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Fixed Income Sector

What is Fixed Income?Bonds Up CloseInvestment VehiclesOur HoldingsGeneral Thoughts. TOC. BondsGovernmentCorporateCertificates of Deposit (CDs)Commercial PaperSavings AccountsPreferred Stock. What is Fixed Income?. How do they work?Par Value ? Price = EarningsMaturity lengthCoupon Rates

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Fixed Income Sector

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    1. Fixed Income Sector Franz Russler Gregory Duperon September 29, 2009

    2. What is Fixed Income? Bonds Up Close Investment Vehicles Our Holdings General Thoughts TOC

    3. Bonds Government Corporate Certificates of Deposit (CDs) Commercial Paper Savings Accounts Preferred Stock What is Fixed Income?

    4. How do they work? Par Value Price = Earnings Maturity length Coupon Rates (Computed Yields) Government Bonds US Treasuries Bills, Notes & Bonds Municipal Bonds Are government bonds guaranteed? Bonds: A Closer Look Munis General Obligation Bonds (GOs) are backed by the ability to pay using tax revenues (credit) not revenues from a project or backed by an asset Revenue Bonds Munis backed by revenues generated from a specific project (toll roads?)Munis General Obligation Bonds (GOs) are backed by the ability to pay using tax revenues (credit) not revenues from a project or backed by an asset Revenue Bonds Munis backed by revenues generated from a specific project (toll roads?)

    5. Credit Rating of the Issuer Investment Grades High-Yield (Junk) Bonds: A Closer Look (2) Determinants of Bond Safety: 1. Coverage Ratios company earnings to fixed costs (low/declining is bad) Leverage Ratio Debt-to-equity high is bad; unable to earn enough to satisfy bond obligations Liquidity Ratios Current and Quick ability to pay current bills with current liquid assets Profitability Ratios Rate of return on assets or equity (ROA, ROE) Cash flow-to-debt ratioDeterminants of Bond Safety: 1. Coverage Ratios company earnings to fixed costs (low/declining is bad) Leverage Ratio Debt-to-equity high is bad; unable to earn enough to satisfy bond obligations Liquidity Ratios Current and Quick ability to pay current bills with current liquid assets Profitability Ratios Rate of return on assets or equity (ROA, ROE) Cash flow-to-debt ratio

    6. Factors Affecting Yield Current Price Market Interest Rates Maturity Inflation Lowers the Par Value Bonds: A Closer Look (3) 1. Bond Prices and yields are inversely related Yield to maturity is maximum expected yield, and Expected Yield takes into account default risk Not knowing future interest rates induces a yield risk premium to be added to the initial price 2. Prices of long-term bonds are more sensitive to interest rate changes than short-term 3. Prices of low-coupon bonds are more sensitive to rate changes than high-coupon bonds1. Bond Prices and yields are inversely related Yield to maturity is maximum expected yield, and Expected Yield takes into account default risk Not knowing future interest rates induces a yield risk premium to be added to the initial price 2. Prices of long-term bonds are more sensitive to interest rate changes than short-term 3. Prices of low-coupon bonds are more sensitive to rate changes than high-coupon bonds

    7. Individual Bonds Credit & Maturity ? Yield Bond Funds Strategy & Style Maps Money Markets Real Return Exchange Traded Funds (ETFs) Isolation Strategy Investment Vehicles

    8. Our Holdings

    9. Our Holdings (2)

    10. Performance v . S&P 500

    11. Commodity Real Return Fund (PCRCX) Strategy invests in commodity-linked derivative instruments commodity index-linked notes, swaps, options, futures, options on futures! backed by a portfolio of inflation-indexed securities and other FI instruments Risks Commodity risk Derivatives risk Subsidiary risk

    12. Commodity Real Return Fund (PCRCX)

    13. Commodity Real Return Fund (PCRCX)

    14. Commodity Real Return Fund (PCRCX) Highlights U.S. Agency mortgage-backed securities benefited performance as mortgage spreads tightened Lowlights Commodities declined 44.99% . Energy sector was down 62.74% during period. TIPS, the funds collateral, underperformed benchmark Exposure to U.S. corporate bonds in financial sector Emphasis on inflation-linked bonds in Japan Benchmark: Dow Jones-AIG Commodity Index Total Return

    15. Emerging Markets Bond Fund (PEBCX) Strategy invests at least 80% of assets in instruments economically tied to emerging markets could be forwards, options, futures, swaps investment-grade and high-yield securities (max 15% below B rating) may be denominated non-U.S. currencies Risks currency risk emerging markets risk high-yield risk

    16. Emerging Markets Bond Fund (PEBCX)

    17. Emerging Markets Bond Fund (PEBCX)

    18. Emerging Markets Bond Fund (PEBCX) Highlight(s) Underweighting Ecuador, Venezuela and Pakistan Lowlight(s) Overweighting Russia Underweighting Lebanon and Turkey = missed opportunities Benchmark: JPMorgan Emerging Markets Bond Index (EMBI) Global

    19. High Yield C Fund (PHDCX) Strategy at least 80% in high-yield securities can include forwards, options, swaps 20%, possibly, in securities dominated in foreign currencies 15%, possibly, in emerging market securities 10%, possibly, in preferred stocks Risks default risk currency risk liquidity risk

    20. High Yield C Fund (PHDCX)

    21. High Yield C Fund (PHDCX)

    22. High Yield C Fund (PHDCX) Highlight(s) Exposure to investment-grade bonds, which outperformed high-yields by ~15%. Overweighting healthcare sector, which benefited as investors sought defensive plays Underweighting gaming sector Lowlight(s) Overweighting financial sector Underweighting environmental sector, which was among the top performers in high-yield market Overweighting auto-related bonds Benchmark: Merrill Lynch U.S. high-Yield, BB-B Rated, Constrained Index

    23. Global Bond Fund (USDHedged) (PCIIX) Strategy invests at least 80% of assets in securities economically tied to at least 3 countries forwards, options, futures, swaps may invest up to 10% in high-yield securities (B and higher) Risks currency risk interest rate risk default risk

    24. Global Bond Fund (USDHedged) (PCIIX)

    25. Global Bond Fund (USDHedged) (PCIIX)

    26. Global Bond Fund (USDHedged) (PCIIX) Highlights Underweighting British pound Lowlights Positions in Agency and non-Agency mortgage-backed securities and other asset-backed securities Japanese inflation-linked bonds, which underperformed nominal Japanese government bonds Corporate bond holdings of select financial companies Exposure to short-dated interest rate swaps Benchmark: JPMorgan GBI Global Hedged in USD

    27. Where is the market heading? Market Interest Rates Inflation How do we want to allocate Fixed Income? Holistically Individually Other Considerations? General Discussion

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