266       (58

CBK

    249        0        0        249         (255     0        0       (255     (6     0       (6

DUB

    0        0        0        0         0       0        (1,121     (1,121         (1,121         (2,226         (3,347

GLM

    2        0        0        2         0       0        0       0       2       0       2  

GST

    0        0        0        0         0       0        (263     (263     (263     240       (23

HUS

    8        0        0        8         (15     0        (335     (350     (342     317       (25

JPM

    0        0        0        0         (29     0        0       (29     (29     0       (29

MYC

    0        0        0        0         0       0        (244     (244     (244     (1,662     (1,906

SSB

    0        0        0        0         (188     0        0       (188     (188     276       88  

UAG

    1,081        0        0        1,081         0       0        0       0       1,081       (1,230     (149
 

 

 

    

 

 

    

 

 

    

 

 

     

 

 

   

 

 

    

 

 

   

 

 

       

Total Over the Counter

  $     1,852      $     0      $     0      $     1,852       $     (1,127   $     0      $     (2,167   $     (3,294      
 

 

 

    

 

 

    

 

 

    

 

 

     

 

 

   

 

 

    

 

 

   

 

 

       

 

(q)

Securities with an aggregate market value of $2,482 have been pledged as collateral for financial derivative instruments as governed by International Swaps and Derivatives Association, Inc. master agreements as of July 31, 2018.

 

(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, securities or other deliverable obligations 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 indicators 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.

 

54   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2018

 

(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 8, Master Netting Arrangements, 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, 2018:

 

    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     $ 1,985     $ 2,064  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

 

Forward Foreign Currency Contracts

  $ 0     $ 0     $ 0     $ 1,852     $ 0     $ 1,852  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 79     $ 0     $ 1,852     $ 1,985     $ 3,916  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial Derivative Instruments - Liabilities

 

Exchange-traded or centrally cleared

 

Swap Agreements

  $ 0     $ 0     $ 0     $ 0     $ 2,141     $ 2,141  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

 

Forward Foreign Currency Contracts

  $ 0     $ 0     $ 0     $ 1,127     $ 0     $ 1,127  

Swap Agreements

    0       802       0       0       1,365       2,167  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 802     $ 0     $ 1,127     $ 1,365     $ 3,294  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $     0     $     802     $     0     $     1,127     $     3,506     $     5,435  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

The effect of Financial Derivative Instruments on the Statements of Operations for the period ended July 31, 2018:

 

    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     $ 807     $ 0     $ 0     $ 7,100     $ 7,907  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

 

Forward Foreign Currency Contracts

  $ 0     $ 0     $ 0     $ (290   $ 0     $ (290

Swap Agreements

    0       101       0       0       4,280       4,381  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 101     $ 0     $ (290   $ 4,280     $ 4,091  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 908     $ 0     $ (290   $ 11,380     $ 11,998  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

Exchange-traded or centrally cleared

 

Swap Agreements

  $ 0     $ 912     $ 0     $ 0     $ (14,106   $ (13,194
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

 

Forward Foreign Currency Contracts

  $ 0     $ 0     $ 0     $ 5,436     $ 0     $ 5,436  

Swap Agreements

    0       236       0       0       (4,529     (4,293
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 236     $ 0     $ 5,436     $ (4,529   $ 1,143  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $     0     $     1,148     $     0     $     5,436     $     (18,635   $     (12,051
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2018   55


Schedule of Investments PIMCO High Income Fund (Cont.)

 

 

FAIR VALUE MEASUREMENTS

 

The following is a summary of the fair valuations according to the inputs used as of July 31, 2018 in valuing the Fund’s assets and liabilities:

 

Category and Subcategory   Level 1     Level 2     Level 3     Fair
Value at
07/31/2018
 

Investments in Securities, at Value

 

Loan Participations and Assignments

  $ 0     $ 26,966     $ 719     $ 27,685  

Corporate Bonds & Notes

 

Banking & Finance

    0           191,412       0       191,412  

Industrials

    0       258,590       1,167       259,757  

Utilities

    0       73,149       0       73,149  

Convertible Bonds & Notes

 

Industrials

    0       4,646       0       4,646  

Municipal Bonds & Notes

 

California

    0       4,055       0       4,055  

District of Columbia

    0       10,846       0       10,846  

Illinois

    0       22,610       0       22,610  

New York

    0       1,485       0       1,485  

Texas

    0       10,162       0       10,162  

Virginia

    0       1,342       0       1,342  

West Virginia

    0       13,768       0       13,768  

U.S. Government Agencies

    0       26,597       8,473       35,070  

Non-Agency Mortgage-Backed Securities

    0       162,730       0       162,730  

Asset-Backed Securities

    0       99,487       0       99,487  

Sovereign Issues

    0       38,631       0       38,631  

Common Stocks

 

Consumer Discretionary

        6,610       0       0       6,610  

Energy

    3,889       562       0       4,451  

Financials

    0       0       5,445       5,445  

Warrants

 

Industrials

    0       0       450       450  

Preferred Securities

 

Banking & Finance

    0       9,439       0       9,439  

Industrials

    0       0           33,520           33,520  
Category and Subcategory   Level 1     Level 2     Level 3     Fair
Value at
07/31/2018
 

Real Estate Investment Trusts

 

Real Estate

  $ 19,023     $ 0     $ 0     $ 19,023  

Short-Term Instruments

 

Repurchase Agreements

    0       52,730       0       52,730  

Argentina Treasury Bills

    0       1,642       0       1,642  

U.S. Treasury Bills

    0       2,736       0       2,736  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Investments

  $ 29,522     $ 1,013,585     $ 49,774     $ 1,092,881  
 

 

 

   

 

 

   

 

 

   

 

 

 

Financial Derivative Instruments - Assets

 

   

Exchange-traded or centrally cleared

    0       2,064       0       2,064  

Over the counter

    0       1,852       0       1,852  
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 3,916     $ 0     $ 3,916  
 

 

 

   

 

 

   

 

 

   

 

 

 

Financial Derivative Instruments - Liabilities

 

   

Exchange-traded or centrally cleared

    0       (2,141     0       (2,141

Over the counter

    0       (3,294     0       (3,294
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ (5,435   $ 0     $ (5,435
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Financial Derivative Instruments

  $ 0     $ (1,519   $ 0     $ (1,519
 

 

 

   

 

 

   

 

 

   

 

 

 

Totals

  $     29,522     $     1,012,066     $     49,774     $     1,091,362  
 

 

 

   

 

 

   

 

 

   

 

 

 
 

 

There were no significant transfers among Levels 1 and 2 during the period ended July 31, 2018.

 

The following is a reconciliation of the fair valuations using significant unobservable inputs (Level 3) for the Fund during the period ended July 31, 2018:

 

Category and Subcategory   Beginning
Balance
at 07/31/2017
    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
07/31/2018
    Net Change in
Unrealized
Appreciation/
(Depreciation)
on Investments
Held at
07/31/2018(1)
 

Investments in Securities, at Value

 

Loan Participations and Assignments

  $ 1,607     $ 457     $ (926   $ 24     $ 11     $ (38   $ 467     $ (883   $ 719     $ 2  

Corporate Bonds & Notes

 

Banking & Finance

    7,218       0       (382     3       16       (100     0       (6,755     0       0  

Industrials

    10,403       1,169       (10,405     1       106       (107     0       0       1,167       0  

U.S. Government Agencies

    8,136       0       (151     214       58       216       0       0       8,473       209  

Common Stocks

 

Energy

    31       0       0       0       (1,610     1,579       0       0       0       0  

Financials

    4,561       0       0       0       0       884       0       0       5,445       884  

Warrants

 

Industrials

    842       0       0       0       0       (392     0       0       450       (392

Preferred Securities

 

Industrials

    32,467       3,565       0       0       0         (2,512     0       0       33,520       (2,512
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals

  $   65,265     $   5,191     $   (11,864   $   242     $   (1,419   $ (470   $   467     $   (7,638   $   49,774     $   (1,809
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

56   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2018

 

 

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 07/31/2018
     Valuation
Technique
   Unobservable
Inputs
   Input Value(s)
(% Unless
Noted
Otherwise)
 

Investments in Securities, at Value

 

Loan Participations and Assignments

  $ 200      Proxy Pricing    Base Price      100.074  
    519      Third Party Vendor    Broker Quote      100.000 - 101.625  

Corporate Bonds & Notes

 

Industrials

    487      Other Valuation Techniques(2)          
    680      Proxy Pricing    Base Price      97.010  

U.S. Government Agencies

    8,473      Proxy Pricing    Base Price      60.341  

Common Stocks

 

Financials

    5,445      Other Valuation Techniques(2)          

Warrants

 

Industrials

    450      Other Valuation Techniques(2)          

Preferred Securities

 

Industrials

    33,520      Indicative Market Quotation    Broker Quote    $     900.000  
 

 

 

          

Total

  $     49,774           
 

 

 

          

 

(1)  

Any difference between Net Change in Unrealized Appreciation/(Depreciation) and Net Change in Unrealized Appreciation/(Depreciation) on Investments Held at July 31, 2018 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, 2018   57


Schedule of Investments PIMCO Income Strategy Fund

 

(Amounts in thousands*, except number of shares, contracts and units, if any)

 

        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 
INVESTMENTS IN SECURITIES 128.2%

 

LOAN PARTICIPATIONS AND ASSIGNMENTS 5.8%

 

Altice France S.A.

 

TBD% due 07/13/2026

  $     100     $     98  

Avantor, Inc.

 

6.077% (LIBOR03M + 4.000%) due 11/21/2024 ~

      50         50  

Banff Merger Sub, Inc.

 

TBD% due 06/21/2019

      5,300         5,280  

California Resources Corp.

 

6.831% (LIBOR03M + 4.750%) due 12/31/2022 «~

      50         51  

Community Health Systems, Inc.

 

5.557% (LIBOR03M + 3.250%) due 01/27/2021 ~

      965         951  

Dubai World

 

1.750% - 2.000% (LIBOR03M + 2.000%) due 09/30/2022 ~

      202         190  

Forbes Energy Services LLC

 

5.000% - 7.000% due 04/13/2021

      176         178  

Frontier Communications Corp.

 

5.830% (LIBOR03M + 3.750%) due 06/15/2024 ~

      298         294  

iHeartCommunications, Inc.

 

TBD% due 01/30/2019 ^(e)

      8,800         6,846  

McDermott Technology Americas, Inc.

 

7.077% (LIBOR03M + 5.000%) due 05/10/2025 ~

      499         503  

MH Sub LLC

 

5.829% (LIBOR03M + 3.750%) due 09/13/2024 ~

      60         60  

Multi Color Corp.

 

4.327% (LIBOR03M + 2.250%) due 10/31/2024 ~

      8         8  

PetSmart, Inc.

 

5.100% (LIBOR03M + 3.000%) due 03/11/2022 ~

      40         33  

Ply Gem Industries, Inc.

 

6.087% (LIBOR03M + 3.750%) due 04/12/2025 ~

      100         100  

Sequa Mezzanine Holdings LLC

 

7.067% (LIBOR03M + 5.000%) due 11/28/2021 «~

      109         109  

11.072% (LIBOR03M + 9.000%) due 04/28/2022 «~

      40         40  

Sprint Communications, Inc.

 

4.625% (LIBOR03M + 2.500%) due 02/02/2024 ~

      790         791  

Stars Group Holdings BV

 

5.831% (LIBOR03M + 3.500%) due 07/10/2025 ~

      100         101  

Syniverse Holdings, Inc.

 

7.078% (LIBOR03M + 5.000%) due 03/09/2023 ~

      10         10  

West Corp.

 

6.077% (LIBOR03M + 4.000%) due 10/10/2024 ~

      26         26  

Westmoreland Coal Co.

 

TBD% due 12/16/2020 ^(e)

      455         119  

TBD% - 10.581% (LIBOR03M + 8.250%) due 05/31/2020 ~

      755         770  
       

 

 

 

Total Loan Participations and Assignments (Cost $18,087)

 

        16,608  
       

 

 

 
CORPORATE BONDS & NOTES 55.4%

 

BANKING & FINANCE 23.2%

 

Ally Financial, Inc.

 

8.000% due 11/01/2031

      2,430         2,940  

Ambac LSNI LLC

 

7.337% due 02/12/2023 •

      123         124  

Ardonagh Midco PLC

 

8.375% due 07/15/2023

  GBP     2,815         3,752  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Athene Holding Ltd.

 

4.125% due 01/12/2028

  $     24     $     22  

Avolon Holdings Funding Ltd.

 

5.500% due 01/15/2023

      83         83  

AXA Equitable Holdings, Inc.

 

4.350% due 04/20/2028

      60         59  

5.000% due 04/20/2048

      36         35  

Banco Bilbao Vizcaya Argentaria S.A.

 

6.750% due 02/18/2020 •(j)(k)

  EUR     1,000         1,234  

Banco Espirito Santo S.A.

 

4.000% due 01/21/2019 ^(e)

      3,800         1,355  

Banco Santander S.A.

 

6.250% due 09/11/2021 •(j)(k)

      200         250  

Barclays Bank PLC

 

14.000% due 06/15/2019 •(j)

  GBP     3,700         5,318  

Barclays PLC

 

3.250% due 01/17/2033

      100         122  

6.500% due 09/15/2019 •(j)(k)

  EUR     800         975  

Blackstone CQP Holdco LP

 

6.000% due 08/18/2021

  $     400         400  

6.500% due 03/20/2021

      2,400         2,415  

Brighthouse Holdings LLC

 

6.500% due 07/27/2037 (j)

      35         34  

Brookfield Finance, Inc.

 

3.900% due 01/25/2028

      42         40  

4.700% due 09/20/2047

      96         92  

Cantor Fitzgerald LP

 

6.500% due 06/17/2022 (n)

      3,000         3,176  

CBL & Associates LP

 

5.950% due 12/15/2026

      1,046         903  

Co-operative Group Holdings Ltd.

 

7.500% due 07/08/2026

  GBP     2,800         4,412  

Cooperatieve Rabobank UA

 

6.625% due 06/29/2021 •(j)(k)

  EUR     400         532  

Credit Suisse Group AG

 

7.500% due 07/17/2023 •(j)(k)

  $     200         207  

7.500% due 12/11/2023 •(j)(k)

      3,540         3,783  

Emerald Bay S.A.

 

0.000% due 10/08/2020 (h)

  EUR     846         929  

EPR Properties

 

4.750% due 12/15/2026 (n)

  $     1,500         1,468  

Equinix, Inc.

 

2.875% due 03/15/2024

  EUR     100         117  

2.875% due 02/01/2026

      100         114  

Flagstar Bancorp, Inc.

 

6.125% due 07/15/2021

  $     1,700         1,774  

Fortress Transportation & Infrastructure Investors LLC

 

6.750% due 03/15/2022

      160         167  

Freedom Mortgage Corp.

 

8.250% due 04/15/2025

      31         30  

GSPA Monetization Trust

 

6.422% due 10/09/2029

      1,661         1,884  

HSBC Holdings PLC

 

6.000% due 09/29/2023 •(j)(k)

  EUR     1,800           2,386  

6.500% due 03/23/2028 •(j)(k)

  $     200         196  

Hunt Cos., Inc.

 

6.250% due 02/15/2026

      12         11  

iStar, Inc.

 

4.625% due 09/15/2020

      7         7  

5.250% due 09/15/2022

      23         23  

Jefferies Finance LLC

 

6.875% due 04/15/2022

      3,800         3,848  

7.375% due 04/01/2020

      915         936  

7.500% due 04/15/2021

      200         205  

Kennedy-Wilson, Inc.

 

5.875% due 04/01/2024

      32         31  

Life Storage LP

 

3.875% due 12/15/2027

      14         13  

Lloyds Bank PLC

 

12.000% due 12/16/2024 •(j)

      300         366  

Lloyds Banking Group PLC

 

7.875% due 06/27/2029 •(j)(k)

  GBP     2,200         3,373  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Meiji Yasuda Life Insurance Co.

 

5.100% due 04/26/2048 •

  $     200     $     204  

MetLife, Inc.

 

5.875% due 03/15/2028 •(j)

      34         35  

Nationstar Mortgage LLC

 

6.500% due 07/01/2021

      346         348  

Nationwide Building Society

 

10.250% ~(j)

  GBP     6         1,115  

Navient Corp.

 

5.625% due 08/01/2033

  $     41         35  

6.500% due 06/15/2022

      38         39  

Oppenheimer Holdings, Inc.

 

6.750% due 07/01/2022

      792         806  

Provident Funding Associates LP

 

6.375% due 06/15/2025

      13         13  

Royal Bank of Scotland Group PLC

 

7.500% due 08/10/2020 •(j)(k)(n)

      1,400         1,449  

8.000% due 08/10/2025 •(j)(k)(n)

      3,000         3,194  

8.625% due 08/15/2021 •(j)(k)

      1,000         1,082  

Santander UK Group Holdings PLC

 

6.750% due 06/24/2024 •(j)(k)

  GBP     1,950         2,661  

7.375% due 06/24/2022 •(j)(k)

      1,800         2,485  

Spirit Realty LP

 

4.450% due 09/15/2026 (n)

  $     700         674  

Springleaf Finance Corp.

 

5.625% due 03/15/2023

      600         603  

6.125% due 05/15/2022

      323         332  

6.875% due 03/15/2025

      118         120  

7.125% due 03/15/2026

      82         84  

8.250% due 10/01/2023

      180         199  

Unigel Luxembourg S.A.

 

10.500% due 01/22/2024

      270         282  

WeWork Cos., Inc.

 

7.875% due 05/01/2025

      36         35  
       

 

 

 
            65,936  
       

 

 

 
INDUSTRIALS 25.1%

 

Air Canada Pass-Through Trust

 

3.700% due 07/15/2027

      12         11  

Altice Financing S.A.

 

6.625% due 02/15/2023

      300         304  

7.500% due 05/15/2026

      1,500         1,464  

Altice France S.A.

 

6.000% due 05/15/2022

      850         877  

8.125% due 02/01/2027

      500         511  

Altice Luxembourg S.A.

 

7.250% due 05/15/2022

  EUR     440         529  

7.750% due 05/15/2022

  $     2,200         2,197  

Associated Materials LLC

 

9.000% due 01/01/2024

      260         275  

Bacardi Ltd.

 

4.450% due 05/15/2025

      100         100  

4.700% due 05/15/2028

      100         99  

Baffinland Iron Mines Corp.

 

8.750% due 07/15/2026

      600         602  

BMC Software Finance, Inc.

 

8.125% due 07/15/2021 (n)

      520         533  

Caesars Resort Collection LLC

 

5.250% due 10/15/2025

      4         4  

Centene Corp.

 

5.375% due 06/01/2026

      47         48  

Charles River Laboratories International, Inc.

 

5.500% due 04/01/2026

      12         12  

Charter Communications Operating LLC

 

4.200% due 03/15/2028

      66         63  

Cheniere Corpus Christi Holdings LLC

 

5.875% due 03/31/2025

      100         106  

Cheniere Energy Partners LP

 

5.250% due 10/01/2025

      15         15  

Chesapeake Energy Corp.

 

5.589% (US0003M + 3.250%) due 04/15/2019 ~

      62         62  
 

 

58   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2018

 

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

Clear Channel Worldwide Holdings, Inc.

 

6.500% due 11/15/2022

  $     310     $     318  

7.625% due 03/15/2020

      1,480         1,489  

Cleveland-Cliffs, Inc.

 

4.875% due 01/15/2024

      16         16  

Community Health Systems, Inc.

 

5.125% due 08/01/2021 (n)

      1,513         1,439  

6.250% due 03/31/2023

      3,321         3,105  

8.625% due 01/15/2024

      152         158  

Continental Airlines Pass-Through Trust

 

9.798% due 10/01/2022

      465         494  

CSN Islands Corp.

 

6.875% due 09/21/2019

      100         100  

CSN Resources S.A.

 

6.500% due 07/21/2020

      598         579  

Diamond Resorts International, Inc.

 

10.750% due 09/01/2024

      1,200         1,257  

EI Group PLC

 

6.875% due 02/15/2021

  GBP     2,360         3,371  

Exela Intermediate LLC

 

10.000% due 07/15/2023

  $     57         59  

Ferroglobe PLC

 

9.375% due 03/01/2022

      700         722  

First Quantum Minerals Ltd.

 

6.500% due 03/01/2024

      688         673  

6.875% due 03/01/2026

      758         743  

7.000% due 02/15/2021

      284         287  

Ford Motor Co.

 

7.700% due 05/15/2097 (n)

      7,435         8,633  

Fresh Market, Inc.

 

9.750% due 05/01/2023

      3,313         2,352  

Full House Resorts, Inc.

 

8.575% due 01/31/2024 «

      199         195  

General Electric Co.

 

5.000% due 01/21/2021 •(j)

      78         77  

Hadrian Merger Sub, Inc.

 

8.500% due 05/01/2026

      20         19  

Harland Clarke Holdings Corp.

 

8.375% due 08/15/2022

      26         25  

HCA, Inc.

 

4.500% due 02/15/2027

      400         390  

7.500% due 11/15/2095

      1,050         1,037  

Hilton Domestic Operating Co., Inc.

 

5.125% due 05/01/2026

      66         66  

iHeartCommunications, Inc.

 

9.000% due 09/15/2022 ^(e)

      1,000         772  

IHS Markit Ltd.

 

4.000% due 03/01/2026

      3         3  

Intelsat Jackson Holdings S.A.

 

7.250% due 10/15/2020 (n)

      1,685         1,700  

9.750% due 07/15/2025

      56         60  

Intelsat Luxembourg S.A.

 

7.750% due 06/01/2021

      5,279         5,041  

8.125% due 06/01/2023

      524         452  

Intrepid Aviation Group Holdings LLC

 

6.875% due 02/15/2019

      4,263         4,270  

8.500% due 08/15/2021

      3,470         3,505  

Kinder Morgan, Inc.

 

7.750% due 01/15/2032 (n)

      800         992  

7.800% due 08/01/2031 (n)

      1,600           1,976  

Mallinckrodt International Finance S.A.

 

5.500% due 04/15/2025

      302         245  

Matterhorn Merger Sub LLC

 

8.500% due 06/01/2026

      4         4  

Metinvest BV

 

8.500% due 04/23/2026

      400         388  

New Albertson’s LP

 

6.570% due 02/23/2028

      2,800         1,907  

Odebrecht Oil & Gas Finance Ltd.

 

0.000% due 08/30/2018 (h)(j)

      191         3  

0.000% due 08/31/2018 (h)(j)

      259         5  

Park Aerospace Holdings Ltd.

 

3.625% due 03/15/2021

      39         38  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

4.500% due 03/15/2023

  $     78     $     75  

5.250% due 08/15/2022

      6         6  

5.500% due 02/15/2024

      18         18  

Petroleos Mexicanos

 

6.500% due 03/13/2027

      70         71  

6.750% due 09/21/2047

      20         18  

PetSmart, Inc.

 

5.875% due 06/01/2025

      53         42  

Pisces Midco, Inc.

 

8.000% due 04/15/2026

      82         85  

Pitney Bowes, Inc.

 

4.700% due 04/01/2023

      18         16  

Platin 1426 GmbH

 

6.875% due 06/15/2023 «(c)

  EUR     200         227  

Prime Security Services Borrower LLC

 

9.250% due 05/15/2023

  $     620         665  

QVC, Inc.

 

5.950% due 03/15/2043

      2,305         2,151  

Radiate Holdco LLC

 

6.875% due 02/15/2023

      30         29  

Rockpoint Gas Storage Canada Ltd.

 

7.000% due 03/31/2023

      4         4  

Russian Railways via RZD Capital PLC

 

7.487% due 03/25/2031

  GBP     700         1,147  

Sabine Pass Liquefaction LLC

 

5.875% due 06/30/2026 (n)

  $     1,200         1,308  

Safeway, Inc.

 

7.250% due 02/01/2031

      470         462  

Scientific Games International, Inc.

 

5.000% due 10/15/2025

      5         5  

Shelf Drilling Holdings Ltd.

 

8.250% due 02/15/2025

      18         18  

SoftBank Group Corp.

 

4.000% due 04/20/2023

  EUR     2,200         2,692  

Spirit Issuer PLC

 

3.368% (BP0003M + 2.700%) due 12/28/2031 ~

  GBP     500         645  

Sunoco LP

 

4.875% due 01/15/2023

  $     32         32  

T-Mobile USA, Inc.

 

4.750% due 02/01/2028

      9         8  

Teva Pharmaceutical Finance Netherlands BV

 

3.250% due 04/15/2022

  EUR     200         244  

Transocean Pontus Ltd.

 

6.125% due 08/01/2025

  $     70         71  

Unique Pub Finance Co. PLC

 

5.659% due 06/30/2027

  GBP     1,752         2,542  

6.542% due 03/30/2021

      381         528  

Univision Communications, Inc.

 

5.125% due 02/15/2025

  $     200         186  

UPCB Finance Ltd.

 

3.625% due 06/15/2029

  EUR     100         116  

ViaSat, Inc.

 

5.625% due 09/15/2025

  $     44         42  

Virgin Media Secured Finance PLC

 

5.000% due 04/15/2027

  GBP     200         258  

VOC Escrow Ltd.

 

5.000% due 02/15/2028

  $     36         35  

Westmoreland Coal Co.

 

8.750% due 01/01/2022 ^(e)

      2,930         828  
       

 

 

 
            71,351  
       

 

 

 
UTILITIES 7.1%

 

AT&T, Inc.

 

4.900% due 08/15/2037

      176         170  

5.150% due 02/15/2050

      208         200  

5.300% due 08/15/2058

      488         462  

5.450% due 03/01/2047

      30         30  

DTEK Finance PLC (10.750% Cash or 10.750% PIK)

 

10.750% due 12/31/2024 (d)

      1,347         1,394  

Enable Midstream Partners LP

 

4.950% due 05/15/2028

      29         29  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Gazprom Neft OAO Via GPN Capital S.A.

 

6.000% due 11/27/2023 (n)

  $     4,600     $     4,810  

Northwestern Bell Telephone

 

7.750% due 05/01/2030

      7,000         7,486  

Odebrecht Drilling Norbe Ltd.

 

6.350% due 12/01/2021

      73         72  

Odebrecht Drilling Norbe Ltd. (6.350% Cash or 7.350% PIK)

 

7.350% due 12/01/2026 (d)

      128         70  

Odebrecht Offshore Drilling Finance Ltd.

 

6.720% due 12/01/2022

      760         726  

Odebrecht Offshore Drilling Finance Ltd. (6.720% Cash or 7.720% PIK)

 

7.720% due 12/01/2026 (d)

      2,450         729  

Petrobras Global Finance BV

 

5.999% due 01/27/2028

      75         71  

6.125% due 01/17/2022

      66         69  

6.625% due 01/16/2034

  GBP     100         132  

7.375% due 01/17/2027

  $     367         382  

Rio Oil Finance Trust

 

9.250% due 07/06/2024

      3,063         3,309  

Sprint Corp.

 

7.625% due 03/01/2026

      134         139  
       

 

 

 
          20,280  
       

 

 

 

Total Corporate Bonds & Notes
(Cost $158,032)

 

        157,567  
       

 

 

 
CONVERTIBLE BONDS & NOTES 0.8%

 

INDUSTRIALS 0.8%

 

Caesars Entertainment Corp.

 

5.000% due 10/01/2024

      486         874  

DISH Network Corp.

 

3.375% due 08/15/2026

      1,600         1,457  
       

 

 

 

Total Convertible Bonds & Notes
(Cost $2,506)

 

      2,331  
       

 

 

 
MUNICIPAL BONDS & NOTES 5.9%

 

CALIFORNIA 0.8%

 

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

 

7.500% due 10/01/2030

      600         657  

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

 

7.942% due 10/01/2038

      1,600         1,685  
       

 

 

 
          2,342  
       

 

 

 
ILLINOIS 2.5%

 

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

 

7.517% due 01/01/2040

      6,000         6,789  

Chicago, Illinois General Obligation Bonds, Series 2014

 

6.314% due 01/01/2044

      30         31  

Chicago, Illinois General Obligation Bonds, Series 2017

 

7.045% due 01/01/2029

      60         64  

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

 

6.725% due 04/01/2035

      10         11  

7.350% due 07/01/2035

      10         11  

Illinois State General Obligation Bonds, Series 2003

 

5.100% due 06/01/2033

      120         117  
       

 

 

 
          7,023  
       

 

 

 
VIRGINIA 0.1%

 

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

 

6.706% due 06/01/2046

      390         386  
       

 

 

 
 

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2018   59


Schedule of Investments PIMCO Income Strategy Fund (Cont.)

 

        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 
WEST VIRGINIA 2.5%

 

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

 

0.000% due 06/01/2047 (h)

  $     21,900     $     1,356  

7.467% due 06/01/2047

      5,805         5,784  
       

 

 

 
          7,140  
       

 

 

 

Total Municipal Bonds & Notes (Cost $15,057)

            16,891  
       

 

 

 
U.S. GOVERNMENT AGENCIES 4.0%

 

Fannie Mae

 

3.500% due 12/25/2032 (a)

      604         78  

4.000% due 11/25/2042 (a)

      2,152         357  

5.614% (US0001M + 3.550%) due 07/25/2029 ~

      420         459  

7.814% (US0001M + 5.750%) due 07/25/2029 ~

      570         683  

8.724% (- 3.0*LIBOR01M + 15.000%) due 12/25/2040 ~

      132         152  

Freddie Mac

 

0.000% due 04/25/2045 - 08/25/2046 (b)(h)

      5,938         4,702  

0.100% due 02/25/2046 - 08/25/2046 (a)

      58,664         143  

0.200% due 04/25/2045 (a)

      2,802         3  

2.557% due 11/25/2055 «~

      4,081         2,454  

5.816% (- 2.0*LIBOR01M + 10.000%) due 11/15/2040 ~

      229         235  

9.614% (US0001M + 7.550%) due 12/25/2027 ~

      1,494         1,859  

12.814% (US0001M + 10.750%) due 03/25/2025 ~

      292         396  
       

 

 

 

Total U.S. Government Agencies
(Cost $10,968)

 

      11,521  
       

 

 

 
NON-AGENCY MORTGAGE-BACKED SECURITIES 13.7%

 

Banc of America Alternative Loan Trust

 

6.000% due 01/25/2036 ^

      44         43  

Banc of America Funding Trust

 

6.000% due 08/25/2036 ^

      1,065         1,039  

BCAP LLC Trust

 

3.616% due 03/27/2036 ~

      1,058         714  

4.945% due 03/26/2037

      411         429  

12.786% due 06/26/2036 ~

      209         108  

Bear Stearns ALT-A Trust

 

2.224% due 06/25/2046 ^•

      2,034         2,102  

3.626% due 11/25/2036 ^~

      228         194  

3.683% due 09/25/2047 ^~

      3,075         2,543  

4.206% due 09/25/2035 ^~

      286         220  

Bear Stearns Commercial Mortgage Securities Trust

 

5.726% due 04/12/2038 ~

      100         100  

Bear Stearns Mortgage Funding Trust

 

7.500% due 08/25/2036

      462         418  

CD Mortgage Trust

 

5.398% due 12/11/2049 ~

      13         8  

5.688% due 10/15/2048

      3,781         1,966  

Chase Mortgage Finance Trust

 

3.537% due 12/25/2035 ^~

      4         4  

6.000% due 02/25/2037 ^

      465         367  

6.000% due 07/25/2037 ^

      336         288  

6.250% due 10/25/2036 ^

      946         747  

Citicorp Mortgage Securities Trust

 

5.500% due 04/25/2037

      58         58  

Commercial Mortgage Loan Trust

 

6.052% due 12/10/2049 ~

      924         572  

Countrywide Alternative Loan Resecuritization Trust

 

6.000% due 05/25/2036 ^

      1,288         1,068  

6.000% due 08/25/2037 ^~

      574         448  

Countrywide Alternative Loan Trust

 

2.414% due 05/25/2037 ^•

      195         111  

3.723% due 04/25/2036 ^~

      633         582  

5.500% due 03/25/2035

      151         114  

5.500% due 12/25/2035 ^

      1,745         1,509  

5.750% due 01/25/2035

      170         171  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

6.000% due 02/25/2035

  $     199     $     194  

6.000% due 08/25/2036 ^•

      233         209  

6.000% due 04/25/2037 ^

      605         454  

6.250% due 11/25/2036 ^

      413         366  

6.250% due 12/25/2036 ^•

      952         719  

6.500% due 08/25/2036 ^

      258         172  

Countrywide Home Loan Mortgage Pass-Through Trust

 

3.595% due 02/20/2035 ~

      17         18  

5.500% due 10/25/2035 ^

      347         316  

6.250% due 09/25/2036 ^

      302         242  

Deutsche Mortgage Securities, Inc. Mortgage Loan Trust

 

4.041% due 06/25/2034 •

      2,030         1,946  

Epic Drummond Ltd.

 

0.000% due 01/25/2022 •

  EUR     66         77  

Eurosail PLC

 

4.627% due 06/13/2045 •

  GBP     239         277  

GS Mortgage Securities Trust

 

5.622% due 11/10/2039

  $     425         367  

GSR Mortgage Loan Trust

 

5.500% due 05/25/2036 ^

      47         66  

6.000% due 02/25/2036 ^

      2,202         1,757  

HarborView Mortgage Loan Trust

 

2.802% due 01/19/2035 •

      80         78  

4.078% due 07/19/2035 ~

      28         24  

IndyMac Mortgage Loan Trust

 

6.500% due 07/25/2037 ^

      1,660         1,072  

JPMorgan Alternative Loan Trust

 

3.415% due 03/25/2037 ^~

      821         777  

3.630% due 03/25/2036 ^~

      998         934  

JPMorgan Chase Commercial Mortgage Securities Trust

 

5.623% due 05/12/2045

      580         508  

JPMorgan Mortgage Trust

 

3.689% due 02/25/2036 ^~

      219         186  

3.878% due 01/25/2037 ^~

      250         240  

LB-UBS Commercial Mortgage Trust

 

5.407% due 11/15/2038

      406         314  

5.562% due 02/15/2040 ~

      390         246  

Lehman XS Trust

 

2.284% due 06/25/2047 •

      1,004         910  

Merrill Lynch Mortgage Investors Trust

 

3.564% due 03/25/2036 ^~

      1,022         788  

Morgan Stanley Capital Trust

 

6.120% due 06/11/2049 ~

      241         244  

Morgan Stanley Mortgage Loan Trust

 

5.962% due 06/25/2036 ~

      2,670         1,213  

Motel 6 Trust

 

8.998% due 08/15/2019 •

      487         496  

Residential Asset Securitization Trust

 

5.750% due 02/25/2036 ^

      550         411  

6.000% due 07/25/2037 ^

      721         494  

6.250% due 09/25/2037 ^

      1,311         915  

Residential Funding Mortgage Securities, Inc. Trust

 

4.916% due 08/25/2036 ^~

      681         638  

6.000% due 09/25/2036 ^

      125         119  

6.000% due 06/25/2037 ^

      1,400         1,332  

Structured Adjustable Rate Mortgage Loan Trust

 

3.668% due 11/25/2036 ^~

      897         873  

3.735% due 03/25/2037 ^~

      301         250  

3.834% due 07/25/2036 ^~

      257         223  

3.855% due 01/25/2036 ^~

      779         609  

Suntrust Adjustable Rate Mortgage Loan Trust

 

3.675% due 02/25/2037 ^~

      147         133  

3.791% due 04/25/2037 ^~

      785         670  

WaMu Mortgage Pass-Through Certificates Trust

 

2.395% due 12/25/2046 •

      314         310  

3.403% due 02/25/2037 ^~

      296         287  

3.405% due 10/25/2036 ^~

      437         402  

Wells Fargo Mortgage-Backed Securities Trust

 

3.908% due 07/25/2036 ^~

      132         134  

5.750% due 03/25/2037 ^

      124         122  

6.000% due 06/25/2037 ^

      64         64  
       

 

 

 

Total Non-Agency Mortgage-Backed Securities (Cost $35,438)

 

        39,119  
       

 

 

 
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 
ASSET-BACKED SECURITIES 25.6%

 

Adagio CLO DAC

 

0.000% due 04/30/2031 ~

  EUR     1,750     $     1,712  

Airspeed Ltd.

 

2.342% due 06/15/2032 •

  $     1,494         1,392  

Apidos CLO

 

0.000% due 01/20/2031 ~

      2,200         1,987  

Argent Securities Trust

 

2.254% due 03/25/2036 •

      7,539         4,661  

Asset-Backed Funding Certificates Trust

 

2.214% due 10/25/2036 •

      5,558         5,322  

Bear Stearns Asset-Backed Securities Trust

 

6.500% due 10/25/2036 ^

      226         176  

Belle Haven ABS CDO Ltd.

 

2.587% due 07/05/2046 •

      85,896         601  

BlueMountain CLO Ltd.

 

7.787% due 04/13/2027 •

      1,000         1,007  

CIFC Funding Ltd.

 

0.000% due 05/24/2026 ~

      1,200         852  

0.000% due 07/22/2026 ~

      1,000         565  

Citigroup Mortgage Loan Trust

 

2.214% due 12/25/2036 •

      3,706         1,958  

2.224% due 12/25/2036 •

      1,917         1,266  

Countrywide Asset-Backed Certificates

 

2.204% due 06/25/2047 ^•

      777         717  

2.264% due 06/25/2047 •

      4,942         4,409  

Grosvenor Place CLO BV

 

0.000% due 04/30/2029 ~

  EUR     250         235  

GSAMP Trust

 

2.324% due 02/25/2046 •

  $     3,777         3,623  

3.039% due 03/25/2035 ^•

      6,420         5,618  

JPMorgan Mortgage Acquisition Trust

 

2.384% due 04/25/2036 •

      6,000         5,550  

Lehman XS Trust

 

6.290% due 06/24/2046

      1,828         1,852  

Merrill Lynch Mortgage Investors Trust

 

2.224% due 04/25/2037 •

      275         175  

Morgan Stanley Mortgage Loan Trust

 

2.184% due 04/25/2037 •

      3,524         1,714  

6.250% due 07/25/2047 ^~

      350         249  

Residential Asset Mortgage Products Trust

 

2.344% due 09/25/2036 •

      285         271  

Residential Asset Securities Corp. Trust

 

2.769% due 09/25/2035 •

      13,627         13,129  

Securitized Asset-Backed Receivables LLC Trust

 

2.204% due 05/25/2036 •

      5,510         3,590  

SLM Student Loan EDC Repackaging Trust

 

0.000% due 10/28/2029 «(h)

      1         1,388  

SLM Student Loan Trust

 

0.000% due 01/25/2042 «(h)

      2         1,490  

SoFi Professional Loan Program LLC

 

0.000% due 05/25/2040 «(h)

      2,100         1,216  

0.000% due 09/25/2040 «(h)

      846         507  

South Coast Funding Ltd.

 

2.953% due 08/10/2038 •

      5,792         1,130  

Symphony CLO Ltd.

 

6.939% due 07/14/2026 •

      1,000         994  

Taberna Preferred Funding Ltd.

 

2.749% due 08/05/2036 •

      213         181  

2.749% due 08/05/2036 ^•

      3,999         3,399  
       

 

 

 

Total Asset-Backed Securities (Cost $67,336)

 

        72,936  
       

 

 

 
SOVEREIGN ISSUES 4.2%

 

Argentina Government International Bond

 

2.260% due 12/31/2038

  EUR     1,734         1,250  

3.375% due 01/15/2023

      100         107  

5.250% due 01/15/2028

      100         103  

6.250% due 11/09/2047

      100         96  

7.820% due 12/31/2033

      5,220         6,160  

30.131% (BADLARPP) due 10/04/2022 ~

  ARS     28         1  
 

 

60   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2018

 

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

35.842% (BADLARPP + 2.500%) due 03/11/2019 ~

  ARS     100     $     3  

36.087% (BADLARPP + 3.250%) due 03/01/2020 ~

      700         24  

36.495% (BADLARPP + 2.000%) due 04/03/2022 ~

      30,152         986  

40.000% (ARPP7DRR) due 06/21/2020 ~

      30,215         1,110  

Autonomous Community of Catalonia

 

4.900% due 09/15/2021

  EUR     700         892  

Egypt Government International Bond

 

4.750% due 04/16/2026

      100         115  

5.625% due 04/16/2030

      100         113  

Peru Government International Bond

 

6.350% due 08/12/2028

  PEN     1,300         424  

Republic of Greece Government International Bond

 

4.750% due 04/17/2019

  EUR     300         360  

Venezuela Government International Bond

 

6.000% due 12/09/2020 ^(e)

  $     120         32  

9.250% due 09/15/2027 ^(e)

      151         44  
       

 

 

 

Total Sovereign Issues (Cost $13,584)

 

        11,820  
       

 

 

 
        SHARES            
COMMON STOCKS 1.3%

 

CONSUMER DISCRETIONARY 0.9%

 

Caesars Entertainment Corp. (f)

    227,344         2,569  
       

 

 

 
ENERGY 0.2%

 

Forbes Energy Services Ltd. (f)(l)

    13,350         114  

Ocean Rig UDW, Inc. (f)

      19,414         544  
       

 

 

 
          658  
       

 

 

 
        SHARES         MARKET
VALUE
(000S)
 
FINANCIALS 0.2%

 

TIG FinCo PLC «(l)

      383,023     $     603  
       

 

 

 

Total Common Stocks (Cost $4,065)

 

      3,830  
       

 

 

 
WARRANTS 0.0%

 

INDUSTRIALS 0.0%

 

Sequa Corp. - Exp. 04/28/2024 «

      394,000         99  
       

 

 

 

Total Warrants (Cost $0)

          99  
       

 

 

 
PREFERRED SECURITIES 3.4%

 

BANKING & FINANCE 0.8%

 

Farm Credit Bank of Texas

 

10.000% due 12/15/2020 (j)(l)

      2,015         2,297  
       

 

 

 
INDUSTRIALS 2.6%

 

Sequa Corp.

 

9.000% «

      8,100         7,351  
       

 

 

 

Total Preferred Securities (Cost $9,672)

 

        9,648  
       

 

 

 
REAL ESTATE INVESTMENT TRUSTS 1.5%

 

REAL ESTATE 1.5%

 

VICI Properties, Inc.

      202,347         4,118  
       

 

 

 

Total Real Estate Investment Trusts (Cost $2,691)

 

      4,118  
       

 

 

 
SHORT-TERM INSTRUMENTS 6.6%

 

REPURCHASE AGREEMENTS (m) 6.0%

 

            17,004  
       

 

 

 
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 
ARGENTINA TREASURY BILLS 0.1%

 

18.475% due 09/14/2018 - 09/19/2018 (g)(h)

  ARS     4,630     $     171  

1.855% due 09/14/2018 (g)(i)

  $     28         28  
       

 

 

 
          199  
       

 

 

 
U.S. TREASURY BILLS 0.5%

 

1.968% due 09/27/2018 - 10/18/2018 (g)(h)(q)

      1,360         1,355  
       

 

 

 
Total Short-Term Instruments
(Cost $18,608)

 

      18,558  
       

 

 

 
Total Investments in Securities
(Cost $356,044)

 

      365,046  
       
Total Investments 128.2%
(Cost $356,044)

 

  $     365,046  

Financial Derivative
Instruments (o)(p) 0.0%

(Cost or Premiums, net $8,517)

 

 

      (23

Preferred Shares (18.0)%

 

      (51,275
Other Assets and Liabilities, net (10.2)%

 

      (29,071
       

 

 

 
Net Assets Applicable to Common Shareholders 100.0%

 

  $       284,677  
       

 

 

 
 

NOTES TO SCHEDULE OF INVESTMENTS:

 

*

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

^

Security is in default.

«

Security valued using significant unobservable inputs (Level 3).

~

Variable or Floating rate security. Rate shown is the rate in effect as of period end. Certain variable rate securities are not based on a published reference rate and spread, rather are determined by the issuer or agent and are based on current market conditions. Reference rate is as of reset date, which may vary by security. These securities may not indicate a reference rate and/or spread in their description.

Rate shown is the rate in effect as of period end. The rate may be based on a fixed rate, a capped rate or a floor rate and may convert to a variable or floating rate in the future. These securities do not indicate a reference rate and spread in their description.

 

All or a portion of this amount represent unfunded loan commitments. The interest rate for the unfunded portion will be determined at the time of funding. See Note 4, Securities and Other Investments, in the Notes to Financial Statements for more information regarding unfunded loan commitments.

(a)

Interest only security.

(b)

Principal only security.

(c)

When-issued security.

(d)

Payment in-kind security.

(e)

Security is not accruing income as of the date of this report.

(f)

Security did not produce income within the last twelve months.

(g)

Coupon represents a weighted average yield to maturity.

(h)

Zero coupon security.

(i)

Coupon represents a yield to maturity.

(j)

Perpetual maturity; date shown, if applicable, represents next contractual call date.

(k)

Contingent convertible security.

 

(l)  RESTRICTED SECURITIES:

 

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

Farm Credit Bank of Texas 10.000% due 12/15/2020

         09/17/2013     $ 2,373     $ 2,297       0.81

Forbes Energy Services Ltd.

         10/09/2014 - 11/18/2016       531       114       0.04  

TIG FinCo PLC

         04/02/2015 - 07/20/2017       513       603       0.21  
        

 

 

   

 

 

   

 

 

 
  $     3,417     $     3,014       1.06
 

 

 

   

 

 

   

 

 

 

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2018   61


Schedule of Investments PIMCO Income Strategy Fund (Cont.)

 

 

BORROWINGS AND OTHER FINANCING TRANSACTIONS

 

(m)  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)
 
FICC     1.500     07/31/2018       08/01/2018     $ 2,004     U.S. Treasury Notes 2.625% due 11/15/2020   $ (2,047   $ 2,004     $ 2,004  
SAL     1.990       07/31/2018       08/01/2018           15,000     U.S. Treasury Notes 2.625% due 06/15/2021     (15,301     15,000       15,001  
           

 

 

   

 

 

   

 

 

 

Total Repurchase Agreements

 

    $     (17,348   $     17,004     $     17,005  
   

 

 

   

 

 

   

 

 

 

 

REVERSE REPURCHASE AGREEMENTS:

 

Counterparty   Borrowing
Rate(2)
    Settlement
Date
    Maturity
Date
    Amount
Borrowed(2)
    Payable for
Reverse
Repurchase
Agreements
 

BCY

    0.950     06/18/2018       TBD (3)     $ (609   $ (610

BPS

    2.450       06/01/2018       09/04/2018           (1,425     (1,431

CIW

    2.450       07/06/2018       08/03/2018       (1,225     (1,227
    2.450       07/13/2018       08/10/2018       (3,141     (3,145
    2.450       08/03/2018       08/31/2018       (1,250     (1,250

JML

    2.550       07/18/2018       08/20/2018       (3,892     (3,896

RDR

    2.520       06/12/2018       09/12/2018       (3,156     (3,167

UBS

    2.540       06/05/2018       09/05/2018       (4,594     (4,612
    2.560       06/11/2018       09/10/2018       (4,329     (4,345
    2.860       05/31/2018       08/31/2018       (1,260     (1,266
    2.910       05/14/2018       08/14/2018       (2,802     (2,820
    2.910       06/21/2018       08/07/2018       (1,490     (1,495
         

 

 

 

Total Reverse Repurchase Agreements

 

      $     (29,264
         

 

 

 

 

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 pledged/(received) as of July 31, 2018:

 

Counterparty   Repurchase
Agreement
Proceeds
to be
Received(1)
    Payable for
Reverse
Repurchase
Agreements
    Payable for
Sale-Buyback
Transactions
     Total
Borrowings and
Other Financing
Transactions
    Collateral
Pledged/(Received)
    Net  Exposure(4)  

Global/Master Repurchase Agreement

 

BCY

  $ 0     $ (610   $ 0      $ (610   $ 666     $ 56  

BPS

    0       (1,431     0        (1,431     1,468       37  

CIW

    0       (5,622     0        (5,622     4,477           (1,145

FICC

    2,004       0       0        2,004       (2,047     (43

JML

    0       (3,896     0        (3,896     4,810       914  

RDR

    0       (3,167     0        (3,167     3,176       9  

SAL

    15,001       0       0        15,001           (15,302     (301

UBS

    0       (14,538     0            (14,538     15,728       (119
 

 

 

   

 

 

   

 

 

        

Total Borrowings and Other Financing Transactions

  $     17,005     $     (29,264   $     0         
 

 

 

   

 

 

   

 

 

        

 

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     $     (12,583   $     (14,821   $ (610   $ (28,014
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Borrowings

  $ 0     $     (12,583   $     (14,821   $     (610   $     (28,014
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Payable for reverse repurchase agreements(5)

 

  $ (28,014
 

 

 

 

 

(n)

Securities with an aggregate market value of $30,325 have been pledged as collateral under the terms of the above master agreements as of July 31, 2018.

 

(1)

Includes accrued interest.

(2)

The average amount of borrowings outstanding during the period ended July 31, 2018 was $(31,564) at a weighted average interest rate of 2.022%. Average borrowings may include sale-buyback transactions and reverse repurchase agreements, if held during the period.

 

62   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2018

 

(3)

Open maturity reverse repurchase agreement.

(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 8, Master Netting Arrangements, in the Notes to Financial Statements for more information regarding master netting arrangements.

(5)

Unsettled reverse repurchase agreements liability of $(1,250) is outstanding at period end.

 

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

 

SWAP AGREEMENTS:

 

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

 

Reference Entity   Fixed
Receive Rate
    Payment
Frequency
    Maturity
Date
    Implied
Credit Spread at
July 31, 2018(2)
    Notional
Amount(3)
    Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
    Market
Value(4)
    Variation Margin  
  Asset     Liability  

Frontier Communications Corp.

    5.000     Quarterly       06/20/2020       9.536     $       2,900     $ (95   $     (102   $     (197   $ 5     $ 0  

Navient Corp.

    5.000       Quarterly       12/20/2021       1.986         300       11       19       30       0       0  
             

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
            $     (84   $ (83   $ (167   $     5     $     0  
             

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

Index/Tranches   Fixed
Receive Rate
  Payment
Frequency
  Maturity
Date
    Notional
Amount(3)
    Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
    Market
Value(4)
    Variation Margin  
  Asset     Liability  

CDX.HY-30 5-Year Index

  5.000%   Quarterly     06/20/2023     $     1,800     $     106     $     31     $     137     $     2     $     0  
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

INTEREST RATE SWAPS

 

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

Receive

 

3-Month USD-LIBOR

     2.000     Semi-Annual       06/20/2023       $       26,300     $ 963     $ 236     $ 1,199     $ 1     $ 0  

Pay

 

3-Month USD-LIBOR

     2.750       Semi-Annual       06/17/2025         70,420       4,237       (5,369     (1,132     23       0  

Pay

 

3-Month USD-LIBOR

     2.250       Semi-Annual       06/15/2026         15,300       723       (1,566     (843     7       0  

Pay

 

3-Month USD-LIBOR

     2.500       Semi-Annual       12/20/2027         28,100       200       (1,472     (1,272     17       0  

Pay

 

3-Month USD-LIBOR

     3.500       Semi-Annual       06/19/2044         83,100       (2,711     9,042       6,331       211       0  

Receive

 

3-Month USD-LIBOR

     2.500       Semi-Annual       06/20/2048         130,100       5,516       9,921       15,437       0       (349

Pay

 

6-Month  AUD-BBR-BBSW

     3.000       Semi-Annual       12/17/2019       AUD       6,200       89       (35     54       0       (2

Pay

 

6-Month  AUD-BBR-BBSW

     3.500       Semi-Annual       06/17/2025         3,900       97       66       163       0       (2

Receive(5)

 

6-Month EUR-EURIBOR

     1.250       Annual       09/19/2028       EUR       5,800       (81     (101     (182     19       0  

Receive(5)

 

6-Month EUR-EURIBOR

     1.250       Annual       12/19/2028         1,200       (21     (9     (30     4       0  

Receive(5)

 

6-Month GBP-LIBOR

     1.500       Semi-Annual       09/19/2028       GBP       15,300       352       (142     210       92       0  
              

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
          $ 9,364     $ 10,571     $ 19,935     $ 374     $ (353
              

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Swap Agreements

 

  $     9,386     $     10,519     $     19,905     $     381     $     (353
              

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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, 2018:

 

    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     $     381     $     381       $     0     $     0     $     (353)     $     (353)  
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

 

Cash of $5,916 has been pledged as collateral for exchange-traded and centrally cleared financial derivative instruments as of July 31, 2018. See Note 8, Master Netting Arrangements, in the Notes to Financial Statements for more information regarding master netting arrangements.

 

(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, securities or other deliverable obligations 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 indicators 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.

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2018   63


Schedule of Investments PIMCO Income Strategy Fund (Cont.)

 

(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 indicators 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.

(5)

This instrument has a forward starting effective date. See Note 2, Securities Transactions and Investment Income, in the Notes to Financial Statements for further information.

 

(p)  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  

BOA

     08/2018     $     23,855     EUR     20,471     $ 83     $ 0  
     08/2018         293     GBP     221       0       (3
     09/2018     EUR     20,471     $     23,912       0       (83

BPS

     08/2018     $     73     ARS     2,205       5       0  
     09/2018     PEN     1,505     $     457       0       (2

CBK

     08/2018     EUR     1,140         1,332       0       (1
     08/2018     $     33,303     GBP     25,427       71       0  
     09/2018     GBP     25,427     $     33,348       0       (71

GLM

     08/2018     $     253     EUR     217       1       0  
     08/2018         289     GBP     218       0       (2

HUS

     08/2018         2,512     RUB     157,179       2       (5

SSB

     08/2018     EUR     19,548     $     22,806       0       (52

UAG

     08/2018     GBP     25,866         34,250       299       0  
     09/2018     $     59     RUB     3,682       0       0  
            

 

 

   

 

 

 

Total Forward Foreign Currency Contracts

 

  $     461     $     (219
 

 

 

   

 

 

 

 

SWAP AGREEMENTS:

 

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

 

Counterparty   Reference Entity   Fixed
Receive Rate
    Payment
Frequency
    Maturity
Date
    Implied
Credit Spread at
July 31, 2018(2)
    Notional
Amount(3)
    Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
    Swap Agreements,
at Value
 
  Asset      Liability  
BPS  

Petrobras Global Finance BV

    1.000     Quarterly       12/20/2024       3.275   $         500     $ (98   $ 38     $ 0      $ (60
GST  

Petrobras Global Finance BV

    1.000       Quarterly       12/20/2024       3.275         700       (139     55       0        (84
HUS  

Petrobras Global Finance BV

    1.000       Quarterly       12/20/2019       1.324         200       (16     15       0        (1
 

Petrobras Global Finance BV

    1.000       Quarterly       09/20/2020       1.619         20       (3     3       0        0  
 

Petrobras Global Finance BV

    1.000       Quarterly       12/20/2024       3.275         800       (166     70       0        (96
MYC  

Petrobras Global Finance BV

    1.000       Quarterly       12/20/2019       1.324         4,100       (379     366       0        (13
               

 

 

   

 

 

   

 

 

    

 

 

 
              $     (801   $     547     $     0      $     (254
             

 

 

   

 

 

   

 

 

    

 

 

 

 

INTEREST RATE SWAPS

 

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

Pay

  3-Month USD-LIBOR     3.025%     Semi-Annual     09/04/2023     $     86,000     $     (66   $     25     $     0     $     (41
             

 

 

   

 

 

   

 

 

   

 

 

 

 

TOTAL RETURN SWAPS ON INTEREST RATE INDICES

 

Counterparty   Pay/Receive(4)   Underlying Reference   # of Units     Financing Rate   Payment
Frequency
  Maturity
Date
  Notional
Amount
    Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
    Swap Agreements,
at Value
 
  Asset     Liability  

BOA

 

Receive

 

iBoxx USD Liquid High Yield Index

    N/A    

3-Month USD-LIBOR

  Maturity   09/20/2018   $     100     $ (1   $ 2     $ 1     $ 0  

GST

 

Receive

 

iBoxx USD Liquid High Yield Index

    N/A    

3-Month USD-LIBOR

  Maturity   09/20/2018     100       (1     2       1       0  
               

 

 

   

 

 

   

 

 

   

 

 

 
              $ (2   $ 4     $ 2     $ 0  
               

 

 

   

 

 

   

 

 

   

 

 

 

Total Swap Agreements

 

  $     (869   $     576     $     2     $     (295
               

 

 

   

 

 

   

 

 

   

 

 

 

 

64   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2018

 

 

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 pledged/(received) as of July 31, 2018:

 

    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
Pledged/
(Received)
    Net
Exposure(5)
 

BOA

  $ 83      $ 0      $ 1      $ 84       $ (86   $ 0      $ 0     $ (86   $ (2   $ 0     $ (2

BPS

    5        0        0        5         (2     0        (60     (62     (57     276       219  

CBK

    71        0        0        71         (72     0        0       (72     (1     0       (1

GLM

    1        0        0        1         (2     0        0       (2     (1     0       (1

GST

    0        0        1        1         0       0        (84     (84     (83     292       209  

HUS

    2        0        0        2         (5     0        (97     (102       (100     0       (100

MYC

    0        0        0        0         0       0        (54     (54     (54       (264       (318

SSB

    0        0        0        0         (52     0        0       (52     (52     0       (52

UAG

    299        0        0        299         0       0        0       0       299       (270     29  
 

 

 

    

 

 

    

 

 

    

 

 

     

 

 

   

 

 

    

 

 

   

 

 

       

Total Over the Counter

  $   461      $   0      $   2      $   463       $   (219   $   0      $   (295   $   (514      
 

 

 

    

 

 

    

 

 

    

 

 

     

 

 

   

 

 

    

 

 

   

 

 

       

 

(q)

Securities with an aggregate market value of $594 have been pledged as collateral for financial derivative instruments as governed by International Swaps and Derivatives Association, Inc. master agreements as of July 31, 2018.

 

(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, securities or other deliverable obligations 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 indicators 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)

Receive represents that the Fund receives payments for any positive net return on the underlying reference. The Fund makes payments for any negative net return on such underlying reference. Pay represents that the Fund receives payments for any negative net return on the underlying reference. The Fund makes payments for any positive net return on such underlying reference.

(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 8, Master Netting Arrangements, 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, 2018:

 

    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     $ 7     $ 0     $ 0     $ 374     $ 381  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

 

Forward Foreign Currency Contracts

  $ 0     $ 0     $ 0     $ 461     $ 0     $ 461  

Swap Agreements

    0       0       0       0       2       2  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 0     $ 0     $ 461     $ 2     $ 463  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 7     $ 0     $ 461     $ 376     $ 844  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial Derivative Instruments - Liabilities

 

Exchange-traded or centrally cleared

 

Swap Agreements

  $ 0     $ 0     $ 0     $ 0     $ 353     $ 353  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

 

Forward Foreign Currency Contracts

  $ 0     $ 0     $ 0     $ 219     $ 0     $ 219  

Swap Agreements

    0       254       0       0       41       295  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 254     $ 0     $ 219     $ 41     $ 514  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $     0     $     254     $     0     $     219     $     394     $     867  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2018   65


Schedule of Investments PIMCO Income Strategy Fund (Cont.)

 

 

The effect of Financial Derivative Instruments on the Statements of Operations for the period ended July 31, 2018:

 

    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     $ 405     $ 0     $ 0     $ 7,765     $ 8,170  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

 

Forward Foreign Currency Contracts

  $ 0     $ 0     $ 0     $ (993   $ 0     $ (993

Swap Agreements

    0       66       0       0       106       172  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 66     $ 0     $ (993   $ 106     $ (821
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 471     $ 0     $ (993   $ 7,871     $ 7,349  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

Exchange-traded or centrally cleared

 

Swap Agreements

  $ 0     $ (247   $ 0     $ 0     $ (9,263   $ (9,510
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

 

Forward Foreign Currency Contracts

  $ 0     $ 0     $ 0     $ 1,918     $ 0     $ 1,918  

Swap Agreements

    0       93       0       0       27       120  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 93     $ 0     $ 1,918     $ 27     $ 2,038  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $     0     $     (154   $     0     $     1,918     $     (9,236   $     (7,472
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

FAIR VALUE MEASUREMENTS

 

The following is a summary of the fair valuations according to the inputs used as of July 31, 2018 in valuing the Fund’s assets and liabilities:

 

Category and Subcategory   Level 1     Level 2     Level 3     Fair
Value at
07/31/2018
 

Investments in Securities, at Value

 

Loan Participations and Assignments

  $ 0     $ 16,408     $ 200     $ 16,608  

Corporate Bonds & Notes

 

Banking & Finance

    0       65,936       0       65,936  

Industrials

    0       70,929       422       71,351  

Utilities

    0       20,280       0       20,280  

Convertible Bonds & Notes

 

Industrials

    0       2,331       0       2,331  

Municipal Bonds & Notes

 

California

    0       2,342       0       2,342  

Illinois

    0       7,023       0       7,023  

Virginia

    0       386       0       386  

West Virginia

    0       7,140       0       7,140  

U.S. Government Agencies

    0       9,067       2,454       11,521  

Non-Agency Mortgage-Backed Securities

    0       39,119       0       39,119  

Asset-Backed Securities

    0       68,335           4,601           72,936  

Sovereign Issues

    0           11,820       0       11,820  

Common Stocks

 

Consumer Discretionary

        2,569       0       0       2,569  

Energy

    544       114       0       658  

Financials

    0       0       603       603  

Warrants

 

Industrials

    0       0       99       99  

Preferred Securities

 

Banking & Finance

    0       2,297       0       2,297  

Industrials

    0       0       7,351       7,351  
Category and Subcategory   Level 1     Level 2     Level 3     Fair
Value at
07/31/2018
 

Real Estate Investment Trusts

 

Real Estate

  $ 4,118     $ 0     $ 0     $ 4,118  

Short-Term Instruments

 

Repurchase Agreements

    0       17,004       0       17,004  

Argentina Treasury Bills

    0       199       0       199  

U.S. Treasury Bills

    0       1,355       0       1,355  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Investments

  $     7,231     $     342,085     $     15,730     $     365,046  
 

 

 

   

 

 

   

 

 

   

 

 

 

Financial Derivative Instruments - Assets

 

Exchange-traded or centrally cleared

    0       381       0       381  

Over the counter

    0       463       0       463  
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 844     $ 0     $ 844  
 

 

 

   

 

 

   

 

 

   

 

 

 

Financial Derivative Instruments - Liabilities

 

Exchange-traded or centrally cleared

    0       (353     0       (353

Over the counter

    0       (514     0       (514
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ (867   $ 0     $ (867
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Financial Derivative Instruments

  $ 0     $ (23   $ 0     $ (23
 

 

 

   

 

 

   

 

 

   

 

 

 

Totals

  $ 7,231     $ 342,062     $ 15,730     $ 365,023  
 

 

 

   

 

 

   

 

 

   

 

 

 
 

 

There were no significant transfers among Levels 1 and 2 during the period ended July 31, 2018.

 

66   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2018

 

 

The following is a reconciliation of the fair valuations using significant unobservable inputs (Level 3) for the Fund during the period ended July 31, 2018:

 

Category and Subcategory   Beginning
Balance
at 07/31/2017
    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 07/31/2018
    Net Change in
Unrealized
Appreciation/
(Depreciation)
on Investments
Held at
07/31/2018(1)
 

Investments in Securities, at Value

 

Loan Participations and Assignments

  $ 1,439     $ 111     $ (1,129   $ 7     $ (184   $ (15   $ 149     $ (178   $ 200     $ 2  

Corporate Bonds & Notes

 

Banking & Finance

    2,078       0       (139     1       8       (30     0       (1,918     0       0  

Industrials

    0       422       (1     0       0       1       0       0       422       1  

U.S. Government Agencies

    2,357       0       (44     62       17       62       0       0       2,454       61  

Asset-Backed Securities

    4,682       0       0       43       0       (124     0       0       4,601       (124

Common Stocks

 

Financials

    505       0       0       0       0       98       0       0       603       98  

Warrants

 

Industrials

    185       0       0       0       0       (86     0       0       99       (86

Preferred Securities

 

Industrials

    7,120       782       0       0       0       (551     0       0       7,351       (551
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals

  $     18,366     $     1,315     $     (1,313   $     113     $     (159   $     (645   $     149     $     (2,096   $     15,730     $     (599
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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 07/31/2018
     Valuation
Technique
   Unobservable
Inputs
   Input Value(s)
(% Unless
Noted
Otherwise)
 

Investments in Securities, at Value

 

Loan Participations and Assignments

  $ 200      Third Party Vendor    Broker Quote      100.000-101.625  

Corporate Bonds & Notes

 

Industrials

    195      Other Valuation Techniques(2)          
    227      Proxy Pricing    Base Price      97.010  

U.S. Government Agencies

    2,454      Proxy Pricing    Base Price      60.341  

Asset-Backed Securities

    4,601      Proxy Pricing    Base Price      58.000-102,005.100  

Common Stocks

 

Financials

    603      Other Valuation Techniques(2)          

Warrants

 

Industrials

    99      Other Valuation Techniques(2)          

Preferred Securities

 

Industrials

    7,351      Indicative Market Quotation    Broker Quote    $ 900.000  
 

 

 

          

Total

  $     15,730           
 

 

 

          

 

(1) 

Any difference between Net Change in Unrealized Appreciation/(Depreciation) and Net Change in Unrealized Appreciation/(Depreciation) on Investments Held at July 31, 2018 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, 2018   67


Schedule of Investments PIMCO Income Strategy Fund II

 

(Amounts in thousands*, except number of shares, contracts and units, if any)

 

        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 
INVESTMENTS IN SECURITIES 125.2%

 

LOAN PARTICIPATIONS AND ASSIGNMENTS 4.9%

 

Alphabet Holding Co., Inc.

 

5.577% (LIBOR03M + 3.500%) due 09/26/2024 ~

  $     99     $     94  

Altice France S.A.

 

TBD% due 07/13/2026

      300         294  

Avantor, Inc.

 

6.077% (LIBOR03M + 4.000%) due 11/21/2024 ~

      50         50  

Banff Merger Sub, Inc.

 

TBD% due 06/21/2019

      10,100           10,062  

California Resources Corp.

 

6.831% (LIBOR03M + 4.750%) due 12/31/2022 «~

      50         51  

CenturyLink, Inc.

 

4.827% (LIBOR03M + 2.750%) due 01/31/2025 ~

      995         981  

Community Health Systems, Inc.

 

5.557% (LIBOR03M + 3.250%) due 01/27/2021 ~

      2,077         2,046  

Dubai World

 

1.750% - 2.000% (LIBOR03M + 2.000%) due 09/30/2022 ~

      504         475  

Energizer Holdings. Inc.

 

TBD% due 05/18/2019

      100         100  

Forbes Energy Services LLC

 

5.000% - 7.000% due 04/13/2021

      288         292  

Frontier Communications Corp.

 

5.830% (LIBOR03M + 3.750%) due 06/15/2024 ~

      595         588  

iHeartCommunications, Inc.

 

TBD% due 01/30/2019 ^(e)

      10,700         8,324  

IRB Holding Corp.

 

5.347% (LIBOR03M + 3.250%) due 02/05/2025 ~

      100         101  

Lightstone Generation LLC

 

5.827% (LIBOR03M + 3.750%) due 01/30/2024 ~

      1,927         1,938  

McDermott Technology Americas, Inc.

 

7.077% (LIBOR03M + 5.000%) due 05/10/2025 ~

      998         1,005  

MH Sub LLC

 

5.829% (LIBOR03M + 3.750%) due 09/13/2024 ~

      119         119  

Ministry of Finance of Tanzania

 

7.825% (LIBOR03M + 5.500%) due 12/10/2019 «~

      200         200  

Multi Color Corp.

 

4.327% (LIBOR03M + 2.250%) due 10/31/2024 ~

      17         17  

Parexel International Corp.

 

4.827% (LIBOR03M + 2.750%) due 09/27/2024 ~

      99         99  

PetSmart, Inc.

 

5.100% (LIBOR03M + 3.000%) due 03/11/2022 ~

      180         150  

Ply Gem Industries, Inc.

 

6.087% (LIBOR03M + 3.750%) due 04/12/2025 ~

      200         201  

Sequa Mezzanine Holdings LLC

 

7.067% (LIBOR03M + 5.000%) due 11/28/2021 «~

      228         228  

11.072% (LIBOR03M + 9.000%) due 04/28/2022 «~

      90         90  

Stars Group Holdings BV

 

5.831% (LIBOR03M + 3.500%) due 07/10/2025 ~

      100         101  

Syniverse Holdings, Inc.

 

7.078% (LIBOR03M + 5.000%) due 03/09/2023 ~

      120         120  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Traverse Midstream Partners LLC

 

6.340% (LIBOR03M + 4.000%) due 09/27/2024 ~

  $     91     $     91  

West Corp.

 

6.077% (LIBOR03M + 4.000%) due 10/10/2024 ~

      41         41  

Westmoreland Coal Co.

 

TBD% due 12/16/2020 ^(e)

      955         250  

TBD% - 10.581% (LIBOR03M + 8.250%) due 05/31/2020 ~

      1,580         1,612  
       

 

 

 

Total Loan Participations and Assignments
(Cost $31,963)

      29,720  
       

 

 

 
CORPORATE BONDS & NOTES 54.8%

 

BANKING & FINANCE 23.4%

 

AGFC Capital Trust

 

4.089% (US0003M + 1.750%) due 01/15/2067 ~

      1,800         1,089  

Ally Financial, Inc.

 

8.000% due 11/01/2031

      4,616         5,586  

Ambac LSNI LLC

 

7.337% due 02/12/2023 •

      256         258  

Ardonagh Midco PLC

 

8.375% due 07/15/2023

  GBP     4,148         5,529  

Athene Holding Ltd.

 

4.125% due 01/12/2028

  $     54         51  

Avolon Holdings Funding Ltd.

 

5.500% due 01/15/2023

      176         176  

AXA Equitable Holdings, Inc.

 

4.350% due 04/20/2028

      126         123  

5.000% due 04/20/2048

      74         71  

Banco Bilbao Vizcaya Argentaria S.A.

 

6.750% due 02/18/2020 •(i)(j)

  EUR     1,600         1,974  

Banco Espirito Santo S.A.

 

4.000% due 01/21/2019 ^(e)

      8,100         2,889  

Banco Santander S.A.

 

6.250% due 09/11/2021 •(i)(j)

      500         624  

Barclays Bank PLC

 

7.625% due 11/21/2022 (j)

  $     4,400         4,771  

Barclays PLC

 

3.250% due 01/17/2033

  GBP     200         245  

6.500% due 09/15/2019 •(i)(j)

  EUR     3,200         3,901  

7.875% due 09/15/2022 •(i)(j)

  GBP     415         585  

8.000% due 12/15/2020 •(i)(j)

  EUR     4,100         5,346  

Blackstone CQP Holdco LP

 

6.000% due 08/18/2021

  $     900         900  

6.500% due 03/20/2021

      5,000         5,031  

Brighthouse Holdings LLC

 

6.500% due 07/27/2037 (i)

      70         68  

Brookfield Finance, Inc.

 

3.900% due 01/25/2028

      90         85  

4.700% due 09/20/2047

      200         191  

Cantor Fitzgerald LP

 

6.500% due 06/17/2022 (m)

      8,500         8,999  

CBL & Associates LP

 

5.950% due 12/15/2026 (m)

      2,288         1,976  

Co-operative Group Holdings Ltd.

 

7.500% due 07/08/2026

  GBP     5,800         9,140  

Cooperatieve Rabobank UA

 

6.625% due 06/29/2021 •(i)(j)

  EUR     1,200         1,597  

Credit Agricole S.A.

 

7.875% due 01/23/2024 •(i)(j)

  $     500         533  

Credit Suisse Group AG

 

7.500% due 07/17/2023 •(i)(j)

      200         207  

7.500% due 12/11/2023 •(i)(j)

      7,243         7,740  

Emerald Bay S.A.

 

0.000% due 10/08/2020 (h)

  EUR     1,873         2,056  

Equinix, Inc.

 

2.875% due 03/15/2024

      100         117  

2.875% due 02/01/2026

      100         114  

Flagstar Bancorp, Inc.

 

6.125% due 07/15/2021

  $     3,500         3,652  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Fortress Transportation & Infrastructure Investors LLC

 

6.750% due 03/15/2022

  $     324     $     338  

Freedom Mortgage Corp.

 

8.250% due 04/15/2025

      63         61  

GSPA Monetization Trust

 

6.422% due 10/09/2029

      3,571         4,050  

HSBC Holdings PLC

 

6.000% due
09/29/2023 •(i)(j)

  EUR     3,530         4,679  

6.500% due
03/23/2028 •(i)(j)

  $     500         491  

Hunt Cos., Inc.

 

6.250% due 02/15/2026

      26         24  

iStar, Inc.

 

4.625% due 09/15/2020

      14         14  

5.250% due 09/15/2022

      49         48  

Jefferies Finance LLC

 

6.875% due 04/15/2022 (m)

      6,850         6,937  

7.375% due 04/01/2020

      2,890         2,955  

7.500% due 04/15/2021

      347         356  

Kennedy-Wilson, Inc.

 

5.875% due 04/01/2024

      68         67  

Life Storage LP

 

3.875% due 12/15/2027

      28         26  

Lloyds Banking Group PLC

 

7.625% due
06/27/2023 •(i)(j)

  GBP     2,300         3,340  

7.875% due
06/27/2029 •(i)(j)

      250         383  

LoanCore Capital Markets LLC

 

6.875% due 06/01/2020

  $     200         203  

Meiji Yasuda Life Insurance Co.

 

5.100% due 04/26/2048 •

      200         204  

MetLife, Inc.

 

5.875% due 03/15/2028 •(i)

      74         76  

Nationstar Mortgage LLC

 

6.500% due 07/01/2021

      730         734  

Nationwide Building Society

 

10.250% ~(i)

  GBP     13         2,498  

Navient Corp.

 

4.875% due 06/17/2019

  $     500         505  

5.625% due 08/01/2033

      63         54  

6.500% due 06/15/2022

      80         82  

Oppenheimer Holdings, Inc.

 

6.750% due 07/01/2022

      1,616         1,644  

Provident Funding Associates LP

 

6.375% due 06/15/2025

      26         25  

Royal Bank of Scotland Group PLC

 

7.500% due
08/10/2020 •(i)(j)(m)

      3,080         3,188  

8.000% due
08/10/2025 •(i)(j)(m)

      5,190         5,525  

8.625% due
08/15/2021 •(i)(j)

      2,700         2,920  

Santander UK Group Holdings PLC

 

6.750% due
06/24/2024 •(i)(j)

  GBP     2,025         2,764  

7.375% due
06/24/2022 •(i)(j)

      4,100         5,660  

Societe Generale S.A.

 

6.750% due 04/06/2028 •(i)(j)

  $     200         192  

Spirit Realty LP

 

4.450% due 09/15/2026 (m)

      1,500         1,444  

Springleaf Finance Corp.

 

5.625% due 03/15/2023

      1,200         1,206  

6.125% due 05/15/2022

      674         693  

6.875% due 03/15/2025

      224         228  

7.125% due 03/15/2026

      203         207  

8.250% due 10/01/2023

      180         199  

Tesco Property Finance PLC

 

5.411% due 07/13/2044

  GBP     4,360         6,436  

6.052% due 10/13/2039

      2,537         3,932  

Unigel Luxembourg S.A.

 

10.500% due 01/22/2024

  $     570         596  

WeWork Cos., Inc.

 

7.875% due 05/01/2025

      74         72  
       

 

 

 
            140,680  
       

 

 

 
INDUSTRIALS 24.9%

 

Air Canada Pass-Through Trust

 

3.700% due 07/15/2027

      24         23  
 

 

68   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2018

 

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

Altice Financing S.A.

 

6.625% due 02/15/2023 (m)

  $     700     $     710  

7.500% due 05/15/2026

      3,200         3,124  

Altice France S.A.

 

7.375% due 05/01/2026 (m)

      5,564         5,547  

Altice Luxembourg S.A.

 

7.250% due 05/15/2022

  EUR     2,070         2,487  

7.750% due 05/15/2022

  $     3,455         3,451  

Associated Materials LLC

 

9.000% due 01/01/2024

      548         580  

Bacardi Ltd.

 

4.450% due 05/15/2025

      100         100  

4.700% due 05/15/2028

      100         99  

Baffinland Iron Mines Corp.

 

8.750% due 07/15/2026

      1,300         1,305  

BMC Software Finance, Inc.

 

8.125% due 07/15/2021

      2,890         2,962  

Caesars Resort Collection LLC

 

5.250% due 10/15/2025

      8         8  

Centene Corp.

 

5.375% due 06/01/2026

      82         84  

Charles River Laboratories International, Inc.

 

5.500% due 04/01/2026

      26         26  

Charter Communications Operating LLC

 

4.200% due 03/15/2028

      137         132  

Cheniere Energy Partners LP

 

5.250% due 10/01/2025

      33         33  

Chesapeake Energy Corp.

 

5.589% (US0003M + 3.250%) due 04/15/2019 ~

      134         135  

Clear Channel Worldwide Holdings, Inc.

 

6.500% due 11/15/2022

      650         666  

7.625% due 03/15/2020

      3,140         3,159  

Cleveland-Cliffs, Inc.

 

4.875% due 01/15/2024

      34         33  

Community Health Systems, Inc.

 

5.125% due 08/01/2021 (m)

      3,070         2,919  

6.250% due 03/31/2023

      7,071         6,611  

8.625% due 01/15/2024

      254         263  

CSN Islands Corp.

 

6.875% due 09/21/2019 (m)

      200         200  

CSN Resources S.A.

 

6.500% due 07/21/2020

      1,214         1,175  

Diamond Resorts International, Inc.

 

10.750% due 09/01/2024

      2,500         2,619  

DriveTime Automotive Group, Inc.

 

8.000% due 06/01/2021

      800         816  

Exela Intermediate LLC

 

10.000% due 07/15/2023

      120         124  

Ferroglobe PLC

 

9.375% due 03/01/2022

      1,500         1,547  

First Quantum Minerals Ltd.

 

6.500% due 03/01/2024

      1,452         1,419  

6.875% due 03/01/2026

      1,600         1,568  

7.000% due 02/15/2021

      598         605  

Ford Motor Co.

 

7.700% due 05/15/2097 (m)

      9,770           11,344  

Fresh Market, Inc.

 

9.750% due 05/01/2023

      7,590         5,389  

Frontier Finance PLC

 

8.000% due 03/23/2022

  GBP     4,600         6,264  

Full House Resorts, Inc.

 

8.575% due 01/31/2024 «

  $     298         292  

General Electric Co.

 

5.000% due 01/21/2021 •(i)

      164         161  

Hadrian Merger Sub, Inc.

 

8.500% due 05/01/2026

      40         38  

Harland Clarke Holdings Corp.

 

8.375% due 08/15/2022

      54         52  

HCA, Inc.

 

4.500% due 02/15/2027

      940         916  

7.500% due 11/15/2095

      1,200         1,185  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Hilton Domestic Operating Co., Inc.

 

5.125% due 05/01/2026

  $     135     $     136  

iHeartCommunications, Inc.

 

9.000% due 12/15/2019 ^(e)

      1,243         976  

9.000% due 03/01/2021 ^(e)

      3,144         2,421  

9.000% due 09/15/2022 ^(e)

      3,450         2,665  

IHS Markit Ltd.

 

4.000% due 03/01/2026

      4         4  

Intelsat Jackson Holdings S.A.

 

7.250% due 10/15/2020

      2,276         2,296  

9.750% due 07/15/2025

      120         129  

Intelsat Luxembourg S.A.

 

7.750% due 06/01/2021

      6,888         6,578  

8.125% due 06/01/2023

      7,535         6,499  

Intrepid Aviation Group Holdings LLC

 

6.875% due 02/15/2019

      9,155         9,171  

8.500% due 08/15/2021

      7,450         7,524  

Kinder Morgan, Inc.

 

7.800% due 08/01/2031 (m)

      3,500         4,322  

Mallinckrodt International Finance S.A.

 

5.500% due 04/15/2025

      50         40  

Matterhorn Merger Sub LLC

 

8.500% due 06/01/2026

      8         8  

Metinvest BV

 

8.500% due 04/23/2026

      1,000         969  

New Albertson’s LP

 

6.570% due 02/23/2028

      6,800         4,632  

Odebrecht Oil & Gas Finance Ltd.

 

0.000% due 08/30/2018 (h)(i)

      401         7  

0.000% due 08/31/2018 (h)(i)

      700         13  

Park Aerospace Holdings Ltd.

 

3.625% due 03/15/2021

      82         80  

4.500% due 03/15/2023

      163         156  

5.250% due 08/15/2022

      13         13  

5.500% due 02/15/2024

      36         36  

Pelabuhan Indonesia Persero PT

 

4.500% due 05/02/2023

      200         200  

Petroleos Mexicanos

 

6.500% due 03/13/2027

      190         193  

6.750% due 09/21/2047

      50         46  

PetSmart, Inc.

 

5.875% due 06/01/2025

      112         89  

Pisces Midco, Inc.

 

8.000% due 04/15/2026

      173         179  

Pitney Bowes, Inc.

 

4.700% due 04/01/2023

      34         31  

Platin 1426 GmbH

 

6.875% due 06/15/2023 «(c)

  EUR     400         453  

Prime Security Services Borrower LLC

 

9.250% due 05/15/2023

  $     1,310           1,405  

QVC, Inc.

 

5.950% due 03/15/2043

      4,515         4,213  

Radiate Holdco LLC

 

6.875% due 02/15/2023

      70         68  

Rockpoint Gas Storage Canada Ltd.

 

7.000% due 03/31/2023

      8         8  

Russian Railways via RZD Capital PLC

 

7.487% due 03/25/2031

  GBP     1,300         2,130  

Sabine Pass Liquefaction LLC

 

5.875% due 06/30/2026 (m)

  $     2,500         2,724  

Safeway, Inc.

 

7.250% due 02/01/2031

      245         241  

Scientific Games International, Inc.

 

5.000% due 10/15/2025

      12         12  

Shelf Drilling Holdings Ltd.

 

8.250% due 02/15/2025

      37         38  

SoftBank Group Corp.

 

4.000% due 04/20/2023

  EUR     4,800         5,873  

Spirit Issuer PLC

 

3.368% (BP0003M + 2.700%) due 12/28/2031 ~

  GBP     1,000         1,290  

6.582% due 12/28/2027

      700         942  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

Sunoco LP

 

4.875% due 01/15/2023

  $     66     $     65  

T-Mobile USA, Inc.

 

4.750% due 02/01/2028

      20         19  

Telenet Finance Luxembourg Notes SARL

 

5.500% due 03/01/2028

      200         183  

Teva Pharmaceutical Finance Netherlands BV

 

3.250% due 04/15/2022

  EUR     300         367  

Transocean Pontus Ltd.

 

6.125% due 08/01/2025

  $     152         155  

Unique Pub Finance Co. PLC

 

5.659% due 06/30/2027

  GBP     3,595         5,217  

6.542% due 03/30/2021

      889         1,231  

United Group BV

 

4.375% due 07/01/2022

  EUR     100         120  

4.875% due 07/01/2024

      100         120  

Univision Communications, Inc.

 

5.125% due 02/15/2025

  $     400         372  

UPCB Finance Ltd.

 

3.625% due 06/15/2029

  EUR     190         221  

ViaSat, Inc.

 

5.625% due 09/15/2025

  $     94         89  

VOC Escrow Ltd.

 

5.000% due 02/15/2028

      74         71  

Westmoreland Coal Co.

 

8.750% due 01/01/2022 ^(e)

      6,130         1,732  

Wind Tre SpA

 

2.625% due 01/20/2023

  EUR     200         223  

2.750% due 01/20/2024 •

      200         220  

3.125% due 01/20/2025

      200         219  
       

 

 

 
            149,605  
       

 

 

 
UTILITIES 6.5%

 

AT&T, Inc.

 

4.900% due 08/15/2037

  $     366         354  

5.150% due 02/15/2050 (m)

      434         417  

5.300% due 08/15/2058

      978         926  

5.450% due 03/01/2047

      60         60  

DTEK Finance PLC (10.750% Cash or 10.750% PIK)

 

10.750% due 12/31/2024 (d)

      2,841         2,938  

Enable Midstream Partners LP

 

4.950% due 05/15/2028

      62         62  

Gazprom Neft OAO Via GPN Capital S.A.

 

6.000% due 11/27/2023 (m)

      9,600         10,039  

Northwestern Bell Telephone

 

7.750% due 05/01/2030

      12,625         13,502  

Odebrecht Drilling Norbe Ltd.

 

6.350% due 12/01/2021

      122         120  

Odebrecht Drilling Norbe Ltd. (6.350% Cash or 7.350% PIK)

 

7.350% due 12/01/2026 (d)

      213         116  

Odebrecht Offshore Drilling Finance Ltd.

 

6.720% due 12/01/2022

      1,968         1,879  

Odebrecht Offshore Drilling Finance Ltd. (6.720% Cash or 7.720% PIK)

 

7.720% due 12/01/2026 (d)

      6,348         1,889  

Petrobras Global Finance BV

 

5.999% due 01/27/2028

      2,764         2,620  

6.125% due 01/17/2022

      159         165  

6.625% due 01/16/2034

  GBP     100         132  

7.375% due 01/17/2027

  $     772         804  

Rio Oil Finance Trust

 

8.200% due 04/06/2028

      250         257  

9.250% due 07/06/2024

      2,031         2,194  

Sprint Corp.

 

7.625% due 03/01/2026

      282         293  
       

 

 

 
          38,767  
       

 

 

 

Total Corporate Bonds & Notes
(Cost $329,611)

      329,052  
       

 

 

 
 

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2018   69


Schedule of Investments PIMCO Income Strategy Fund II (Cont.)

 

        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 
CONVERTIBLE BONDS & NOTES 0.8%

 

INDUSTRIALS 0.8%

 

Caesars Entertainment Corp.

 

5.000% due 10/01/2024

  $     1,066     $     1,918  

DISH Network Corp.

 

3.375% due 08/15/2026

      3,400         3,097  
       

 

 

 

Total Convertible Bonds & Notes (Cost $5,390)

      5,015  
       

 

 

 
MUNICIPAL BONDS & NOTES 7.7%

 

CALIFORNIA 1.2%

 

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

 

7.500% due 10/01/2030

      1,200         1,313  

San Francisco, California City & County Redevelopment Agency Tax Allocation Bonds, Series 2009

 

8.406% due 08/01/2039

      1,650         2,432  

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

 

7.942% due 10/01/2038

      3,500         3,687  
       

 

 

 
          7,432  
       

 

 

 
ILLINOIS 0.2%

 

Chicago, Illinois General Obligation Bonds, Series 2015

 

7.375% due 01/01/2033

      180         203  

7.750% due 01/01/2042

      330         360  

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

 

6.725% due 04/01/2035

      35         38  

7.350% due 07/01/2035

      20         22  

Illinois State General Obligation Bonds, Series 2003

 

5.100% due 06/01/2033

      280         272  
       

 

 

 
          895  
       

 

 

 
OHIO 3.7%

 

Ohio State University Revenue Bonds, Series 2011

 

4.800% due 06/01/2111

      21,000         22,476  
       

 

 

 
VIRGINIA 0.1%

 

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

 

6.706% due 06/01/2046

      820         812  
       

 

 

 
WEST VIRGINIA 2.5%

 

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

 

0.000% due 06/01/2047 (h)

      45,700         2,829  

7.467% due 06/01/2047

      12,070         12,027  
       

 

 

 
          14,856  
       

 

 

 

Total Municipal Bonds & Notes (Cost $38,928)

      46,471  
       

 

 

 
U.S. GOVERNMENT AGENCIES 3.3%

 

Fannie Mae

       

3.500% due 02/25/2042 (a)

      940         118  

4.186% (- 1.0*LIBOR01M + 6.250%) due 01/25/2040 ~(a)

      344         44  

4.500% due 11/25/2042 (a)

      2,465         392  

Freddie Mac

       

0.000% due 02/25/2046 - 08/25/2046 (b)(h)

      9,633         7,242  

0.100% due 02/25/2046 - 08/25/2046 (a)

      121,142         295  

2.557% due 11/25/2055 «~

      8,648         5,201  

3.000% due 02/15/2033 (a)

      2,045         222  

3.500% due 12/15/2032 (a)

      3,395         507  

6.421% (- 2.667*LIBOR01M + 12.000%) due 09/15/2035 ~

      776         788  

9.614% (US0001M + 7.550%) due 12/25/2027 ~

      2,888         3,593  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

12.814% (US0001M + 10.750%) due 03/25/2025 ~

  $     729     $     989  

Ginnie Mae

       

3.500% due 06/20/2042 - 10/20/2042 (a)

      730         105  

4.000% due 10/16/2042 - 10/20/2042 (a)

      448         62  
       

 

 

 

Total U.S. Government Agencies (Cost $18,861)

      19,558  
       

 

 

 
NON-AGENCY MORTGAGE-BACKED SECURITIES 20.5%

 

Banc of America Alternative Loan Trust

 

6.000% due 01/25/2036 ^

      103         101  

Banc of America Funding Corp.

       

6.000% due 01/25/2037

      6,296         6,003  

Banc of America Funding Trust

       

4.050% due 01/20/2047 ^~

      1,181         1,142  

BCAP LLC Trust

       

3.736% due 05/26/2036 ~

      76         4  

3.832% due 07/26/2037 ~

      9,785         8,853  

3.864% due 08/28/2037 ~

      7,146         6,949  

3.870% due 08/26/2037 ~

      13,773         10,304  

4.111% due 05/26/2037 ~

      1,708         748  

4.417% due 09/26/2036 ~

      5,153         5,062  

4.945% due 03/26/2037

      856         893  

5.750% due 12/26/2035 ~

      4,169         3,912  

6.250% due 11/26/2036

      4,588         4,011  

12.786% due 06/26/2036 ~

      418         216  

Bear Stearns ALT-A Trust

 

2.564% due 01/25/2036 ^•

      1,373         1,436  

3.626% due 11/25/2036 ^~

      457         387  

3.683% due 09/25/2047 ^~

      6,499         5,375  

3.835% due 11/25/2035 ~

      6,885         6,078  

4.206% due 09/25/2035 ^~

      599         461  

CD Mortgage Trust

 

5.688% due 10/15/2048

      2,155         1,121  

Chase Mortgage Finance Trust

 

3.537% due 12/25/2035 ^~

      9         9  

5.500% due 05/25/2036 ^

      21         18  

Citicorp Mortgage Securities Trust

 

5.500% due 04/25/2037

      116         116  

6.000% due 09/25/2037

      1,152         1,191  

Commercial Mortgage Loan Trust

 

6.052% due 12/10/2049 ~

      2,126         1,317  

Countrywide Alternative Loan Resecuritization Trust

 

6.000% due 05/25/2036 ^

      2,645         2,193  

6.000% due 08/25/2037 ^~

      1,196         934  

Countrywide Alternative Loan Trust

 

3.723% due 04/25/2036 ^~

      1,306         1,201  

5.500% due 03/25/2035

      311         234  

5.500% due 01/25/2036

      657         584  

5.750% due 01/25/2035

      353         354  

5.750% due 02/25/2035

      407         397  

5.750% due 12/25/2036 ^

      844         603  

6.000% due 02/25/2035

      415         403  

6.000% due 04/25/2036

      588         455  

6.000% due 04/25/2037 ^

      1,898         1,387  

6.250% due 11/25/2036 ^

      849         753  

6.250% due 12/25/2036 ^•

      614         464  

6.500% due 08/25/2036 ^

      517         344  

Countrywide Home Loan Mortgage Pass-Through Trust

 

2.644% due 03/25/2035 ^•

      5,103         4,577  

6.000% due 07/25/2037

      1,782         1,450  

6.250% due 09/25/2036 ^

      620         498  

Credit Suisse First Boston Mortgage-Backed Pass-through Certificates

 

6.000% due 11/25/2035 ^

      474         403  

Credit Suisse Mortgage Capital Certificates

 

4.040% due 10/26/2036 ~

      7,525         5,046  

Credit Suisse Mortgage Capital Mortgage-Backed Trust

 

5.750% due 04/25/2036 ^

      167         129  

Epic Drummond Ltd.

 

0.000% due 01/25/2022 •

  EUR     137         159  

First Horizon Mortgage Pass-Through Trust

 

3.750% due 11/25/2035 ^~

  $     199         176  

4.039% due 05/25/2037 ^~

      351         295  
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 

GS Mortgage Securities Trust

 

5.622% due 11/10/2039

  $     972     $     839  

IndyMac Mortgage Loan Trust

 

6.500% due 07/25/2037 ^

      3,508         2,265  

JPMorgan Alternative Loan Trust

 

3.415% due 03/25/2037 ^~

      1,129         1,069  

3.630% due 03/25/2036 ^~

      2,108         1,971  

3.767% due 05/25/2036 ^~

      1,922         1,561  

JPMorgan Chase Commercial Mortgage Securities Trust

 

5.623% due 05/12/2045

      1,288         1,129  

JPMorgan Mortgage Trust

 

3.686% due 10/25/2035 ~

      291         283  

3.689% due 02/25/2036 ^~

      380         323  

6.500% due 09/25/2035

      114         110  

LB-UBS Commercial Mortgage Trust

 

5.407% due 11/15/2038

      858         663  

5.562% due 02/15/2040 ~

      909         574  

Lehman Mortgage Trust

 

6.000% due 07/25/2037 ^

      965         933  

6.500% due 09/25/2037 ^

      2,639         1,954  

Lehman XS Trust

 

2.284% due 06/25/2047 •

      2,121         1,922  

MASTR Asset Securitization Trust

 

6.500% due 11/25/2037 ^

      513         333  

Merrill Lynch Mortgage Investors Trust

 

3.564% due 03/25/2036 ^~

      1,991         1,536  

Morgan Stanley Capital Trust

 

6.120% due 06/11/2049 ~

      482         487  

Nomura Asset Acceptance Corp. Alternative Loan Trust

 

4.976% due 05/25/2035 ^

      13         10  

Residential Accredit Loans, Inc. Trust

 

4.729% due 12/26/2034 ^~

      1,124         894  

6.000% due 08/25/2036 ^

      362         330  

Residential Asset Securitization Trust

 

5.750% due 02/25/2036 ^

      1,138         850  

6.000% due 07/25/2037 ^

      1,533         1,049  

6.250% due 09/25/2037 ^

      2,797         1,953  

Residential Funding Mortgage Securities, Inc. Trust

 

4.355% due 09/25/2035 ~

      819         670  

4.916% due 08/25/2036 ^~

      1,184         1,109  

Structured Adjustable Rate Mortgage Loan Trust

 

3.668% due 11/25/2036 ^~

      2,633         2,562  

3.834% due 07/25/2036 ^~

      523         455  

3.855% due 01/25/2036 ^~

      2,338         1,826  

Suntrust Adjustable Rate Mortgage Loan Trust

 

3.675% due 02/25/2037 ^~

      294         266  

WaMu Mortgage Pass-Through Certificates Trust

 

3.403% due 02/25/2037 ^~

      591         574  

3.405% due 10/25/2036 ^~

      874         804  

3.582% due 05/25/2037 ^~

      1,437         1,371  

3.898% due 07/25/2037 ^~

      1,024         954  

Wells Fargo Mortgage-Backed Securities Trust

 

3.908% due 07/25/2036 ^~

      276         279  

5.750% due 03/25/2037 ^

      248         245  
       

 

 

 

Total Non-Agency Mortgage-Backed Securities (Cost $110,789)

      122,899  
       

 

 

 
ASSET-BACKED SECURITIES 19.6%

 

Adagio CLO DAC

 

0.000% due 04/30/2031 ~

  EUR     1,800         1,761  

Airspeed Ltd.

 

2.342% due 06/15/2032 •

  $     3,097         2,886  

Apidos CLO

 

0.000% due 07/22/2026 ~

      1,500         794  

0.000% due 01/20/2031 ~

      4,500         4,063  

Argent Securities Trust

 

2.254% due 03/25/2036 •

      3,879         2,398  

Bear Stearns Asset-Backed Securities Trust

 

2.204% due 10/25/2036 ^~

      5,033         5,270  

6.500% due 10/25/2036 ^

      362         281  

Belle Haven ABS CDO Ltd.

 

2.587% due 07/05/2046 •

      180,259         1,262  
 

 

70   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2018

 

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

CIFC Funding Ltd.

 

0.000% due 05/24/2026 ~

  $     2,400     $     1,704  

0.000% due 07/22/2026 ~

      1,500         848  

Citigroup Mortgage Loan Trust

 

2.214% due 12/25/2036 •

      15,646         8,269  

2.224% due 12/25/2036 •

      4,044         2,671  

Cork Street CLO Designated Activity Co.

 

0.000% due 11/27/2028 ~

  EUR     2,366         2,820  

3.600% due 11/27/2028

      1,062         1,245  

4.500% due 11/27/2028

      929         1,090  

6.200% due 11/27/2028

      1,150         1,350  

Countrywide Asset-Backed Certificates

 

2.204% due 12/25/2046 •

  $     14,454         13,043  

2.204% due 06/25/2047 ^•

      1,658         1,529  

2.234% due 03/25/2037 •

      1,817         1,770  

2.264% due 06/25/2047 •

      10,360         9,243  

Countrywide Asset-Backed Certificates Trust

 

2.814% due 11/25/2035 •

      4,008         4,135  

Fremont Home Loan Trust

 

2.214% due 01/25/2037 •

      14,665         8,683  

Grosvenor Place CLO BV

 

0.000% due 04/30/2029 ~

  EUR     500         470  

Home Equity Mortgage Loan Asset-Backed Trust

 

2.224% due 07/25/2037 •

  $     3,197         2,112  

HSI Asset Securitization Corp. Trust

 

0.000% due 10/25/2036 (h)

      3,251         1,316  

Lehman XS Trust

 

6.290% due 06/24/2046

      3,083         3,122  

Long Beach Mortgage Loan Trust

 

2.364% due 01/25/2036 •

      4,685         4,217  

Merrill Lynch Mortgage Investors Trust

 

2.224% due 04/25/2037 •

      550         350  

Morgan Stanley Mortgage Loan Trust

 

6.250% due 07/25/2047 ^~

      701         498  

SLM Student Loan EDC Repackaging Trust

 

0.000% due 10/28/2029 «(h)

      1         1,474  

SLM Student Loan Trust

 

0.000% due 01/25/2042 «(h)

      4         2,981  

SoFi Professional Loan Program LLC

 

0.000% due 05/25/2040 «(h)

      4,400         2,547  

0.000% due 07/25/2040 «(h)

      21         1,268  

0.000% due 09/25/2040 «(h)

      1,758         1,054  

South Coast Funding Ltd.

 

2.953% due 08/10/2038 •

      12,278         2,395  

Taberna Preferred Funding Ltd.

 

2.723% due 12/05/2036 •

      5,154         4,536  

2.749% due 08/05/2036 •

      427         363  

2.749% due 08/05/2036 ^•

      8,425         7,161  

2.807% due 07/05/2035 •

      4,935         4,639  
       

 

 

 

Total Asset-Backed Securities (Cost $112,240)

      117,618  
       

 

 

 
        PRINCIPAL
AMOUNT
(000S)
        MARKET
VALUE
(000S)
 
SOVEREIGN ISSUES 4.1%

 

Argentina Government International Bond

 

2.260% due 12/31/2038

  EUR     3,270     $     2,357  

3.375% due 01/15/2023

      200         214  

5.250% due 01/15/2028

      200         205  

6.250% due 11/09/2047

      100         96  

7.820% due 12/31/2033

      9,789         11,554  

30.131% (BADLARPP) due 10/04/2022 ~

  ARS     58         3  

35.842% (BADLARPP + 2.500%) due 03/11/2019 ~

      200         7  

36.087% (BADLARPP + 3.250%) due 03/01/2020 ~

      1,200         42  

36.495% (BADLARPP + 2.000%) due 04/03/2022 ~

      63,442         2,075  

40.000% (ARPP7DRR) due 06/21/2020 ~

      105,103         3,859  

Autonomous Community of Catalonia

 

4.900% due 09/15/2021

  EUR     1,500         1,911  

Egypt Government International Bond

 

4.750% due 04/16/2026

      300         345  

5.625% due 04/16/2030

      300         338  

Peru Government International Bond

 

6.350% due 08/12/2028

  PEN     2,800         914  

Republic of Greece Government International Bond

 

4.750% due 04/17/2019

  EUR     300         360  

Venezuela Government International Bond

 

6.000% due 12/09/2020 ^(e)

  $     248         66  

9.250% due 09/15/2027 ^(e)

      315         92  
       

 

 

 

Total Sovereign Issues (Cost $28,981)

 

        24,438  
       

 

 

 
        SHARES            
COMMON STOCKS 1.6%

 

CONSUMER DISCRETIONARY 0.9%

 

Caesars Entertainment Corp. (f)

    486,164         5,494  
       

 

 

 
ENERGY 0.1%

 

Forbes Energy Services Ltd. (f)(k)

    21,825         185  

Ocean Rig UDW, Inc. (f)

      16,639         467  
       

 

 

 
          652  
       

 

 

 
FINANCIALS 0.6%

 

TIG FinCo PLC «(k)

      2,072,442         3,264  
       

 

 

 

Total Common Stocks (Cost $9,579)

 

      9,410  
       

 

 

 
WARRANTS 0.0%

 

INDUSTRIALS 0.0%

 

Sequa Corp. - Exp. 04/28/2024 «

    819,000         205  
       

 

 

 

Total Warrants (Cost $0)

          205  
       

 

 

 
        SHARES         MARKET
VALUE
(000S)
 
PREFERRED SECURITIES 3.9%

 

BANKING & FINANCE 1.3%

 

Farm Credit Bank of Texas

       

10.000% due 12/15/2020 (i)(k)

      7,150     $     8,151  
       

 

 

 
INDUSTRIALS 2.6%

 

Sequa Corp.

       

9.000% «

      16,859         15,300  
       

 

 

 

Total Preferred Securities (Cost $23,612)

 

      23,451  
       

 

 

 
REAL ESTATE INVESTMENT TRUSTS 1.4%

 

REAL ESTATE 1.4%

 

VICI Properties, Inc.

      423,584         8,620  
       

 

 

 

Total Real Estate Investment Trusts
(Cost $5,525)

 

      8,620  
       

 

 

 
SHORT-TERM INSTRUMENTS 2.6%

 

REPURCHASE AGREEMENTS (l) 1.9%

 

          11,433  
       

 

 

 
        PRINCIPAL
AMOUNT
(000S)
           
ARGENTINA TREASURY BILLS 0.1%

 

22.210% due 09/14/2018 - 09/19/2018 (g)(h)

  ARS     18,970         693  

1.502% due 08/24/2018 - 09/14/2018 (g)(h)

  $     158         158  
       

 

 

 
          851  
       

 

 

 
U.S. TREASURY BILLS 0.6%

 

1.974% due 09/27/2018 - 10/18/2018 (g)(h)(o)(q)

      3,423         3,411  
       

 

 

 
Total Short-Term Instruments (Cost $15,882)

 

      15,695  
       

 

 

 
       
Total Investments in Securities (Cost $731,361)

 

      752,152  
       
Total Investments 125.2% (Cost $731,361)       $       752,152  

Financial Derivative Instruments (n)(p) 0.0%

(Cost or Premiums, net $18,416)

 

 

      (269
 
Preferred Shares (15.4)%     (92,450
Other Assets and Liabilities, net (9.8)%

 

      (58,543
       

 

 

 
Net Assets Applicable to Common Shareholders 100.0%

 

  $     600,890  
       

 

 

 
 

NOTES TO SCHEDULE OF INVESTMENTS:

 

*

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

^

Security is in default.

«

Security valued using significant unobservable inputs (Level 3).

~

Variable or Floating rate security. Rate shown is the rate in effect as of period end. Certain variable rate securities are not based on a published reference rate and spread, rather are determined by the issuer or agent and are based on current market conditions. Reference rate is as of reset date, which may vary by security. These securities may not indicate a reference rate and/or spread in their description.

Rate shown is the rate in effect as of period end. The rate may be based on a fixed rate, a capped rate or a floor rate and may convert to a variable or floating rate in the future. These securities do not indicate a reference rate and spread in their description.

 

All or a portion of this amount represent unfunded loan commitments. The interest rate for the unfunded portion will be determined at the time of funding. See Note 4, Securities and Other Investments, in the Notes to Financial Statements for more information regarding unfunded loan commitments.

(a)

Interest only security.

(b)

Principal only security.

(c)

When-issued security.

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2018   71


Schedule of Investments PIMCO Income Strategy Fund II (Cont.)

 

(d)

Payment in-kind security.

(e)

Security is not accruing income as of the date of this report.

(f)

Security did not produce income within the last twelve months.

(g)

Coupon represents a weighted average yield to maturity.

(h)

Zero coupon security.

(i)

Perpetual maturity; date shown, if applicable, represents next contractual call date.

(j)

Contingent convertible security.

 

(k)  RESTRICTED SECURITIES:

 

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

Farm Credit Bank of Texas

10.000% due 12/15/2020

         09/17/2013     $ 8,419     $ 8,151       1.36

Forbes Energy Services Ltd.

         10/09/2014 - 12/03/2014       944       185       0.03  

TIG FinCo PLC

         04/02/2015 - 07/20/2017       2,776       3,264       0.54  
        

 

 

   

 

 

   

 

 

 
  $     12,139     $     11,600       1.93
 

 

 

   

 

 

   

 

 

 

 

BORROWINGS AND OTHER FINANCING TRANSACTIONS

 

(l)  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)
 
BPS     2.010     07/31/2018       08/01/2018     $     7,000     U.S. Treasury Inflation Protected Securities 1.375% due 02/15/2044   $ (7,140   $ 7,000     $ 7,000  
FICC     1.500       07/31/2018       08/01/2018       4,433     U.S. Treasury Notes 2.625% due 11/15/2020     (4,524     4,433       4,433  
           

 

 

   

 

 

   

 

 

 

Total Repurchase Agreements

 

    $     (11,664   $     11,433     $     11,433  
   

 

 

   

 

 

   

 

 

 

 

REVERSE REPURCHASE AGREEMENTS:

 

Counterparty   Borrowing
Rate(2)
    Settlement
Date
    Maturity
Date
    Amount
Borrowed(2)
    Payable for
Reverse
Repurchase
Agreements
 

BCY

    (0.500 )%      06/28/2018       TBD (3)     $ (738   $ (738
    0.950       06/18/2018       TBD (3)       (1,217     (1,218

BPS

    2.450       06/01/2018       09/04/2018       (5,161     (5,182

BRC

    0.000       07/26/2018       TBD (3)       (202     (202

CIW

    2.450       07/13/2018       08/10/2018           (3,981     (3,986

JML

    2.550       07/18/2018       08/20/2018       (8,122     (8,130

RBC

    2.490       02/07/2018       08/07/2018       (2,464     (2,494
    2.590       02/07/2018       08/07/2018       (6,085     (6,162

RDR

    2.520       06/12/2018       09/12/2018       (3,788     (3,801

SOG

    2.850       07/10/2018       10/10/2018       (5,089     (5,098

UBS

    2.560       06/11/2018       09/10/2018       (7,321     (7,348
    2.570       07/09/2018       10/09/2018       (5,528     (5,537
    2.860       05/31/2018       08/31/2018       (2,772     (2,786
    2.910       05/14/2018       08/14/2018       (4,847     (4,878
         

 

 

 

Total Reverse Repurchase Agreements

 

  $     (57,560
         

 

 

 

 

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 pledged/(received) as of July 31, 2018:

 

Counterparty   Repurchase
Agreement
Proceeds
to be
Received(1)
    Payable for
Reverse
Repurchase
Agreements
    Payable for
Sale-Buyback
Transactions
     Total
Borrowings and
Other Financing
Transactions
    Collateral
Pledged/(Received)
    Net  Exposure(4)  

Global/Master Repurchase Agreement

 

BCY

  $ 0     $     (1,956   $     0      $     (1,956   $ 2,195     $ 239  

BPS

        7,000       (5,182     0        1,818       (1,951         (133

BRC

    0       (202     0        (202     201       (1

CIW

    0       (3,986     0        (3,986     4,018       32  

FICC

    4,433       0       0        4,433           (4,524     (91

JML

    0       (8,130     0        (8,130     10,039       1,909  

 

72   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2018

 

Counterparty   Repurchase
Agreement
Proceeds
to be
Received(1)
    Payable for
Reverse
Repurchase
Agreements
    Payable for
Sale-Buyback
Transactions
     Total
Borrowings and
Other Financing
Transactions
    Collateral
Pledged/(Received)
    Net  Exposure(4)  

RBC

  $ 0     $ (8,656   $ 0      $ (8,656   $ 9,988     $ 1,332  

RDR

    0       (3,801     0        (3,801     3,812       11  

SOG

    0       (5,098     0        (5,098     5,504       406  

UBS

    0       (20,549     0            (20,549         22,148           1,599  
 

 

 

   

 

 

   

 

 

        

Total Borrowings and Other Financing Transactions

  $     11,433     $     (57,560   $     0         
 

 

 

   

 

 

   

 

 

        

 

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     $ (25,650   $ (29,752   $ (2,158   $ (57,560
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Borrowings

  $     0     $     (25,650   $     (29,752   $     (2,158   $ (57,560
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Payable for reverse repurchase agreements

 

  $     (57,560
 

 

 

 

 

(m)

Securities with an aggregate market value of $62,814 and cash of $320 have been pledged as collateral under the terms of the above master agreements as of July 31, 2018.

 

(1)

Includes accrued interest.

(2)

The average amount of borrowings outstanding during the period ended July 31, 2018 was $(63,736) at a weighted average interest rate of 2.018%. Average borrowings may include sale-buyback transactions and reverse repurchase agreements, if held during the period.

(3)

Open maturity reverse repurchase agreement.

(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 8, Master Netting Arrangements, in the Notes to Financial Statements for more information regarding master netting arrangements.

 

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

 

SWAP AGREEMENTS:

 

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

 

Reference Entity   Fixed
Receive Rate
    Payment
Frequency
  Maturity
Date
    Implied
Credit Spread at
July 31, 2018(2)
    Notional
Amount(3)
    Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
    Market
Value(4)
        Variation Margin  
  Asset     Liability  

Frontier Communications Corp.

    5.000   Quarterly     06/20/2020       9.536   $     6,500     $     (215   $     (227   $     (442   $     11     $     0  
           

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

Index/Tranches   Fixed
Receive Rate
    Payment
Frequency
    Maturity
Date
    Notional
Amount(3)
    Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
    Market
Value(4)
        Variation Margin  
  Asset     Liability  

CDX.HY-30 5-Year Index

    5.000     Quarterly       06/20/2023       $    5,300     $     318     $     84     $     402     $     5     $     0  
         

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

INTEREST RATE SWAPS

 

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

Receive

 

3-Month USD-LIBOR

    2.000     Semi-Annual       06/20/2023     $     55,000     $ 2,014     $ 493     $ 2,507     $ 1     $ 0  

Pay

 

3-Month USD-LIBOR

    2.750       Semi-Annual       06/17/2025         149,020       9,092       (11,488     (2,396     48       0  

Pay

 

3-Month USD-LIBOR

    2.250       Semi-Annual       06/15/2026         26,800       1,267       (2,743     (1,476     13       0  

Pay

 

3-Month USD-LIBOR

    2.500       Semi-Annual       12/20/2027         49,000       343       (2,563     (2,220     30       0  

Pay

 

3-Month USD-LIBOR

    3.500       Semi-Annual       06/19/2044         201,500       (6,573     21,924       15,351       512       0  

Receive

 

3-Month USD-LIBOR

    2.500       Semi-Annual       06/20/2048         311,400       13,270       23,678       36,948       0       (836

Pay

 

6-Month  AUD-BBR-BBSW

    3.000       Semi-Annual       12/17/2019     AUD     12,900       185       (72     113       0       (3

Pay

 

6-Month  AUD-BBR-BBSW

    3.500       Semi-Annual       06/17/2025         8,100       201       137       338       0       (4

Receive(5)

 

6-Month EUR-EURIBOR

    1.250       Annual       09/19/2028     EUR     13,100       (183     (227     (410     43       0  

Receive(5)

 

6-Month EUR-EURIBOR

    1.250       Annual       12/19/2028         2,100       (36     (16     (52     7       0  

Receive(5)

 

6-Month GBP-LIBOR

    1.500       Semi-Annual       09/19/2028     GBP     24,000       552       (222     330       145       0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
          $ 20,132     $ 28,901     $ 49,033     $ 799     $ (843
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Swap Agreements

 

  $     20,235     $     28,758     $     48,993     $     815     $     (843
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2018   73


Schedule of Investments PIMCO Income Strategy Fund II (Cont.)

 

 

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, 2018:

 

    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     $     815     $     815       $     0     $     0     $     (843)     $     (843)  
 

 

 

   

 

 

   

 

 

   

 

 

     

 

 

   

 

 

   

 

 

   

 

 

 

 

(o)

Securities with an aggregate market value of $522 and cash of $12,375 have been pledged as collateral for exchange-traded and centrally cleared financial derivative instruments as of July 31, 2018. See Note 8, Master Netting Arrangements, in the Notes to Financial Statements for more information regarding master netting arrangements.

 

(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, securities or other deliverable obligations 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 indicators 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 indicators 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.

(5)

This instrument has a forward starting effective date. See Note 2, Securities Transactions and Investment Income, in the Notes to Financial Statements for further information.

 

(p)  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  

BOA

     08/2018     $     61,552     EUR     52,957     $ 373     $ 0  
     08/2018         1,137     GBP     859       0       (10
     09/2018     EUR       52,957     $     61,699       0       (373

BPS

     08/2018     ARS     23,692         788       0       (56
     09/2018     PEN     3,236         987       0       (1

BRC

     09/2018     ARS     14,643         527       21       0  

CBK

     08/2018     EUR     2,599         3,037       0       (3
     08/2018     $     61,607     GBP     47,037       132       0  
     09/2018     GBP     47,037     $     61,689       0       (131

GLM

     08/2018     $     489     EUR     419       1       0  

HUS

     08/2018         5,560     RUB       347,928       6       (10

JPM

     08/2018     AUD     581     $     428       0       (4

SSB

     08/2018     EUR     50,777         59,240       0       (135
     08/2018     $     644     GBP     487       0       (5

UAG

     08/2018     GBP     48,383     $     64,065       560       0  
            

 

 

   

 

 

 

Total Forward Foreign Currency Contracts

 

  $   1,093     $   (728
            

 

 

   

 

 

 

 

SWAP AGREEMENTS:

 

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

 

Counterparty   Reference Entity   Fixed
Receive Rate
    Payment
Frequency
  Maturity
Date
    Implied
Credit Spread at
July 31, 2018(2)
    Notional
Amount(3)
    Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
    Swap Agreements,
at Value
 
  Asset     Liability  
BPS  

Petrobras Global Finance BV

    1.000   Quarterly     12/20/2024       3.275   $         1,000     $ (195   $ 75     $ 0     $ (120
GST  

Petrobras Global Finance BV

    1.000     Quarterly     09/20/2020       1.619         10       (1     1       0       0  
 

Petrobras Global Finance BV

    1.000     Quarterly     12/20/2021       2.165         100       (16     12       0       (4
 

Petrobras Global Finance BV

    1.000     Quarterly     12/20/2024       3.275         1,400       (278     110       0       (168

 

74   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2018

 

Counterparty   Reference Entity   Fixed
Receive Rate
    Payment
Frequency
  Maturity
Date
    Implied
Credit Spread at
July 31, 2018(2)
    Notional
Amount(3)
    Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
    Swap Agreements,
at Value
 
  Asset     Liability  
HUS  

Petrobras Global Finance BV

    1.000 %     Quarterly     12/20/2019       1.324 %     $         300     $ (25   $ 24     $ 0     $ (1
 

Petrobras Global Finance BV

    1.000     Quarterly     09/20/2020       1.619         40       (6     6       0       0  
 

Petrobras Global Finance BV

    1.000     Quarterly     12/20/2024       3.275         1,700       (353     150       0       (203
MYC  

Petrobras Global Finance BV

    1.000     Quarterly     12/20/2019       1.324         8,700       (805     777       0       (28
               

 

 

   

 

 

   

 

 

   

 

 

 
              $     (1,679   $     1,155     $     0     $     (524
             

 

 

   

 

 

   

 

 

   

 

 

 

 

INTEREST RATE SWAPS

 

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

Pay

 

3-Month USD-LIBOR

    3.025%     Semi-Annual   09/04/2023   $         180,000     $     (137   $     51     $     0     $     (86
               

 

 

   

 

 

   

 

 

   

 

 

 

 

TOTAL RETURN SWAPS ON INTEREST RATE INDICES

 

Counterparty   Pay/Receive(4)   Underlying Reference   # of Units     Financing Rate   Payment
Frequency
    Maturity
Date
  Notional
Amount
    Premiums
Paid/(Received)
    Unrealized
Appreciation/
(Depreciation)
    Swap Agreements,
at Value
 
  Asset     Liability  

BOA

 

Receive

 

iBoxx USD Liquid High Yield Index

    N/A    

3-Month USD-LIBOR

    Maturity     09/20/2018   $             300     $ (2   $ 4     $ 2     $ 0  

GST

 

Receive

 

iBoxx USD Liquid High Yield Index

    N/A    

3-Month USD-LIBOR

    Maturity     09/20/2018       300       (1     3       2       0  
                 

 

 

   

 

 

   

 

 

   

 

 

 
                $ (3   $ 7     $ 4     $ 0  
               

 

 

   

 

 

   

 

 

   

 

 

 

Total Swap Agreements

 

  $     (1,819   $     1,213     $     4     $     (610
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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 pledged/(received) as of July 31, 2018:

 

    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
Pledged/
(Received)
    Net
Exposure(5)
 

BOA

  $ 373      $ 0      $ 2      $ 375       $ (383   $ 0      $ 0     $ (383   $ (8   $ 0     $ (8

BPS

    0        0        0        0         (57     0        (120     (177     (177     0       (177

BRC

    21        0        0        21         0       0        0       0       21       0       21  

CBK

    132        0        0        132         (134     0        0       (134     (2     0       (2

GLM

    1        0        0        1         0       0        0       0       1       0       1  

GST

    0        0        2        2         0       0        (172     (172         (170     325       155  

HUS

    6        0        0        6         (10     0        (204     (214     (208     402       194  

JPM

    0        0        0        0         (4     0        0       (4     (4     0       (4

MYC

    0        0        0        0         0       0        (114     (114     (114     (477         (591

SSB

    0        0        0        0         (140     0        0       (140     (140     0       (140

UAG

    560        0        0        560         0       0        0       0       560           (640     (80
 

 

 

    

 

 

    

 

 

    

 

 

     

 

 

   

 

 

    

 

 

   

 

 

       

Total Over the Counter

  $   1,093      $   0      $   4      $   1,097       $   (728   $   0      $   (610   $   (1,338      
 

 

 

    

 

 

    

 

 

    

 

 

     

 

 

   

 

 

    

 

 

   

 

 

       

 

(q)

Securities with an aggregate market value of $867 have been pledged as collateral for financial derivative instruments as governed by International Swaps and Derivatives Association, Inc. master agreements as of July 31, 2018.

 

(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, securities or other deliverable obligations 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 indicators 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)

Receive represents that the Fund receives payments for any positive net return on the underlying reference. The Fund makes payments for any negative net return on such underlying reference. Pay represents that the Fund receives payments for any negative net return on the underlying reference. The Fund makes payments for any positive net return on such underlying reference.

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2018   75


Schedule of Investments PIMCO Income Strategy Fund II (Cont.)

 

(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 8, Master Netting Arrangements, 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, 2018:

 

    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     $ 16     $ 0     $ 0     $ 799     $ 815  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

 

Forward Foreign Currency Contracts

  $ 0     $ 0     $ 0     $ 1,093     $ 0     $ 1,093  

Swap Agreements

    0       0       0       0       4       4  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 0     $ 0     $ 1,093     $ 4     $ 1,097  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $     0     $ 16     $     0     $     1,093     $ 803     $ 1,912  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Financial Derivative Instruments - Liabilities

 

Exchange-traded or centrally cleared

 

Swap Agreements

  $ 0     $ 0     $ 0     $ 0     $ 843     $ 843  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

 

Forward Foreign Currency Contracts

  $ 0     $ 0     $ 0     $ 728     $ 0     $ 728  

Swap Agreements

    0       524       0       0       86       610  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 524     $ 0     $ 728     $ 86     $ 1,338  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $     0     $     524     $     0     $ 728     $     929     $     2,181  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

The effect of Financial Derivative Instruments on the Statements of Operations for the period ended July 31, 2018:

 

    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     $ 1,240     $ 0     $ 0     $ 18,296     $ 19,536  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

           

Forward Foreign Currency Contracts

  $ 0     $ 0     $ 0     $ (1,086   $ 0     $ (1,086

Swap Agreements

    0       141       0       0       315       456  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 141     $ 0     $ (1,086   $ 315     $ (630
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $     1,381     $ 0     $     (1,086   $ 18,611     $ 18,906  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

Exchange-traded or centrally cleared

 

Swap Agreements

  $ 0     $ (884   $ 0     $ 0     $     (19,871   $     (20,755
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Over the counter

           

Forward Foreign Currency Contracts

  $ 0     $ 0     $ 0     $ 3,756     $ 0     $ 3,756  

Swap Agreements

    0       194       0       0       59       253  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 194     $ 0     $ 3,756     $ 59     $ 4,009  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
  $     0     $ (690   $     0     $ 3,756     $ (19,812   $     (16,746
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

76   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


 

July 31, 2018

 

 

FAIR VALUE MEASUREMENTS

 

The following is a summary of the fair valuations according to the inputs used as of July 31, 2018 in valuing the Fund’s assets and liabilities:

 

Category and Subcategory   Level 1     Level 2     Level 3     Fair
Value at
07/31/2018
 

Investments in Securities, at Value

 

Loan Participations and Assignments

  $ 0     $ 29,151     $ 569     $ 29,720  

Corporate Bonds & Notes

 

Banking & Finance

    0       140,680       0       140,680  

Industrials

    0       148,860       745       149,605  

Utilities

    0       38,767       0       38,767  

Convertible Bonds & Notes

 

Industrials

    0       5,015       0       5,015  

Municipal Bonds & Notes

 

California

    0       7,432       0       7,432  

Illinois

    0       895       0       895  

Ohio

    0       22,476       0       22,476  

Virginia

    0       812       0       812  

West Virginia

    0       14,856       0       14,856  

U.S. Government Agencies

    0       14,357       5,201       19,558  

Non-Agency Mortgage-Backed Securities

    0       122,899       0           122,899  

Asset-Backed Securities

    0           108,294       9,324       117,618  

Sovereign Issues

    0       24,438       0       24,438  

Common Stocks

 

Consumer Discretionary

        5,494       0       0       5,494  

Energy

    467       185       0       652  

Financials

    0       0       3,264       3,264  

Warrants

 

Industrials

    0       0       205       205  

Preferred Securities

 

Banking & Finance

    0       8,151       0       8,151  

Industrials

    0       0           15,300       15,300  
Category and Subcategory   Level 1     Level 2     Level 3     Fair
Value at
07/31/2018
 

Real Estate Investment Trusts

 

Real Estate

  $ 8,620     $ 0     $ 0     $ 8,620  

Short-Term Instruments

 

Repurchase Agreements

    0       11,433       0       11,433  

Argentina Treasury Bills

    0       851       0       851  

U.S. Treasury Bills

    0       3,411       0       3,411  
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Investments

  $     14,581     $     702,963     $     34,608     $     752,152  
 

 

 

   

 

 

   

 

 

   

 

 

 

Financial Derivative Instruments - Assets

 

Exchange-traded or centrally cleared

    0       815       0       815  

Over the counter

    0       1,097       0       1,097  
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ 1,912     $ 0     $ 1,912  
 

 

 

   

 

 

   

 

 

   

 

 

 

Financial Derivative Instruments - Liabilities

 

Exchange-traded or centrally cleared

    0       (843     0       (843

Over the counter

    0       (1,338     0       (1,338
 

 

 

   

 

 

   

 

 

   

 

 

 
  $ 0     $ (2,181   $ 0     $ (2,181
 

 

 

   

 

 

   

 

 

   

 

 

 

Total Financial Derivative Instruments

  $ 0     $ (269   $ 0     $ (269
 

 

 

   

 

 

   

 

 

   

 

 

 

Totals

  $ 14,581     $ 702,694     $ 34,608     $ 751,883  
 

 

 

   

 

 

   

 

 

   

 

 

 
 

 

There were no significant transfers among Levels 1 and 2 during the period ended July 31, 2018.

 

The following is a reconciliation of the fair valuations using significant unobservable inputs (Level 3) for the Fund during the period ended July 31, 2018:

 

Category and Subcategory   Beginning
Balance
at 07/31/2017
    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 07/31/2018
    Net Change in
Unrealized
Appreciation/
(Depreciation)
on Investments
Held at
07/31/2018(1)
 

Investments in Securities, at Value

 

Loan Participations and Assignments

  $ 871     $ 320     $ (651   $ 9     $ 8     $ (14   $ 318     $ (292   $ 569     $ 2  

Corporate Bonds & Notes

 

Banking & Finance

    4,451       0       (288     2       15       (63     0       (4,117     0       0  

Industrials

    2,020       746       (2,022     1       21       (21     0       0       745       0  

U.S. Government Agencies

    4,994       0       (93     140       36       124       0       0       5,201       119  

Asset-Backed Securities

    9,442       0       0       91       0       (209     0       0       9,324       (209

Common Stocks

 

Financials

    2,734       0       0       0       0       530       0       0       3,264       530  

Warrants

 

Industrials

    384       0       0       0       0       (179     0       0       205       (179

Preferred Securities

 

Industrials

    14,820       1,626       0       0       0           (1,146     0       0       15,300           (1,146
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Totals

  $     39,716     $     2,692     $     (3,054   $     243     $     80     $ (978   $     318     $     (4,409   $     34,608     $ (883
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

See Accompanying Notes   ANNUAL REPORT   JULY 31, 2018   77


Schedule of Investments PIMCO Income Strategy Fund II (Cont.)

 

July 31, 2018

 

 

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 07/31/2018
     Valuation
Technique
   Unobservable
Inputs
   Input Value(s)
(% Unless
Noted
Otherwise)
 

Investments in Securities, at Value

 

Loan Participations and Assignments

  $ 200      Proxy Pricing    Base Price      100.074  
    369      Third Party Vendor    Broker Quote      100.000-101.625  

Corporate Bonds & Notes

Industrials

    292      Other Valuation Techniques(2)          
    453      Proxy Pricing    Base Price      97.010  

U.S. Government Agencies

    5,201      Proxy Pricing    Base Price      60.341  

Asset-Backed Securities

    9,324      Proxy Pricing    Base Price      58.000-102,005.100  

Common Stocks

 

Financials

    3,264      Other Valuation Techniques(2)          

Warrants

 

Industrials

    205      Other Valuation Techniques(2)          

Preferred Securities

 

Industrials

    15,300      Indicative Market Quotation    Broker Quote    $ 900.000  
 

 

 

          

Total

  $     34,608           
 

 

 

          

 

(1) 

Any difference between Net Change in Unrealized Appreciation/(Depreciation) and Net Change in Unrealized Appreciation/(Depreciation) on Investments Held at July 31, 2018 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.

 

78   PIMCO CLOSED-END FUNDS        See Accompanying Notes  


Notes to Financial Statements

 

July 31, 2018

 

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 functional and reporting currency for the Funds is the U.S. dollar. 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. The net asset value ("NAV") presented may differ from the NAV reported for the same period in other Fund materials.

 

(a) Securities Transactions and Investment Income  Securities transactions are recorded as of the trade date for financial reporting purposes. Realized gains (losses) from securities sold are recorded on the identified cost basis. Securities purchased or sold on a when-issued or delayed-delivery basis may be settled beyond a standard settlement period for the security after the trade date. 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, if any, are recorded as components of interest income on the Statements of Operations. Income or short-term capital gain distributions received from registered investment companies, if any, are recorded as dividend income. Long-term capital gain distributions received from registered investment companies, if any, 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 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 gain (loss) and net change 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. 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

 

 

  ANNUAL REPORT   JULY 31, 2018   79


Notes to Financial Statements (Cont.)

 

unrealized appreciation (depreciation) on foreign currency assets and liabilities on the Statements of Operations.

 

(c) Distributions — Common Shares  The following table shows the anticipated frequency of distributions from net investment income and gains from the sale of portfolio securities and other sources to common shareholders.

 

          Distribution Frequency  
Fund Name         Declared     Distributed  

PIMCO Corporate & Income Opportunity Fund

      Monthly       Monthly  

PIMCO Corporate & Income Strategy Fund

      Monthly       Monthly  

PIMCO High Income Fund

      Monthly       Monthly  

PIMCO Income Strategy Fund

      Monthly       Monthly  

PIMCO Income Strategy Fund II

      Monthly       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, seek to generate current, distributable income without regard to possible declines in the Fund’s NAV. A Fund’s income and gain generating strategies, including certain derivatives strategies, may generate current, distributable income, even if such strategies could potentially result in declines in the Fund’s NAV. 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 NAV 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 on amounts that are effectively a taxable return of the shareholder’s investment in the Fund at a time when their investment in a Fund has declined in value, which tax may be at ordinary income rates. The tax treatment of certain derivatives in which a Fund invests may be unclear and thus subject to recharacterization. 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. Further, the character of investment income and capital gains may be different for certain transactions under the two methods of accounting. 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 its distribution may be comprised of amounts from sources other than net investment income in accordance with its policies and good accounting practices, the Fund will notify shareholders of the estimated composition of such distribution through a Section 19 Notice. For these purposes, a Fund estimates the source or sources from which a distribution is paid, to the close of the period as of which it is paid, in reference to its internal accounting records and related accounting practices. If, based on such accounting records and practices, it is estimated that 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 and practices, a Fund’s financial statements presented in accordance with U.S. GAAP, and recordkeeping practices under income tax regulations. For instance, a Fund’s internal accounting records and practices may take into account, among other factors, tax-related characteristics of certain sources of distributions that differ from treatment under U.S. GAAP. 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. Accordingly, among other consequences, 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 and/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. Please visit www.pimco.com for the most recent Section 19 Notice, if applicable, for additional information regarding the estimated composition of distributions. Final determination of a distribution’s tax character will be reported on Form 1099 DIV sent to shareholders for the calendar year.

 

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

 

 

80   PIMCO CLOSED-END FUNDS     


 

July 31, 2018

 

gain (loss) and/or paid in capital to more appropriately conform U.S. GAAP to tax characterizations of distributions.

 

(d) New Accounting Pronouncements  In March 2016, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”), ASU 2016-05, which provides guidance related to the impact of derivative contract novations on certain relationships under Accounting Standards Codification (“ASC”) 815. The ASU is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Funds have adopted the ASU. The implementation of the ASU did not have an impact on the Funds’ financial statements.

 

In August 2016, the FASB issued ASU 2016-15 which amends ASC 230 to clarify guidance on the classification of certain cash receipts and cash payments in the Statement of Cash Flows. The ASU is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. The Funds have adopted the ASU. The implementation of the ASU did not have an impact on the Funds’ financial statements.

 

In October 2016, the U.S. Securities and Exchange Commission (“SEC”) adopted new rules and forms, and amendments to certain current rules and forms, to modernize reporting and disclosure of information by registered investment companies. The amendments to Regulation S-X require standardized, enhanced disclosure about derivatives in investment company financial statements, and also change the rules governing the form and content of such financial statements. The compliance date for these amendments was August 1, 2017. Compliance is based on reporting period-end date. Management has adopted these amendments and the changes are incorporated in the financial statements.

 

In November 2016, the FASB issued ASU 2016-18 which amends ASC 230 to provide guidance on the classification and presentation of changes in restricted cash and restricted cash equivalents on the Statement of Cash Flows. The ASU is effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. The Funds have adopted the ASU. The implementation of the ASU did not have an impact on the Funds’ financial statements.

 

In March 2017, the FASB issued ASU 2017-08 which provides guidance related to the amortization period for certain purchased callable debt securities held at a premium. The ASU is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. The Funds have adopted the ASU. The implementation of the ASU did not have an impact on the Funds’ financial statements.

3. INVESTMENT VALUATION AND FAIR VALUE MEASUREMENTS

 

(a) Investment Valuation Policies  The 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 SEC.

 

For purposes of calculating a 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. If market value pricing is used, 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. A Fund’s investments in open-end management investment companies, other than exchange-traded funds (“ETFs”), are valued at the NAVs of such investments.

 

 

  ANNUAL REPORT   JULY 31, 2018   81


Notes to Financial Statements (Cont.)

 

 

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. For these purposes, any movement in the applicable reference index or instrument (“zero trigger”) relating to the non-U.S security being fair valued between the earlier close of the applicable foreign market and the NYSE Close may be deemed to be a significant event, prompting the application of the pricing model (effectively resulting in daily fair valuations). Foreign exchanges may permit trading in foreign (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

 

 

82   PIMCO CLOSED-END FUNDS     


 

July 31, 2018

 

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:

 

   

Level 1 — Quoted prices in active markets or exchanges for identical assets and liabilities.

 

   

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.

 

   

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.

 

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 2 to Level 3 are a result of a change, in the normal course of business, from the use of methods used by Pricing Services (Level 2) to the use of a Broker Quote or valuation technique which utilizes significant unobservable inputs due to an absence of current or reliable market-based data (Level 3). 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 for 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 value 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 Schedule 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.

 

 

  ANNUAL REPORT   JULY 31, 2018   83


Notes to Financial Statements (Cont.)

 

 

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.

 

Equity exchange-traded options and over the counter financial derivative instruments, such as forward foreign currency contracts and options contracts derive their value from underlying asset prices, indices, reference rates, and other inputs or a combination of these factors. 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 and over the counter swaps derive their value from underlying asset prices, indices, reference rates, and other inputs or a combination of these factors. They are valued using a broker-dealer bid quotation or on market-based prices provided by Pricing Services (normally determined as of the NYSE close). Centrally cleared swaps and over the counter swaps can be valued by Pricing Services using a series of techniques, including simulation pricing models. The pricing models may use inputs that are observed from actively quoted markets such as the overnight index swap rate (“OIS”), London Interbank Offered Rate (“LIBOR”) forward rate, interest rates, yield curves and credit spreads. 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.

 

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 value of such short-term debt instruments is approximately the same as the fair value of the instrument as determined without the use of amortized cost valuation. These securities are categorized as Level 2 or Level 3 of the fair value hierarchy depending on the source of the base price.

 

4. SECURITIES AND OTHER INVESTMENTS

 

(a) Investments in Securities

The Funds may utilize the investments and strategies described below to the extent permitted by each Fund’s respective investment policies.

 

Loan Participations and Assignments  are direct debt instruments which are interests in amounts owed to lenders or lending syndicates by corporate, governmental, or other borrowers. A Fund’s loan interests 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 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 acquire interests in multiple series or tranches of a loan, which may have varying terms and carry different

 

 

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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.

 

Acquisitions of 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 acquiring mezzanine and other subordinated loans, including those arising under bankruptcy, fraudulent conveyance, equitable subordination, environmental and other laws and regulations, and risks and costs associated with debt servicing and taking foreclosure actions associated with the loans.

 

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 instruments in which the Funds may acquire interests 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 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.

 

Acquisitions of 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 acquiring 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 acquiring 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. Unfunded loan commitments are reflected as a liability on the Statements of Assets and Liabilities.

 

Mortgage-Related and Other Asset-Backed Securities  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

 

 

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Notes to Financial Statements (Cont.)

 

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 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. The Funds may invest in any level of the capital structure of an issuer of mortgage-backed or asset-backed securities, including the equity or “first loss” tranche.

 

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

 

 

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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 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  (“PIKs”) may give the issuer the option at each interest payment date of making interest payments in either cash and/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 (depreciation) on investments to interest receivable on the Statements of Assets and Liabilities.

 

Real Estate Investment Trusts  (“REITs”) are pooled investment vehicles that own, and typically operate, income-producing real estate. If a REIT meets certain requirements, including distributing to shareholders substantially all of its taxable income (other than net capital gains), then it is not taxed on the income distributed to shareholders. Distributions received from REITs may be characterized as income, capital gain or a return of capital. A return of capital is recorded by a Fund as a reduction to the cost basis of its investment in the REIT. REITs are subject to management fees and other expenses, and so the Funds that invest in REITs will bear their proportionate share of the costs of the REITs’ operations.

 

Restricted Investments  are subject to legal or contractual restrictions on resale and may generally be sold privately, but may be 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 investments may involve time-consuming negotiations and expenses, and prompt sale at an acceptable price may be difficult to achieve. Restricted investments held by the Funds at July 31, 2018 are disclosed in the Notes to Schedules of Investments.

 

Securities Issued by U.S. Government Agencies or Government-Sponsored Enterprises  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. Instead, they are supported only by the discretionary authority of the U.S. Government to purchase the agency’s obligations.

 

Warrants  are securities that are usually issued together with a debt security or preferred security and that give the holder the right to buy a proportionate amount of common stock at a specified price. Warrants are freely transferable and are often traded on major exchanges. Warrants normally have a life that is measured in years and entitle the holder to buy common stock of a company at a price that is usually higher than the market price at the time the warrant is issued.

 

 

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Notes to Financial Statements (Cont.)

 

Warrants may entail greater risks than certain other types of investments. Generally, warrants do not carry the right to receive dividends or exercise voting rights with respect to the underlying securities, and they do not represent any rights in the assets of the issuer. In addition, their value does not necessarily change with the value of the underlying securities, and they cease to have value if they are not exercised on or before their expiration date. If the market price of the underlying stock does not exceed the exercise price during the life of the warrant, the warrant will expire worthless. Warrants may increase the potential profit or loss to be realized from the investment as compared with investing the same amount in the underlying securities. Similarly, the percentage increase or decrease in the value of an equity security warrant may be greater than the percentage increase or decrease in the value of the underlying common stock. Warrants may relate to the purchase of equity or debt securities. Debt obligations with warrants attached to purchase equity securities have many characteristics of convertible securities and their prices may, to some degree, reflect the performance of the underlying stock. Debt obligations also may be issued with warrants attached to purchase additional debt securities at the same coupon rate. A decline in interest rates would permit a Fund to sell such warrants at a profit. If interest rates rise, these warrants would generally expire with no value.

 

When-Issued Transactions  are purchases or sales made 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 Funds may enter into the borrowings and other financing transactions described below to the extent permitted by each Fund’s respective investment policies.

 

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  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. In an open maturity repurchase agreement, there is no pre-determined repurchase date and the agreement can be terminated by the Fund or counterparty at any time. The underlying securities for all repurchase agreements are held by a Fund’s custodian or designated subcustodians under tri-party repurchase agreements and in certain instances will remain in custody with the counterparty. The market value of the collateral must be equal to or exceed the total 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  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 a 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; please see Note 7, Principal Risks.

 

(c) Short Sales  Short sales are transactions in which a Fund sells a security that it may not own. A Fund may make short sales of securities to (i) offset potential declines in long positions in similar securities, (ii) to increase the flexibility of the Fund, (iii) for investment return, (iv) as part of a risk arbitrage strategy, and (v) as part of its overall portfolio management strategies involving the use of derivative instruments. When a Fund engages in a short sale, it may borrow the

 

 

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security sold short and deliver it to the counterparty. A Fund will ordinarily have to pay a fee or premium to borrow a security and be obligated to repay the lender of the security any dividend or interest that accrues on the security during the period of the loan. Securities sold in short sale transactions and the dividend or interest payable on such securities, if any, are reflected as payable for short sales on the Statements of Assets and Liabilities. Short sales expose a Fund to the risk that it will be required to cover its short position at a time when the security or other asset has appreciated in value, thus resulting in losses to a Fund. A short sale is “against the box” if a Fund holds in its portfolio or has the right to acquire the security sold short, or securities identical to the security sold short, at no additional cost. A Fund will be subject to additional risks to the extent that it engages in short sales that are not “against the box.” A Fund’s loss on a short sale could theoretically be unlimited in cases where a Fund is unable, for whatever reason, to close out its short position.

 

6. FINANCIAL DERIVATIVE INSTRUMENTS

 

The Funds may enter into the financial derivative instruments described below to the extent permitted by each Fund’s respective investment policies.

 

The following disclosures contain information on how and why the Funds use 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 the net realized gain (loss) and net change in unrealized appreciation (depreciation) 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 net realized gain (loss) and net change 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  may be engaged, 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 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  An option on an instrument (or an index) is a contract that gives the holder of the option, in return for a premium, the right to buy from (in the case of a call) or sell to (in the case of a put) the writer of the option the 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 and subsequently marked to market to reflect the current value of the option written. These amounts 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

 

 

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Notes to Financial Statements (Cont.)

 

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.

 

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  may be written or purchased to enter into a pre-defined swap agreement or to shorten, extend, cancel or otherwise modify an existing 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  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 variation margin on the Statements of Assets and Liabilities. Centrally Cleared and 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 gain (loss) 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 gain (loss) on the Statements of Operations.

 

For purposes of a Fund’s investment policy adopted pursuant to Rule 35d-1 under the 1940 Act (if any), the Fund will count derivative instruments at market value. For purposes of applying a Fund’s other investment policies and restrictions, swap agreements, like other derivative instruments, may be valued by a Fund at market value, notional value or full exposure value or any combination of the foregoing (e.g., notional value for purposes of calculating the numerator and market value for purposes of calculating the denominator for compliance with a particular policy or restriction). See Note 6 - Asset Segregation below. In the case of a credit default swap, 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 full exposure value for purposes of a Fund’s credit quality guidelines (if any) because such value in general better reflects a Fund’s actual economic exposure during the term of the credit default swap agreement. As a result, a Fund may, at times, have notional exposure to an asset class (before netting) that is greater or lesser than the stated limit or restriction noted in a Fund’s prospectus. 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

 

 

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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 the values of the 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  on corporate, loan, sovereign, U.S. municipal or U.S. Treasury issues are entered into 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 swap 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 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

 

 

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Notes to Financial Statements (Cont.)

 

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, loan, sovereign, U.S. municipal or U.S. Treasury issues as of period end, if any, 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  may be entered into to help hedge against interest rate risk exposure and to maintain a Fund’s ability to generate income at prevailing market rates. The value of the fixed rate bonds that the Funds hold 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.

 

Total Return Swap Agreements  are entered into to gain or mitigate exposure to the underlying reference asset. Total return swap agreements involve commitments where single or multiple cash flows are exchanged based on the price of an underlying reference asset and on a fixed or variable interest rate. Total return swap agreements may involve commitments to pay interest in exchange for a market-linked return. One counterparty pays out the total return of a specific underlying reference asset, which may include a single security, a basket of securities, or an index, and in return receives a fixed or variable rate. At the maturity date, a net cash flow is exchanged where the total return is equivalent to the return of the underlying reference asset less a financing rate, if any. As a receiver, a Fund would receive payments based on any net positive total return and would owe payments in the event of a net negative total return. As the payer, a Fund would owe payments on any net positive total return, and would receive payments in the event of a net negative total return. A Fund’s use of a total return swap exposes the Fund to credit loss in the event of nonperformance by the swap counterparty. Risk may also arise from the unanticipated movements in value of exchange rates, interest rates, securities, or the index.

 

Asset Segregation  Certain transactions described above can be viewed as constituting a form of borrowing or financing transaction by a Fund. In such event, a Fund will cover its obligation 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 a Fund. With respect to forwards, futures contracts, options and swaps that are contractually required to cash settle (i.e., where physical delivery of the underlying reference asset is not permitted), a Fund (other than PIMCO Corporate & Income Opportunity Fund, PIMCO Income Strategy Fund

 

 

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and PIMCO Income Strategy Fund II) is permitted to segregate or earmark liquid assets equal to a Fund’s daily marked-to-market net obligation under the derivative instrument, if any, rather than the derivative’s full notional value. For PIMCO Corporate & Income Opportunity Fund, with respect to forwards and futures contracts and interest rate swaps that are contractually required to cash settle (i.e., where physical delivery of the underlying reference asset is not permitted or physical settlement is not otherwise involved), the 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, but will segregate full notional value, as applicable, with respect to certain other derivative instruments (including, written credit default swaps and written options) that contractually require or permit physical delivery of securities or other underlying assets. For PIMCO Income Strategy Fund and PIMCO Income Strategy Fund II, with respect to forwards and futures contracts and interest rate swaps that are contractually required to cash settle (i.e., where physical delivery of the underlying reference asset is not permitted), the 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, but may segregate full notional value, as applicable, with respect to other derivative instruments (including written credit default swaps and written options) that contractually require or permit physical delivery of securities or other underlying assets. By segregating or earmarking liquid assets equal to only its net marked-to-market obligation under certain 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 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 derivative instruments and other financial instruments expose the Fund to various risks such as, but not limited to, interest rate, foreign (non-U.S.) 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 the Fund’s management. Variable rate securities may decline in value if their interest rates do not rise as much, or as quickly, as interest rates in general. 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, etc.). Under current economic conditions, interest rates are near historically low levels. The Funds currently face a heightened level of interest rate risk, especially since the Federal Reserve Board has ended its quantitative easing program and has begun, and may continue, to raise interest rates. To the extent the Federal Reserve Board continues to raise interest rates, there is a risk that rates across the financial system may rise. 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

 

 

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Notes to Financial Statements (Cont.)

 

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.

 

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. For derivatives traded on an exchange or through a central counterparty, credit risk resides with a Fund’s clearing broker, or the clearinghouse itself, rather than with a counterparty in an OTC derivative transaction. 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 the Manager, seeks to minimize counterparty risks to the Funds through 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 the 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. 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.

 

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,

 

 

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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.

 

8. MASTER NETTING ARRANGEMENTS

 

A Fund may be subject to various netting arrangements (“Master Agreements”) with select counterparties. 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 most 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 depending on the terms outlined in the applicable Master Agreement. 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 collateral received is not typically 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 a Fund and select counterparties. Master Repo Agreements maintain provisions for, among other things, 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 certain forward settling transactions, such as TBA 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. Such transactions require posting of initial margin as determined by each relevant clearing agency which is segregated in an account at a futures commission merchant (“FCM”) registered with the CFTC. In the United States, counterparty risk may be reduced as creditors of an FCM cannot 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 are disclosed in the Notes to Schedules of Investments.

 

Prime Broker Arrangements may be entered into to facilitate execution and/or clearing of listed equity option transactions or short sales of equity securities between a Fund and selected counterparties. The arrangements provide guidelines surrounding the rights, obligations, and other events, including, but not limited to, margin, execution, and settlement. These agreements maintain provisions for, among other things, payments, maintenance of collateral, events of default, and termination. Margin and other assets delivered as collateral are typically in the possession of the prime broker and would offset any obligations due to the prime broker. The market values of listed options and securities sold short and related collateral are disclosed in the Notes to Schedules of Investments.

 

International Swaps and Derivatives Association, Inc. Master Agreements and Credit Support Annexes (“ISDA Master Agreements”) govern bilateral OTC derivative transactions entered into by a Fund with 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

 

 

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Notes to Financial Statements (Cont.)

 

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.

 

9. 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, NYSE 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 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 Flexible Credit Income Fund and PIMCO Flexible Municipal Income Fund, each a closed end management investment company managed by PIMCO that is operated as an “interval fund” (the “PIMCO Interval Funds”), and PIMCO-Managed Accounts Trust, an open-end management investment company with multiple series for which PIMCO serves as investment

 

 

96   PIMCO CLOSED-END FUNDS     


 

July 31, 2018

 

adviser and administrator (“PMAT” and, together with the PIMCO Closed-End Funds and the PIMCO Interval 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 U.S. LLC (“AllianzGI U.S.”), an affiliate of PIMCO, serves as investment manager. Prior to the close of business on September 5, 2014, a predecessor entity of AllianzGI U.S. served as investment manager of PMAT and the PIMCO Closed-End Funds.

 

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 among PMAT, the PIMCO Interval Funds 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.

 

10. RELATED PARTY TRANSACTIONS

 

The Manager is a related party. Fees payable to this party are disclosed in Note 9, Fees and Expenses, 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, or an affiliate of 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 under the Act. Further, as defined under the procedures, each transaction is effected at the current market price. During the period ended July 31, 2018, the Funds below engaged in purchases and sales of securities pursuant to Rule 17a-7 under the Act (amounts in thousands):

 

Fund Name         Purchases     Sales  

PIMCO Corporate & Income Opportunity Fund

    $ 31,221     $ 77,598  

PIMCO Corporate & Income Strategy Fund

      6,246       50,639  

PIMCO High Income Fund

        15,879         94,024  

PIMCO Income Strategy Fund

      3,062       27,959  

PIMCO Income Strategy Fund II

      6,365       37,071  

 

  

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

 

11. 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.

 

12. 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 may involve 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 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, 2018, were as follows (amounts in thousands):

 

          U.S. Government/Agency     All Other  
Fund Name         Purchases     Sales     Purchases     Sales  

PIMCO Corporate & Income Opportunity Fund

    $   10,608     $   2,959     $   544,516     $   306,789  

PIMCO Corporate & Income Strategy Fund

      5,108       1,358       159,990       140,375  

PIMCO High Income Fund

      7,856       1,675       315,339       290,273  

PIMCO Income Strategy Fund

      2,505       663       72,350       72,862  

PIMCO Income Strategy Fund II

      5,254       1,369       158,336       132,745  
         

 

  

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

 

  ANNUAL REPORT   JULY 31, 2018   97


Notes to Financial Statements (Cont.)

 

13. COMMON SHARES OFFERING

 

On March 23, 2017, the SEC declared effective a registration statement filed using the “shelf” registration process for PIMCO Corporate & Income Opportunity Fund. Pursuant to the shelf registration, PIMCO Corporate & Income Opportunity Fund may offer and sell, from time to time, in one or more offerings, up to 14,500,000 of its Common Shares, par value $0.00001 per share. The aggregate sale proceeds for the sales of the PIMCO Corporate & Income Opportunity Fund Common Shares are subject to an aggregate cap of $229,680,000. The Fund may not sell any Common Shares at a price below the NAV of such Common Shares, exclusive of any distributing commission or discount. Sales of the Common Shares, if any, may be made in negotiated transactions or transactions that are deemed to be “at the market”, including sales made directly on the NYSE or sales made to or through a market maker other than on an exchange. During the period ended

July 31, 2018, the Fund sold 4,970,843 Common Shares. Proceeds from the offerings during the period ended July 31, 2018 (net of commissions and fees) were $83,648,145. During the fiscal year ended July 31, 2017, the Fund sold 4,605,942 Common Shares. Proceeds from the offerings during the fiscal year ended July 31, 2017 (net of commissions and fees) were $74,137,916.

 

14. 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 reset 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 at least annually.

 

 

For the period ended July 31, 2018, the annualized dividend rates on the ARPS ranged from:

 

Fund Name         Shares
Issued and
Outstanding
    High     Low     As of
July 31, 2018
 

PIMCO Corporate & Income Opportunity Fund

         

Series M

      1,884       3.822%       2.022%       3.802%  

Series T

      1,770       3.842%       2.062%       3.802%  

Series W

      1,847       3.822%       2.282%       3.822%  

Series TH

      2,033       3.822%       2.262%       3.822%  

Series F

      1,984       3.842%       2.022%       3.802%  

PIMCO Corporate & Income Strategy Fund

         

Series M

      406       2.867%       1.517%       2.852%  

Series T

      449       2.882%       1.547%       2.852%  

Series W

      473       2.867%       1.712%       2.867%  

Series TH

      434       2.867%       1.697%       2.867%  

Series F

      459       2.882%       1.517%       2.852%  

PIMCO High Income Fund

         

Series M

      688       3.058%       1.618%       3.042%  

Series T

      958       3.074%       1.650%       3.042%  

Series W

      738       3.058%       1.826%       3.058%  

Series TH

      757       3.058%       1.810%       3.058%  

Series F

      938       3.074%       1.618%       3.042%  

PIMCO Income Strategy Fund

         

Series T

      766       3.238%       2.444%       3.205%  

Series W

      699       3.237%       2.444%       3.200%  

Series TH

      586       3.231%       2.444%       3.193%  

PIMCO Income Strategy Fund II

         

Series M

      721       3.235%       2.444%       3.203%  

Series T

      881       3.238%       2.444%       3.205%  

Series W

      671       3.237%       2.444%       3.200%  

Series TH

      753       3.231%       2.444%       3.193%  

Series F

      672       3.232%       2.444%       3.203%  

 

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.

 

98   PIMCO CLOSED-END FUNDS     


 

July 31, 2018

 

 

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 for the Funds 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

  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

  The higher of       

150%

 

1.25%

 

 

    

x

 

+

 

 

   7-Day USD LIBOR
OR
7-Day USD LIBOR
    

=

 

=

 

 

     Maximum Rate for PFN  

 

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.

 

15. 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.

 

The foregoing speaks only as of the date of this report.

 

16. 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.

A Fund 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, 2018, 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.

 

The Funds file U.S. federal, state, and local tax returns as required. The Funds’ tax returns are subject to examination by relevant tax authorities until expiration of the applicable statute of limitations, which is generally three years after the filing of the tax return but which can be extended to six years in certain circumstances. Tax returns for open years have incorporated no uncertain tax positions that require a provision for income taxes.

 

 

  ANNUAL REPORT   JULY 31, 2018   99


Notes to Financial Statements (Cont.)

 

 

As of July 31, 2018, 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

    $   6,036     $   0     $   123,806     $   (10,719   $ (104,000   $ 0     $ 0  

PIMCO Corporate & Income Strategy Fund

      5,675       0       41,827       (4,447     (35,909     0       0  

PIMCO High Income Fund

      0       0       6,678       (10,494       (135,592       0         0  

PIMCO Income Strategy Fund

      0       0       17,679       (2,328     (24,606     0       0  

PIMCO Income Strategy Fund II

      7,898       0       46,865       (4,810     (60,617     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, passive foreign investment companies (PFIC), straddle loss deferrals, partnership adjustments, convertible preferred securities, and Lehman securities.

(3) 

Represents differences in income tax regulations and financial accounting principles generally accepted in the United States of America, mainly for 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, 2017 through July 31, 2018 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, 2017 through July 31, 2018 and Ordinary losses realized during the period January 1, 2018 through July 31, 2018, which the Funds elected to defer to the following taxable year pursuant to income tax regulations.

 

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, 2018, the Funds had the following post-effective capital losses with no expiration (amounts in thousands):

 

          Short-Term     Long-Term  

PIMCO Corporate & Income Opportunity Fund

    $   104,000     $ 0  

PIMCO Corporate & Income Strategy Fund

      35,909       0  

PIMCO High Income Fund

      83,116         52,476  

PIMCO Income Strategy Fund

      24,606       0  

PIMCO Income Strategy Fund II

      60,617       0  

 

  

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

 

As of July 31, 2018, 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

     $   1,637,772      $   207,450      $ (83,866    $   123,584  

PIMCO Corporate & Income Strategy Fund

       711,613        89,634        (47,713      41,921  

PIMCO High Income Fund

       1,218,836        141,124          (134,334      6,790  

PIMCO Income Strategy Fund

       367,146        43,110        (25,357      17,753  

PIMCO Income Strategy Fund II

       753,823        100,253        (53,171      47,082  

 

  

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

(7) 

Primary differences, if any, between book and tax net unrealized appreciation/(depreciation) on investments are attributable to open wash sale loss deferrals, straddle loss deferrals, unrealized gain or loss on certain forward contracts, market discount and premium amortization, convertible preferred securities, passive foreign investment companies (PFIC), partnership adjustments and Lehman securities for federal income tax purposes.

 

100   PIMCO CLOSED-END FUNDS     


 

July 31, 2018

 

 

For the fiscal years ended July 31, 2018 and July 31, 2017, respectively, the Funds made the following tax basis distributions (amounts in thousands):

 

                 July 31, 2018     July 31, 2017  
          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

    $   132,208     $   0     $   0     $ 118,069     $   0     $ 10,356  

PIMCO Corporate & Income Strategy Fund

      54,197       0       0       68,668       0       834  

PIMCO High Income Fund

      109,992       0       17,226         117,877       0         24,148  

PIMCO Income Strategy Fund

      28,579       0       345       28,374       0       0  

PIMCO Income Strategy Fund II

      59,659       0       0       58,627       0       0  
             

 

  

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

(8) 

Includes short-term capital gains, if any, distributed.

(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.

 

17. 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 September 6, 2018, the SEC declared effective a registration statement filed using the “shelf” registration process for each of PIMCO Income Strategy Fund and PIMCO Income Strategy Fund II.

 

Pursuant to its shelf registration, PIMCO Income Strategy Fund may offer and sell, from time to time, in one or more offerings, up to 5,500,000 of its common shares, par value $0.00001 per share. The aggregate sale proceeds for the sales of the PIMCO Income Strategy Fund common shares are subject to an aggregate cap of $100,000,000.

 

Pursuant to its shelf registration, PIMCO Income Strategy Fund II may offer and sell, from time to time, in one or more offerings, up to 11,500,000 of its common shares, par value $0.00001 per share. The aggregate sale proceeds for the sales of the PIMCO Income Strategy Fund II common shares are subject to an aggregate cap of $175,000,000.

 

Each Fund may not sell any common shares at a price below the NAV of such common shares, exclusive of any distributing commission or discount. Sales of the common shares, if any, may be made in negotiated transactions or transactions that are deemed to be “at the market”, including sales made directly on the NYSE or sales made to or through a market maker other than on an exchange.

 

On August 1, 2018, the following distributions were declared to common shareholders payable September 4, 2018 to shareholders of record on August 13, 2018:

 

PIMCO Corporate & Income Opportunity Fund

    $   0.130000 per common share  

PIMCO Corporate & Income Strategy Fund

    $ 0.112500 per common share  

PIMCO High Income Fund

    $ 0.080699 per common share  

PIMCO Income Strategy Fund

    $ 0.090000 per common share  

PIMCO Income Strategy Fund II

    $ 0.080000 per common share  

 

On September 4, 2018, the following distributions were declared to common shareholders payable October 1, 2018 to shareholders of record on September 14, 2018:

 

PIMCO Corporate & Income Opportunity Fund

    $   0.130000 per common share  

PIMCO Corporate & Income Strategy Fund

    $ 0.112500 per common share  

PIMCO High Income Fund

    $ 0.080699 per common share  

PIMCO Income Strategy Fund

    $ 0.090000 per common share  

PIMCO Income Strategy Fund II

    $ 0.080000 per common share  

 

There were no other subsequent events identified that require recognition or disclosure.

 

  ANNUAL REPORT   JULY 31, 2018   101


Report of Independent Registered Public Accounting Firm

 

To the Board of Trustees and 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

 

Opinions on the Financial Statements

 

We have audited the accompanying statements of assets and liabilities, including the schedules of investments, 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 collectively referred to as the “Funds”) as of July 31, 2018, the related statements of operations for the year ended July 31, 2018, the statements of changes in net assets for each of the two years in the period ended July 31, 2018, and for PIMCO Corporate & Income Opportunity Fund, PIMCO Corporate & Income Strategy Fund, and PIMCO High Income Fund, the statements of cash flows for the year ended July 31, 2018, including the related notes, and the financial highlights for each of the periods indicated therein (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of each of the Funds as of July 31, 2018, the results of each of their operations for the year then ended, the changes in each of their net assets for each of the two years in the period ended July 31, 2018, and for PIMCO Corporate & Income Opportunity Fund, PIMCO Corporate & Income Strategy Fund, and PIMCO High Income Fund, the results of each of their cash flows for the year then ended, and each of the financial highlights for each of the periods indicated therein in conformity with accounting principles generally accepted in the United States of America.

 

Basis for Opinions

 

These financial statements are the responsibility of the Funds’ management. Our responsibility is to express an opinion on the Funds’ financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Funds in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits of these financial statements in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our procedures included confirmation of securities owned as of July 31, 2018 by correspondence with the custodian and brokers; when replies were not received from brokers, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinions.

 

/s/ PricewaterhouseCoopers LLP

Kansas City, Missouri

 

September 26, 2018

 

We have served as the auditor of one or more investment companies in PIMCO Taxable Closed-End Funds since 1995.

 

102   PIMCO CLOSED-END FUNDS     


Glossary: (abbreviations that may be used in the preceding statements)

 

(Unaudited)

 

Counterparty Abbreviations:

               
BCY  

Barclays Capital, Inc.

  FOB  

Credit Suisse Securities (USA) LLC

  RBC  

Royal Bank of Canada

BOA  

Bank of America N.A.

  GLM  

Goldman Sachs Bank USA

  RDR  

RBC Capital Markets LLC

BPS  

BNP Paribas S.A.

  GST  

Goldman Sachs International

  RTA  

Bank of New York Mellon Corp.

BRC  

Barclays Bank PLC

  HUS  

HSBC Bank USA N.A.

  SAL  

Citigroup Global Markets, Inc.

CBK  

Citibank N.A.

  JML  

JP Morgan Securities Plc

  SOG  

Societe Generale

CFR  

Credit Suisse Securities (Europe) Ltd.

  JPM  

JP Morgan Chase Bank N.A.

  SSB  

State Street Bank and Trust Co.

CIW  

CIBC World Markets Corp.

  JPS  

JP Morgan Securities, Inc.

  UAG  

UBS AG Stamford

DUB  

Deutsche Bank AG

  MEI  

Merrill Lynch International

  UBS  

UBS Securities LLC

FBF  

Credit Suisse International

  MYC  

Morgan Stanley Capital Services, Inc.

   
FICC  

Fixed Income Clearing Corporation

  NOM  

Nomura Securities International Inc.

   

Currency Abbreviations:

               
ARS  

Argentine Peso

  CHF  

Swiss Franc

  PEN  

Peruvian New Sol

AUD  

Australian Dollar

  EUR  

Euro

  RUB  

Russian Ruble

BRL  

Brazilian Real

  GBP  

British Pound

  USD (or $)  

United States Dollar

Exchange Abbreviations:

               
OTC  

Over the Counter

       

Index/Spread Abbreviations:

               
ABX.HE  

Asset-Backed Securities Index - Home Equity

  CDX.HY  

Credit Derivatives Index - High Yield

  LIBOR01M  

1 Month USD-LIBOR

ARPP7DRR  

Argentina Central Bank 7 Day Repo Reference Rate

  CDX.IG  

Credit Derivatives Index - Investment Grade

  LIBOR03M  

3 Month USD-LIBOR

BADLARPP  

Argentina Badlar Floating Rate Notes

  CMBX  

Commercial Mortgage-Backed Index

  US0001M  

1 Month USD Swap Rate

BP0003M  

3 Month GBP-LIBOR

  EUR003M  

3 Month EUR Swap Rate

  US0003M  

3 Month USD Swap Rate

Municipal Bond or Agency Abbreviations:

               
AGM  

Assured Guaranty Municipal

       

Other Abbreviations:

               
ABS  

Asset-Backed Security

  CDI  

Brazil Interbank Deposit Rate

  LIBOR  

London Interbank Offered Rate

ALT  

Alternate Loan Trust

  CDO  

Collateralized Debt Obligation

  PIK  

Payment-in-Kind

BABs  

Build America Bonds

  CLO  

Collateralized Loan Obligation

  TBA  

To-Be-Announced

BBR  

Bank Bill Rate

  DAC  

Designated Activity Company

  TBD  

To-Be-Determined

BBSW  

Bank Bill Swap Reference Rate

  EURIBOR  

Euro Interbank Offered Rate

  TBD%  

Interest rate to be determined when loan settles

 

  ANNUAL REPORT   JULY 31, 2018   103


Federal Income Tax Information

 

(Unaudited)

 

As required by the Internal Revenue Code (“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’ ordinary income dividend distribution from the fiscal year ended July 31, 2018 that qualifies for the corporate dividend received deduction is set forth below:

 

Qualified Dividend Income.  Under the Jobs and Growth Tax Relief Reconciliation Act of 2003, the following percentage of ordinary dividends during the calendar year was designated as “qualified dividend income”, as defined in the Jobs and Growth Tax Relief Reconciliation Act of 2003, subject to reduced tax rates in 2018:

 

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 following amounts of ordinary dividends paid during the fiscal year ended July 31, 2018 are considered to be derived from “qualified interest income,” as defined in Section 871(k)(1)(E) of the Code, and therefore are designated as interest-related dividends, as defined in Section 871(k)(1)(C) of the Code. Further, the following amounts of ordinary dividends paid during the fiscal year ended July 31, 2018 are considered to be derived from “qualified short-term capital gain,” as defined in Section 871(k)(2)(D) of the Code, and therefore are 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%        1.50%      $     30,025      $     0  

PIMCO Corporate & Income Strategy Fund

        0.00%        1.50%        61,794        0  

PIMCO High Income Fund

        0.00%        0.00%        45,504        0  

PIMCO Income Strategy Fund

        0.00%        1.01%        13,378        0  

PIMCO Income Strategy Fund II

        0.00%        1.73%        28,463        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 2019, 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 2018.

 

104   PIMCO CLOSED-END FUNDS     


Shareholder Meeting Results

 

(Unaudited)

 

Annual Shareholder Meeting Results

 

PIMCO Corporate & Income Strategy Fund and PIMCO Corporate & Income Opportunity Fund held their annual meetings of shareholders on April 27, 2018. Shareholders voted as indicated below:

 

PIMCO Corporate & Income Opportunity Fund          Affirmative      Withheld
Authority
 

Re-election of Craig A. Dawson — Class III to serve until the annual meeting held during the 2020-2021 fiscal year

       70,498,849        1,944,024  

Re-election of Deborah DeCotis — Class III to serve until the annual meeting held during the 2020-2021 fiscal year

       70,528,975        1,913,898  

Election of Hans W. Kertess — Class III to serve until the annual meeting held during the 2020-2021 fiscal year

       69,887,802        2,555,071  

Election of John C. Maney — Class I to serve until the annual meeting held during the 2018-2019 fiscal year

       70,440,929        2,001,944  

 

The other members of the Board of Trustees at the time of the meeting, namely, Messrs. James A. Jacobson, Bradford K. Gallagher, William B. Ogden, IV and Alan Rappaport continued to serve as Trustees of the Fund.

 

 

Interested Trustee

 

PIMCO Corporate & Income Strategy Fund          Affirmative      Withheld
Authority
 

Re-election of Hans W. Kertess — Class I to serve until the annual meeting for the 2020-2021 fiscal year

       34,024,430        1,006,006  

Re-election of Alan Rappaport — Class I to serve until the annual meeting held during the 2020-2021 fiscal year

       34,178,911        851,525  

Re-election of John C. Maney — Class I to serve until the annual meeting held during the 2020-2021 fiscal year

       34,160,564        869,872  

 

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 William B. Ogden, IV continued to serve as Trustees of the Fund.

 

 

Interested Trustee

 

PIMCO High Income Fund, PIMCO Income Strategy Fund and PIMCO Income Strategy Fund II held their annual meetings of shareholders on June 29, 2018. Shareholders voted as indicated below.

 

PIMCO High Income Fund          Affirmative      Withheld
Authority
 

Re-election of Deborah A. DeCotis — Class III to serve until the annual meeting held during the 2020-2021 fiscal year

       111,646,973        5,531,088  

Election of Hans W. Kertess — Class III to serve until the annual meeting held during the 2020-2021 fiscal year

       111,548,676        5,629,385  

Election of John C. Maney — Class I to serve until the annual meeting held during the 2018-2019 fiscal year

       111,473,120        5,704,941  

 

The other members of the Board of Trustees at the time of the meeting, namely, Messrs. Bradford K. Gallagher, Craig A. Dawson, James A. Jacobson, William B. Ogden, IV and Alan Rappaport continued to serve as Trustees of the Fund.

 

 

Interested Trustee

 

PIMCO Income Strategy Fund          Affirmative      Withheld
Authority
 

Re-election of James A. Jacobson — Class II to serve until the annual meeting held during the 2020-2021 fiscal year

       22,804,084        681,362  

Re-election of Alan Rappaport — Class II to serve until the annual meeting held during the 2020-2021 fiscal year

       22,804,084        681,362  

Election of John C. Maney — Class II to serve until the annual meeting held during the 2020-2021 fiscal year

       22,865,266        620,180  

Election of Deborah A. DeCotis* — Class III to serve until the annual meeting held during the 2018-2019 fiscal year

       1,980        30  

 

The other members of the Board of Trustees at the time of the meeting, namely, Messrs. Craig A. Dawson, Bradford K. Gallagher, William B. Ogden, IV and Hans W. Kertess continued to serve as Trustees of the Fund.

 

 

Interested Trustee

*

Preferred Shares Trustee

 

PIMCO Income Strategy Fund II          Affirmative      Withheld
Authority
 

Re-election of William B. Ogden, IV* — Class I to serve until the annual meeting held during the 2020-2021 fiscal year

       3,489        39  

Re-election of Alan Rappaport — Class I to serve until the annual meeting held during the 2020-2021 fiscal year

       53,442,557        1,185,879  

Re-election of Craig A. Dawson — Class I to serve until the annual meeting held during the 2020-2021 fiscal year

       53,589,109        1,039,327  

 

The other members of the Board of Trustees at the time of the meeting, namely, Ms. Deborah A. DeCotis and Messrs. John C. Maney, Bradford K. Gallagher, Hans W. Kertess and James A. Jacobson continued to serve as Trustees of the Fund.

 

 

Interested Trustee

*

Preferred Shares Trustee

 

  ANNUAL REPORT   JULY 31, 2018   105


Changes to Boards of Trustees

 

(Unaudited)

 

Effective April 27, 2018, Mr. Hans W. Kertess, who was previously a Class I Trustee of PIMCO Corporate & Income Opportunity Fund, became a Class III Trustee of PIMCO Corporate & Income Opportunity Fund. Effective April 27, 2018, Mr. John C. Maney, who was previously a Class III Trustee of PIMCO Corporate & Income Opportunity Fund, became a Class I Trustee of PIMCO Corporate & Income Opportunity Fund.

 

Effective June 29, 2018, Mr. John C. Maney, who was previously a Class III Trustee of PIMCO Income Strategy Fund, became a Class II Trustee of PIMCO Income Strategy Fund. Effective June 29, 2018, Ms. Deborah A. DeCotis, who was previously a Class II Trustee of PIMCO Income Strategy Fund, became a Class III Trustee of PIMCO Income Strategy Fund. Effective June 29, 2018, Mr. Hans W. Kertess, who was previously a Class I Trustee of PIMCO High Income Fund, became a Class III Trustee of PIMCO High Income Fund. Effective June 29, 2018, Mr. John C. Maney, who was previously a Class III Trustee of PIMCO High Income Fund, became a Class I Trustee of PIMCO High Income Fund.

 

106   PIMCO CLOSED-END FUNDS     


Dividend Reinvestment Plan

 

(Unaudited)

 

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.astfinancial.com, by calling (844) 33-PIMCO (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 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 share of a Fund (“NAV”) is equal to or less than the market price per common share 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.

 

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 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

 

 

  ANNUAL REPORT   JULY 31, 2018   107


Dividend Reinvestment Plan (Cont.)

 

(Unaudited)

 

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.astfinancial.com.

 

 

108   PIMCO CLOSED-END FUNDS     


Management of the Funds

 

(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
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 2020-2021 fiscal year for PCN, PTY and PHK and the 2019-2020 fiscal year for PFL and PFN.   President, H. Kertess & Co., a financial advisory company; and Senior Adviser (formerly Managing Director), Royal Bank of Canada Capital Markets (since 2004).    93   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 2020-2021 fiscal year for PHK and PTY and the 2018-2019 fiscal year for PFL, 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); Trustee, Smith College (since 2017); and Director, Watford Re (since 2017). 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).    93   None

Bradford K. Gallagher

1944

  Trustee   Trustee of each Fund since 2010, expected to stand for re-election at the annual meeting of shareholders held during the 2018-2019 fiscal year for PFL and PFN and the 2019-2020 fiscal year for PHK, PTY and PCN.   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).    93   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 2020-2021 fiscal year for PFL, the 2018-2019 fiscal year for PCN and the 2019-2020 fiscal year for PHK, PTY and PFN.   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).    93   Formerly, 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 held during the 2020-2021 fiscal year for PFN, the 2018-2019 fiscal year for PHK and PTY and the 2019-2020 fiscal year for PFL and PCN.   Retired. Formerly, Asset Management Industry Consultant; and Managing Director, Investment Banking Division of Citigroup Global Markets Inc.    93   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 2020-2021 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); and Director, Victory Capital Holdings, Inc., an asset management firm (since 2013). Formerly, Member of Board of Overseers, NYU Langone Medical Center (2015-2016); Trustee, American Museum of Natural History (2005-2015); Trustee, NYU Langone Medical Center (2007-2015); Vice Chairman (formerly Chairman and President), U.S. Trust (formerly Private Bank of Bank of America, the predecessor entity of U.S. Trust) (2001-2008).    93   None

 

  ANNUAL REPORT   JULY 31, 2018   109


Management of the Funds (Cont.)

 

 

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
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 2020-2021 fiscal year for PTY and PFN, the 2018-2019 fiscal year for PFL and the 2019-2020 fiscal year for PHK and PCN.   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.    27   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 2018-2019 fiscal year for PHK and PTY, the 2020-2021 fiscal year for PCN and PFL and the 2019-2020 fiscal year for PFN.   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).    27   None

 

*

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 11 Baker Street London, WIU 3AH GBR.

**

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, Suite 250, Newport Beach, CA 92660.

 

110   PIMCO CLOSED-END FUNDS     


 

(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 the Past 5 Years

Peter G. Strelow1

1970

   President    Since 2014    Managing Director and Co-Chief Operating Officer, PIMCO. President, PIMCO-Managed Funds, PIMCO Funds, PIMCO Variable Insurance Trust, PIMCO ETF Trust, PIMCO Equity Series and PIMCO Equity Series VIT. Formerly, Chief Administrative Officer, PIMCO.

Keisha Audain-Pressley

1975

   Chief Compliance Officer    Since January 2018    Senior Vice President and Deputy Chief Compliance Officer, PIMCO. Chief Compliance Officer, PIMCO-Managed Funds.

Joshua D. Ratner

1976

   Vice President, Secretary and Chief Legal Officer    Since 2014    Executive Vice President and Deputy General 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.

Wu-Kwan Kit1

1981

   Assistant Secretary    Since March 2017    Vice President and 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, Assistant General Counsel, VanEck Associates Corp.

Stacie D. Anctil1

1969

   Vice President    Since 2015    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.

Eric D. Johnson1

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

   Vice President    Since December 2017    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.

Bijal Parikh1

1978

   Vice President    Since March 2017    Senior Vice President, PIMCO. Vice President, PIMCO-Managed Funds, PIMCO Funds, PIMCO Variable Insurance Trust, PIMCO ETF Trust and PIMCO Equity Series.

Trent W. Walker1

1974

   Treasurer    Since December 2017    Executive Vice President, PIMCO. Treasurer, PIMCO-Managed Funds, PIMCO Funds, PIMCO Variable Insurance Trust, PIMCO ETF Trust, PIMCO Equity Series and PIMCO Equity Series VIT.

Erik C. Brown

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.

Colleen Miller

1980

   Assistant Treasurer    Since March 2017    Senior 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, Vice President, Cohen & Steers Capital Management.

Christopher M. Morin1

1980

   Assistant Treasurer    Since 2016    Senior 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.

 

1 

The address of these officers is Pacific Investment Management Company LLC, 650 Newport Center Drive, Newport Beach, California 92660.

 

  ANNUAL REPORT   JULY 31, 2018   111


Approval of Investment Management Agreement

 

At an in-person meeting held on June 14, 2018 (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 Investment Company Act of 1940) 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 August 1, 2018. Prior to the Approval Meeting, the Contracts Committee of the Board of each Fund (together, the “Committee”) held an in-person meeting on June 14, 2018 (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 11, 2018, the Chair and another member 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 estimated profitability with respect to the Agreement, comparative fees and expenses and Fund performance. On May 16, 2018, 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, 2018, the Committee held a meeting via conference call (collectively with the May 11, 2018 conference call, the 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.

 

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 each Fund for various time periods, presented through comparisons to the investment performance of a group of funds identified by Lipper with investment classifications/objectives comparable to those of the Fund (for each Fund, its “Lipper Performance Universe”), (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 with different investment advisers identified by Lipper (for each Fund, its “Lipper Expense Group”) as well as of a larger sample of comparable funds identified by Lipper (for each Fund, its “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 with similar investment strategies to those of the Funds, (v) the estimated profitability to PIMCO with respect to each Fund for the one-year period ended December 31, 2017, (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) information regarding any economies of scale reached in the operation of the Funds, including in connection with at-the-market offerings contemplated by certain Funds, (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, (xii) information regarding the comparative yields of the Funds, (xiii) information regarding the risk-adjusted returns of the Funds, (xiv) possible “fall-out” benefits to PIMCO from its relationship with 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.

 

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

 

 

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(Unaudited)

 

described below, although individual Trustees may have evaluated the information presented differently from one another, attributing different weights to various factors.

 

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 are 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 shares 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 unitary 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’ unitary fee arrangements cover other supervisory and administrative services required by the Fund that are typically paid for or incurred by peer closed-end funds directly in addition to a fund’s management fee (such fees and expenses, “Operating Expenses”) 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, for each Fund, the contractual management fee rate for the Fund under its unitary fee arrangement was at or below the median contractual management fees of the other funds in its Lipper Expense Group, calculated both on average net assets and on average managed assets, with the exception of PFL, whose contractual management fee rate was above the median in both cases. The Trustees took into account that each Fund’s unitary fee arrangement covers substantially all of the Fund’s Operating Expenses and therefore, all other things being equal, would tend to be higher than the contractual management fee rates of other funds in the applicable Lipper Expense Group, which generally do not have a unitary 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 unitary 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 for the duration of the contractual period as a percentage of either managed assets (including assets attributable to preferred shares and certain other forms of leverage) or net assets (including assets attributable to preferred shares), as applicable, making it more predictable under ordinary circumstances in comparison to other fee and expense structures, under which the Funds’ Operating Expenses (including certain third-party fees and expenses) could vary significantly over time. The Trustees also considered that the unitary 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).

 

Fund-specific comparative performance results for the Funds reviewed by the Trustees are discussed below. The comparative performance

 

 

  ANNUAL REPORT   JULY 31, 2018   113


Approval of Investment Management Agreement (Cont.)

 

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, 2017. The Trustees also reviewed the Fund Scoring Summaries prepared by PIMCO at the Independent Trustees’ request comparing each Fund’s fees/expenses against those of its Lipper Expense Universe and performance against that of its Lipper Performance 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, 2017, in each case, versus a Fund’s management fees or total expense ratio). The Fund Scoring Summaries were based on net assets, one showing total expenses inclusive of interest and borrowing expenses and the other showing total expenses 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.

 

PIMCO Corporate & Income Opportunity Fund

 

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 32 funds for one-year performance, 27 funds for three-year performance, 23 funds for five-year performance and 17 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, 2017.

 

The Trustees noted that the Lipper Expense Group for the Fund consisted of a total of 13 funds, including the Fund. The Trustees also noted that the average net assets of the common shares of the funds in the Lipper Expense Group ranged from $207.6 million to $1.737 billion, and that one fund in the Lipper Expense 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 27 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.

 

PIMCO Corporate & Income Strategy Fund

 

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 32 funds for one-year performance, 27 funds for three-year performance, 23 funds for five-year performance and 17 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, 2017.

 

The Trustees noted that the Lipper Expense Group for the Fund consisted of a total of 13 funds, including the Fund. The Trustees also noted that the average net assets of the common shares of the funds in the Lipper Expense Group ranged from 207.6 million to $1.737 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 27 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.

 

PIMCO High Income Fund

 

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 32 funds for one-year performance, 27 funds for three-year performance, 23 funds for five-year performance and 17 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, 2017.

 

 

114   PIMCO CLOSED-END FUNDS     


(Unaudited)

 

 

The Trustees noted that the Lipper Expense Group for the Fund consisted of a total of 13 funds, including the Fund. The Trustees also noted that the average net assets of the common shares of the funds in the Lipper Expense Group ranged from $207.6 million to $1.737 billion, and that one fund 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 27 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.

 

PIMCO Income Strategy Fund

 

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 32 funds for one-year performance, 27 funds for three-year performance, 23 funds for five-year performance and 17 funds for ten-year performance, the Trustees noted that the Fund had first quintile performance for the one-year and three-year periods, second quintile performance for the five-year period, and third quintile performance for the ten-year period ended December 31, 2017.

 

The Trustees noted that the Lipper Expense Group for the Fund consisted of a total of 13 funds, including the Fund. The Trustees also noted that the average net assets of the common shares of the funds in the Lipper Expense Group ranged from $207.6 million to $1.737 billion, and that eight 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 27 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 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 (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 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 average net assets was at the median total expense ratio (excluding interest and borrowing expenses) of the funds in its Lipper Expense Universe.

 

PIMCO Income Strategy Fund II

 

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 32 funds for one-year performance, 27 funds for three-year performance, 23 funds for five-year performance and 17 funds for ten-year performance, the Trustees noted that the Fund had first quintile performance for the one-year, three-year and five-year periods, and fourth quintile performance for the ten-year period ended December 31, 2017.

 

The Trustees noted that the Lipper Expense Group for the Fund consisted of a total of 13 funds, including the Fund. The Trustees also noted that the average net assets of the common shares of the funds in the Lipper Expense Group ranged from $207.6 million to $1.737 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 27 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 average managed 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 average managed assets was at 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 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.

 

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 information provided by

 

 

  ANNUAL REPORT   JULY 31, 2018   115


Approval of Investment Management Agreement (Cont.)

 

PIMCO regarding the dividend yields of each Fund in comparison to funds in the Lipper General Bond Funds grouping as of December 31, 2017.

 

The Trustees considered information provided by PIMCO regarding the management fees charged by PIMCO to other funds and accounts with similar strategies to those of the Funds. The Trustees considered information provided by PIMCO indicating that, in comparison to certain other products managed by PIMCO, including open-end funds and exchange-traded funds, 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 were advised by PIMCO that, in light of these additional challenges, different pricing structures for closed-end funds such as the Funds and other products managed by PIMCO are to be expected, and that comparisons of pricing structures across these products may not always be apt comparisons, even where other products have similar investment objectives and strategies to those of the Funds.

 

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 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) 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 (collectively, the “Estimated Margins”), in each case for the one-year period ended December 31, 2017; (ii) a year-over-year comparison of PIMCO’s Estimated Margins for the one-year periods ended December 31, 2017 and December 31, 2016; and (iii) an

overview of PIMCO’s average fee rates with respect to all of the closed-end funds advised by PIMCO, including the Funds, compared to PIMCO’s average fee rates with respect to its other clients, including PIMCO-advised separate accounts, open-end funds, 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.

 

The Trustees also took into account that the Funds do not currently have any breakpoints in their management fees. The Trustees considered that, as closed-end investment companies, the Funds do not continually offer new shares to raise additional assets (as does a typical open-end investment company), but may raise additional assets through periodic shelf offerings (such as the shelf offering commenced by PTY in March 2017) and may also experience asset growth through investment performance and/or the increased use of leverage. The Trustees noted that PIMCO shares the benefits of potential economies of scale with the Funds and their shareholders in a number of ways, including investing in portfolio and trade operations management, firm technology, middle and back office support, legal and compliance, and fund administration logistics; senior management supervision and governance of those services; and the enhancement of services provided to the Funds in return for fees paid. The Trustees also considered that the unitary fee arrangements provide inherent economies of scale because a Fund maintains competitive fixed unitary 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’ unitary 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 unitary 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

 

 

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(Unaudited)

 

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.

 

 

  ANNUAL REPORT   JULY 31, 2018   117


Privacy Policy1

 

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. If you are a registered user of the Funds’ website, the Funds or their service providers or third party firms engaged by the Funds or their service providers may collect or share information submitted by you, which may include personally identifiable information. This information can be useful to the Funds when assessing and offering services and website features. You can

 

 

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(Unaudited)

 

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. The Funds do not look for web browser “do not track” requests.

 

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 March 23, 2017.

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”).

 

 

  ANNUAL REPORT   JULY 31, 2018   119


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 the Funds listed on the Report cover.


 

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CEF3011AR_073118


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, 2018

   $            53,910

                          July 31, 2017

   $            37,115

                (b)     Fiscal Year Ended

  

            Audit-Related Fees

                          July 31, 2018

   $            18,000

                          July 31, 2017

   $            18,000

                (c)     Fiscal Year Ended

  

            Tax Fees (1)

                          July 31, 2018

   $                —

                          July 31, 2017

   $                —

                (d)     Fiscal Year Ended

  

            All Other Fees (2)

                          July 31, 2018

   $                —

                          July 31, 2017

   $                —

“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.

“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 “Tax Fees” for the last two fiscal years.

(2) 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)

 

     Aggregate Non-Audit Fees Billed to Entity  
Entity    July 31, 2018      July 31, 2017  

  PIMCO Corporate & Income Strategy Fund

     $ 18,000          $ 18,000    

  Pacific Investment Management Company LLC (“PIMCO”)

 

    

 

7,397,858  

 

 

 

    

 

8,531,028  

 

 

 

  

 

 

 

Total

     $ 7,415,858          $ 8,549,028    
  

 

 

    

 

 

 

 

    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 report to shareholders under Item 1.

Item 7.     Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.

Policy Statement: The proxy voting policy is intended to foster PIMCO’s compliance with its fiduciary obligations and applicable law; the policy applies to any voting or consent rights with respect to securities held in accounts over which PIMCO has discretionary voting authority. The Policy is designed in a manner reasonably expected to ensure that voting and consent rights are exercised in the best interests of PIMCO’s clients.

Overview: PIMCO has adopted a written proxy voting policy (“Proxy Policy”) as required by Rule 206(4)-6 under the Advisers Act. As a general matter, when PIMCO has proxy voting authority, PIMCO has a fiduciary obligation to monitor corporate events and to take appropriate action on client proxies that come to its attention. Each proxy is voted on a case-by-case basis, taking into account relevant facts and circumstances. When considering client proxies, PIMCO may determine not to vote a proxy in limited circumstances.

Equity Securities: PIMCO has retained an Industry Service Provider (“ISP”) to provide research and voting recommendations for proxies relating to equity securities in accordance with the ISP’s guidelines. By following the guidelines of an independent third party, PIMCO seeks to mitigate potential conflicts of interest PIMCO may have with respect to proxies covered by the ISP. PIMCO will follow the recommendations of the ISP unless: (i) the ISP does not provide a voting recommendation; or (ii) a PM decides to override the ISP’s voting recommendation. In either such case as described above, the Legal and Compliance department will review the proxy to determine whether a material conflict of interest, or the appearance of one, exists.

Fixed Income Securities: Fixed income securities can be processed as proxy ballots or corporate action-consents at the discretion of the issuer/ custodian. When processed as proxy ballots, the ISP generally does not provide a voting recommendation and their role is limited to election processing and recordkeeping. When processed as corporate action-consents, the Legal and Compliance department will review all election forms to determine whether a conflict of interest, or the appearance of one, exists with respect to the PM’s consent election. PIMCO’s Credit Research and Portfolio Management Groups are responsible for issuing recommendations on how to vote proxy ballots and corporation action-consents with respect to fixed income securities.

Resolution of potential conflicts of interest: 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 working group to assess and resolve the conflict (the “Proxy Working Group”); or (ii) vote in accordance with protocols previously established by the Proxy Policy, the Proxy Working Group and/or other relevant procedures approved by PIMCO’s Legal and Compliance department with respect to specific types of conflicts.

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.

Sub-Adviser Engagement: As an investment manager, PIMCO may exercise its discretion to engage a Sub-Adviser to provide portfolio management services to certain Funds. Consistent with its management responsibilities, the Sub-Adviser will assume the authority for voting proxies on behalf of PIMCO for these Funds. Sub-Advisers may utilize third parties to perform certain services related to their portfolio management responsibilities. As a fiduciary, PIMCO will maintain oversight of the investment management responsibilities performed by the Sub-Adviser and contracted third parties.

Item 8.     Portfolio Managers of Closed-End Management Investment Companies.

(a)(1)    

As of September 27, 2018, the following individuals have primary responsibility for the day-to-day management of the PIMCO Income Strategy 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, 2018, 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    

 

   20        $140,221.75       10        $29,586.21       11          $1,546.27    
             

 

Mohit Mittal    

 

   11        $23,840.61       15*        $8,876.12       135**        $61,751.77    

* Of these Other Pooled Investment Vehicles, 2 accounts totaling $1,925.82 million in assets pay an advisory fee that is based in part on the performance of the accounts.

**Of these Other Accounts, 3 accounts totaling $639.41 million in assets pay 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. In addition, regulatory restrictions, actual or potential conflicts of interest or other considerations may cause PIMCO to restrict or prohibit participation in certain investments.

    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. Additionally, a fund or other account managed by PIMCO may take an investment position or action that may be different from, or inconsistent with, an investment position or action taken by another fund or other account managed by PIMCO having similar or differing investment objectives. These positions and actions may adversely impact the Fund. For example, the Fund may buy a security and another fund or other account managed by PIMCO may establish a short position in that same security or in another security issued by the same issuer. The subsequent short sale may result in a decrease in the price of the security that the first fund holds. 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, 2018, 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’s approach to compensation seeks to provide professionals with a Total Compensation Plan and process that is driven by PIMCO’s mission and values. 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; and

   

PIMCO’s “Discern and Differentiate” discipline guides total compensation levels.

The Total Compensation Plan consists of three components. The compensation program for portfolio managers is designed to align with clients’ interests, emphasizing each portfolio manager’s ability to generate long-term investment success for PIMCO’s clients. A portfolio manager’s compensation is not based solely on the performance of the Fund or any other account managed by that portfolio manager:

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 risk-adjusted performance and contributions to PIMCO’s broader investment process. The compensation process is not formulaic and the following non-exhaustive list of qualitative and quantitative criteria are considered when determining the total compensation for portfolio managers:

   

Performance measured over a variety of longer- and shorter-term periods, including 5-year, 4-year, 3-year, 2-year and 1-year dollar-weighted and account-weighted, pre-tax total and risk-adjusted investment performance as judged against the applicable benchmarks (which may include internal investment performance-related benchmarks) for each account managed by a portfolio manager (including the Funds) and relative to applicable industry peer groups; greatest emphasis is placed on 5-year and 3-year performance, followed by 1-year performance;

   

Consistency of investment performance across portfolios of similar mandate and guidelines, rewarding low dispersion and consistency of outperformance;

   

Appropriate risk positioning and risk management mindset which includes consistency with PIMCO’s investment philosophy, the Investment Committee’s positioning guidance, absence of defaults, and appropriate alignment with client objectives;

   

Contributions to mentoring, coaching and/or supervising members of team;

   

Collaboration, idea generation, and contribution of investment ideas in the context of PIMCO’s investment process, Investment Committee meetings, and day-to-day management of portfolios;

   

With much lesser importance than the aforementioned factors: amount and nature of assets managed by the portfolio manager, contributions to asset retention, and client satisfaction.

PIMCO’s partnership culture further rewards strong long term risk adjusted returns with promotion decisions almost entirely tied to long term contributions to the investment process. 10-year performance can also be considered, though not explicitly as part of the compensation process.

Deferred Compensation – Long Term Incentive Plan (“LTIP”) and/or M Options are 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 LTIP provides participants with 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.

   

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.

Eligibility to participate in LTIP and the M Unit program is contingent upon continued employment at PIMCO and all other applicable eligibility requirements.


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, 2018:

 

Portfolio Manager  

Dollar Range of Equity Securities of the Fund Owned   
as of July 31, 2018

 

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 as of a date within 90 days of the filing date of this report, based on their evaluation of the Registrant’s disclosure controls and procedures (as defined in Rule 30a-3(c) under the 1940 Act), that the design of such procedures is effective to provide reasonable assurance that material information required to be disclosed by the Registrant on Form N-CSR is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms.

 

  (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 (17 CFR 270.30a-3(d))) that occurred during the last 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.

Disclosure of Securities Lending Activities for Closed-End Management Investment Companies.

None.

 

Item 13.

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.
                  (a)(3)   None.
                  (a)(4)   There was no change in the registrant’s independent public accountant for the period covered by this report.
                  (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 Income Strategy Fund
By:  

/s/ Peter G. Strelow

    

  Peter G. Strelow
  President (Principal Executive Officer)
Date: September 28, 2018

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 28, 2018
By:  

/s/ Trent W. Walker

     

  Trent W. Walker
  Treasurer (Principal Financial & Accounting Officer)
Date: September 28, 2018