PIMCO Total Return Fund pptx

Total Return Fund Fourth Quarter 2012 1 Risk Disclosures and Index Descriptions are located in the Important Information section of the Appendix PIMCO Total Return Fund ƒ Uncertainty an

Quarterly Investment Report

PIMCO

840 Newport Center Drive

Newport Beach California 92660 (888) 87-PIMCO www.pimco.com/investmentsDecember 31, 2012

PIMCO Total Return Fund

Total Return Fund Fourth Quarter 2012

1

Risk Disclosures and Index Descriptions are located in the Important Information section of the Appendix

PIMCO Total Return Fund

ƒ Uncertainty and pessimism surrounding the fiscal cliff

negotiations dominated headlines during the fourth quarter

ƒ The Federal Reserve enacted further monetary easing by

committing to purchase $45 billion in Treasuries per month

and by explicitly tying the federal funds rate to

unemployment and inflation targets

ƒ Most fixed income sectors outperformed Treasuries during

the quarter and 2012 as central bank policies helped push

investors toward higher yielding assets

ƒ PIMCO expects the global economy to grow at a modest 1.5

to 2.0 percent over the year ahead

ƒ U.S policymakers passed a last minute deal to avert majority

of the “fiscal cliff” although additional negotiations will be required to deal with the sequestration Estimated 2013 impact will be a 1.3 – 1.4 percent drag on GDP

ƒ PIMCO anticipates global inflation of between 2.0 and 2.5 percent over the cyclical horizon

ƒ The Fund outperformed its index for the quarter and the year

ƒ Most sectors that trade at a spread to U.S Treasuries

outperformed as global central banks extended their

commitment to monetary easing

ƒ The following strategies were positive for the quarter:

¾ An underweight to U.S duration as yields rose across

most of the curve

¾ An allocation to non-Agency mortgages which were

supported by positive supply technicals

¾ A focus on financials, which outperformed the broader

corporate market amid accommodative monetary policy

and improving housing data

¾ Holdings of Build America Bonds (BABs) which

outperformed like-duration Treasuries and long

investment grade corporates during the quarter

¾ Exposure to emerging market local rates, especially in

Brazil, as the Monetary Policy Committee cut the policy

rate

ƒ The following strategies were negative or neutral for returns:

¾ An overweight to Agency mortgage-backed securities

(MBS) which underperformed like-duration Treasuries

This was partially offset given the focus on lower coupon

mortgages which outperformed on a relative basis

ƒ Continue to reduce risk while preferring high quality income over price appreciation, as risk premiums still appear richly priced relative to our outlook

ƒ Remain focused on sectors that will benefit from central bank actions that have increased liquidity and suppressed volatility

ƒ Selectively add high quality duration in countries with healthier balance sheets and independent monetary policy - including, Australia, Canada, Brazil, and Mexico

ƒ Reduce holdings in Agency mortgages to benchmark weightings as Agency MBS appear fully priced with limited upside following recent central bank actions

ƒ Shift credit exposure towards securities higher in the capital structure and remain cautious on the bonds of companies with economic exposure to Europe

ƒ Retain exposure to select corporate and quasi-sovereign bonds in countries with strong initial conditions and strong balance sheets such as Brazil and Mexico

ƒ Continue to hold high quality municipal bonds which have reverted to fair value; focus on essential service revenue bonds such as water and sewer, power, and airports

ƒ Retain longer dated Treasury Inflation-Protected Securities (TIPS) positions to protect against potentially higher long-term inflation

Summary of Performance Data and Portfolio Statistics

PIMCO Total Return Fund

Barclays U.S Aggregate Index (%)3

The Fund's Total Annual Operating Expenses 0.46%

Summary Information 9/30/2012 12/31/2012 Sector Allocation 9/30/2012 12/31/2012 9/30/2012 12/31/2012

Expense Ratio

See example of tracking error / information ratio in

Important Information section of the Appendix.

% of Market Value % of Duration

Portfolio Index

BofA ML

1-3 Yr

Treasury

Citigroup 10-Yr Strip

0 2 4 6 8 10 12

Standard Deviation of Return 2 (%)

10-Year Return vs Standard Deviation

Government-Related may include nominal and inflation-protected Treasuries, agencies, interest rate swaps, Treasury futures and options, and FDIC-guaranteed corporate securities.

The performance quoted represents past performance Past performance is no guarantee of future results Investment return and

principal value will fluctuate so that Fund shares, when redeemed, may be worth more or less than their original cost Current

performance may be lower or higher than the performance data quoted Details regarding any Fund’s operating expenses can be found

in the Fund’s prospectus Performance data current to the most recent month-end is available at www.pimco.com/investments or by

calling (888) 87-PIMCO.

*The benchmark duration as provided by Benchmark Provider

**Benchmark duration as calculated by PIMCO

2

Additional Share Class Performance

PIMCO Total Return Fund

ADMINISTRATIVE Class:

Total Return Fund, Administrative 0.71 - USD Sep-08-94 8.08 6.55 8.07 7.48 10.08 4.23 1.10

Class D:

Total Return Fund, Class D 0.75 - USD Apr-08-98 8.03 6.49 8.02 7.44 10.04 4.21 1.09

Class P:

Total Return Fund, Class P 0.56 - USD Apr-30-08 8.26 6.71 8.23 7.64 10.25 4.30 1.14

The performance quoted represents past performance Past performance is no guarantee of future results Investment return and principal value will

fluctuate so that Fund shares, when redeemed, may be worth more or less than their original cost Current performance may be lower or higher than

the performance data quoted Details regarding any Fund’s operating expenses can be found in the Fund’s prospectus Performance data current to

the most recent month-end is available at www.pimco.com/investments or by calling (888) 87-PIMCO.

December 31, 2012

3

Market Commentary Fourth Quarter 2012

4

Politics Weigh Heavily on Economics

In a largely status quo election, Americans voted President

Barack Obama to a second term in office in November While

the President’s reelection likely cemented the fate of the

Affordable Care Act and Dodd-Frank reforms, market

participants quickly turned their attention to the uncertainty

surrounding the impending fiscal cliff Both political parties

recognized that averting the cliff was essential to avoiding a

recession in 2013, but negotiations were strained for much of

the quarter with Democrats seeking increased tax revenue from

the wealthiest Americans and Republicans asking for spending

cuts on entitlement programs Ultimately, hopes of a grand

bargain abated and gave way to a short-term deal, thus opening

the door to further fiscal negotiations, most notably on a debt

ceiling increase and spending cuts (the “sequester”), in 2013

While politicians struggled to agree on fiscal policy, the Federal

Reserve (Fed) unveiled new monetary policy measures to

stimulate the economy According to Chairman Bernanke, “The

conditions now prevailing in the job market represent an

enormous waste of human and economic potential.” With

Operation Twist set to expire at the end of the year, the

Committee announced that they will initiate purchases of $45

billion in Treasuries, in addition to the existing purchases of $40

billion in Agency mortgage-backed securities (MBS), each

month The Fed also took the extraordinary step of linking an

increase in the federal funds rate to specific economic targets

Rates will stay low, between 0 and 0.25 percent, at least as long

as the unemployment rate remains over 6.5 percent and

projected inflation is below 2.5 percent These targets replace

the Fed’s previous statement that rates would remain low

through at least the middle of 2015

U.S interest rates reversed a downward trend and rose during

the fourth quarter of 2012 The 10-year U.S Treasury yield

increased 12 basis points during the quarter to end December at

1.76 percent The U.S Treasury yield curve steepened as the

2-year U.S Treasury yield rose 2 basis points while the 30-2-year

U.S Treasury yield rose 13 basis points Yields in most eurozone countries fell as investors responded to the European Central Bank’s program of Outright Monetary Transactions and Mario Draghi’s commitment to support the euro Spanish and Italian 10-year yields fell 67 and 60 basis points respectively during the quarter The Barclays U.S Aggregate Index, a widely used index of U.S high-grade bonds that includes Treasuries, returned 0.22 percent during the quarter, and most fixed income sectors that trade at a spread to U.S Treasuries outperformed

on a duration-adjusted basis

Despite the rhetoric surrounding the fiscal cliff and the damage from Hurricane Sandy, there were positive economic data released during the quarter According to gross domestic product (GDP) data, the U.S economy grew at a higher than expected 3.1 percent annual rate during the third quarter, up from 1.3 percent during the second quarter The housing market continued to show improvement during the fourth quarter amid record low mortgage rates In October, the S&P/Case-Shiller Index of property values in 20 cities increased 4.3 percent from

a year earlier, and sales of existing homes rose 5.9 percent to

an annual rate of 5.04 million, the highest level in three years, according to the National Association of Realtors The

unemployment rate fell to 7.8 percent during the quarter, representing a four year low

Most Fixed Income Sectors Outperform U.S Treasuries

The following summarizes fixed income sector returns during the fourth quarter of 2012:

ƒ Agency MBS underperformed like-duration Treasuries in the fourth quarter but outperformed for the year An increase in prepayment speeds coupled with profit taking following the Fed’s third round of Quantitative Easing (QE3)

announcement led to the relative underperformance While the sector as a whole underperformed, volatility remained in relative valuations between coupons as lower origination coupons fared better amid the Fed’s support Commercial

Market Commentary, (cont’d) Fourth Quarter 2012

5

MBS and non-Agency mortgages outperformed for the

quarter and the year as limited supply, strong investor

appetite for higher yielding assets and signs of a bottom in

housing continued to fuel demand

ƒ Investment grade and high yield corporate bonds

outperformed like-duration Treasuries during the fourth

quarter and the year as investor demand for risk assets

remained elevated given persistently low Treasury yields

Corporate bonds benefitted from positive technicals and

reduced risk of disorderly deleveraging, as they continued to

ride the momentum provided by global monetary policy

action On a relative basis, financials outperformed the

broader corporate market on improving fundamentals and

signs of a stabilizing housing market

ƒ Municipal bonds, both tax-exempt and taxable, posted

positive absolute returns over the quarter and the year, as

demand continued to outpace new issue supply Primary

market supply was up 30 percent year-over-year; however,

the majority of primary market issuance was comprised of

refunding activity rather than new-money issuance Demand

remains strong, as municipal mutual funds continued to see

inflows throughout most of the quarter Select lower quality

municipal sectors outperformed high-grade sectors as

investors reached for yield by pushing out the curve and

down the credit spectrum The industrial revenue and

healthcare sectors were the top performers over the quarter

Municipal credit spreads, as measured by BBB versus AAA

Municipal Market Data yields, tightened modestly during the

quarter

ƒ Treasury Inflation-Protected Securities (TIPS) returned 0.69

percent for the quarter and 6.98 percent for the year

(Barclays TIPS Index), and outperformed nominal Treasuries

for both periods Real yields declined across the maturity

spectrum during the year with the 10-year real yield ending

the year at -0.74 percent Breakeven inflation levels (the

difference between nominal and real yields and a proxy for

inflation expectations) widened during the quarter and the year as the markets priced in higher longer-term inflation expectations given the Fed’s continued dovish monetary policies

ƒ Emerging markets (EM) assets also outperformed during the quarter and the year, benefitting from a decline in yields, a contraction in spreads, and a rise in EM currencies driven by the risk-on environment EM spreads tightened 161 basis points over the year and 42 basis points over the quarter, while the JPMorgan EM Bond Index (EMBIG) returned 3.33 percent for the fourth quarter and 18.54 percent for the year

EM local assets outperformed Treasuries during the quarter and year, returning 4.13 and 16.76 percent, respectively, as measured by the JPMorgan GBI – EM Global Diversified Index EM currencies, as measured by the JPMorgan ELMI+ Index, returned 1.13 percent for the fourth quarter and 7.45 percent for the year

ƒ U.S Treasuries underperformed most other developed sovereign bond markets on a hedged basis for the quarter and year amid reduced uncertainty concerning a left-tail event in Europe given the unprecedented monetary support from global central banks

Market Outlook First Quarter 2013

6

The New Normal Remains Intact

PIMCO expects the global economy to grow at a real rate of 1.5

to 2.0 percent in 2013, representing a slowdown from the 2.2

percent pace of growth seen over the past 12 months Real

growth will be moderated by efforts to resolve debt overhangs

through fiscal restraint as evidenced by the slowing in corporate

profits, capital expenditures and global trade Simultaneously,

inflation will decrease in the near term Households will continue

to delever their balance sheets while the corporate sector

remains reluctant to engage its own Nominal growth could,

however, be bolstered by the continued resolve of central banks

The balance of these forces will determine if GDP growth has

slowed to stall speed or if a coordinated global slowdown can be

averted

The negative effects of austerity measures implemented

throughout the eurozone and the U.K are reflected in the weak

growth numbers within the region and demonstrate recessions

already underway Mixed economic data and the unending hope

for further stimulus in the U.S and other developed and

emerging market (EM) economies allowed for cautious optimism

and tempered market volatility in the second half of 2012

However, ongoing efforts by policymakers to offer short-term

solutions are becoming increasingly ineffective in delivering real

outcomes Financial markets’ heightened sensitivity to

policy-related news reflects acknowledgement of the difficulties that lie

ahead in resolving significant structural problems in many

economies

ƒ Key Decisions Support Eurozone – The ratification of the

European Stability Mechanism (ESM) and the European

Central Bank’s (ECB) conditional commitment to be the

lender of last resort significantly reduced the probability of

tail risk in the eurozone Peripheral sovereign spreads

tightened significantly in the fourth quarter, as both actions

boosted confidence and slowed the process of delevering

The question now becomes when Spain or another troubled

sovereign will formally ask for assistance, fulfilling a key

pre-requisite for the ECB to buy their bonds However, bond purchases alone will not be enough to resolve the fundamental challenges facing the eurozone We expect progress toward greater integration to be incremental, conditional and punctuated with periods of volatility, especially surrounding the upcoming Italian elections

ƒ U.S Recovery Frustrated by Policy Uncertainty – U.S

policymakers passed a last minute deal to avert the majority

of the “fiscal cliff” although additional negotiations will be required to deal with the sequestration The estimated 2013 impact will be a 1.3 – 1.4 percent drag on GDP PIMCO forecasts U.S growth between 1.25 and 1.75 percent as ongoing negotiations over government spending and taxes prevent positive economic reports from establishing a trend

In a notable highlight, third quarter GDP was revised up to 3.1% from an initial reading of 2.0 percent Brighter news continues out of the housing sector where many indicators including strong demand, falling inventory, declining distressed sales and improving affordability suggest a gradual bottoming of home prices

ƒ The New Normal Arrives in Emerging Markets –Although

PIMCO anticipates EM growth to continue to outpace that of developed markets over the cyclical horizon, growth will come at a significantly lower level than in recent years EM economies continue to suffer from the knock-on effects of recession and slowdown in much of the developed world

ƒ Longer Term Inflation Concerns Build – PIMCO

anticipates global inflation of between 2.0 and 2.5 percent over the cyclical horizon On a secular basis, PIMCO expects the prolonged wave of ultra-dovish monetary policy

to drive longer-term inflation higher

Market Outlook, (cont’d) First Quarter 2013

7

Investment Strategies: Managing Liquidity and Avoiding

Default Risk

Once again, central banks’ actions combined with slowing

improving fundamentals drove financial asset valuations higher

during the fourth quarter PIMCO sees many asset classes as

being fully valued and continues to implement risk reduction

strategies across portfolios While risks remain skewed to the

downside, we retain our broad defensive positioning and our

focus on yield derived from high quality sources and active

management

ƒ Interest Rate Strategies – PIMCO plans to maintain a

neutral duration position Portfolios will emphasize high

quality duration from countries that we view as having the

cleanest balance sheets, such as the U.S., Canada, Australia,

Brazil and Mexico We remain concentrated in the 5-10 year

portion of the yield curve where we see superior opportunities

for roll-down1 and price appreciation compared to those

available at the short-end, where potential rate rises and

volatility are constrained by Fed intervention We remain

underweight the long end of the yield curve as longer

maturities may not adequately compensate investors for

sizeable longer-term inflation risk

ƒ Mortgages – PIMCO now views Agency mortgages as fully

priced due to ongoing central bank interventions and will look

to reduce exposure to benchmark neutral While recognizing

that the new Fed program will likely continue to disrupt

absolute valuations within the mortgage market over the

cyclical horizon, PIMCO will continue to take advantage of

relative value opportunities across mortgage coupons We

plan to hold non-Agency mortgages and commercial

mortgage-backed securities (CMBS) that have senior

1 Roll-down is a form of return that is realized as a bond approaches maturity, assuming

an upward sloping yield curve

positions in the capital structure and are a source of attractive yield

ƒ Corporate Bonds – PIMCO sees increasing differentiation

between credits in terms of default risk and continues to shift its exposure towards securities higher up in the capital structure We remain cautious towards companies overly dependent on revenue from regions which are in the earlier stages of their deleveraging cycles, such as Europe

We continue to assess and refine our financials exposure both due to industry developments and from a valuation perspective given the outperformance of this sector in 2012

ƒ Emerging Markets – PIMCO plans to retain exposure to

corporate and quasi-sovereign bonds in select countries with strong initial conditions and high quality balance sheets such

as Brazil and Mexico We also plan to maintain exposure to rates in these countries which have relatively high nominal and real local interest rates and steep yield curves with the potential to capture roll-down We continue to expect EM to outpace developed markets over the secular horizon

ƒ Currency – Having reduced our exposure to

commodity-intensive and EM currencies in recent months, PIMCO plans

to maintain minimal currency exposure while the threat of elevated volatility persists We are focused on high quality,

EM currencies such as the Brazilian real, Chinese yuan and Mexican peso as opposed to low quality, low yielding

currencies in developed markets

ƒ Municipals and Treasury Inflation-Protected Securities (TIPS) – PIMCO will broadly maintain its municipal positioning

yet not seek to add exposure given that tax-exempt municipals reverted to fair value during 2012 PIMCO expects to retain its positions in TIPS as the threat of higher longer term inflation remains

Mortgage Commentary and Outlook Fourth Quarter 2012

8

Market Commentary

ƒ Agency mortgage-backed securities (MBS)

underperformed like-duration Treasuries amid

post-QE3 profit taking and increased prepayment

concerns after the reelection of President Obama

ƒ Lower coupons benefitted from ongoing Fed

support, while higher coupons exhibited significant

volatility (especially in November) due to elevated

prepayment concerns and poor technicals

ƒ The 30-year FNMA Par Coupon ended the year at

2.26%, up slightly from the end of last quarter

ƒ HARP (Home Affordable Refinance Program)

continues to have a material impact on higher

coupon prepayments, but will likely wind down

over the next six months

Market Outlook

ƒ The Fed’s $70 billion in monthly purchases are

likely to continue through 2013, providing strong

support for lower coupon MBS

ƒ Mortgage origination employment has increased in

recent months and could result in a slight

tightening in primary secondary spreads as well as

an increase in prepayment speeds in 2013

ƒ Despite the recent rally, non-Agency MBS will

likely continue to benefit from improving housing

fundamentals and limited new issuance

Source: PIMCO, Federal Reserve Dotted lines represent PIMCO various forecasts

0 5 10 15 20 25 30 35 40 45

Past performance is no guarantee of future results Graphs are

for illustrative purposes only and are not indicative of the performance of any particular investment

Investment Grade Credit Commentary and Outlook Fourth Quarter 2012

9

Market Commentary

ƒ The U.S investment grade credit market, as represented by the

Barclays U.S Credit Index, returned 1.04% in the fourth quarter

U.S credit outperformed Treasuries by +1.17%, as credit

markets continued to ride the technical boost provided by QE3

in addition to the FOMC’s announcement that it would convert

Operation Twist into outright Treasury bond purchases

ƒ The fourth quarter set a record for high grade bond issuance, as

$229bn came to market, bringing total primary market issuance

to $859bn for 2012 Demand remained robust despite the high

issuance total, as average new issue concessions were lower

than each of the prior three years

ƒ Financials were the strongest performing sector on an excess

return basis, returning +1.97% on average relative to

like-duration Treasuries Industrials marginally outpaced utilities,

returning +0.85% and +0.81% relative to like-duration

Treasuries, respectively

Market Outlook

quarter as global central banks enacted policy responses aimed

at offsetting fiscal tightening However, it is unlikely that policy

makers’ attempts at staving off near-term challenges will do

much in the way of addressing longer-term structural

impediments to growth

ƒ We still see many opportunities in credit that can offer

compelling risk-adjusted returns for investors In the current

environment of sluggish global growth, where credit beta has

been squeezed and will likely contribute less to total return of

credit moving forward, we believe investors should focus on

bottom-up research in specific sectors and companies that have

the opportunity to grow faster than their economies

Unless otherwise noted, graph data represents the excess return performance of the Barclays U.S Credit Index and its sub-indices The corporate sectors shown are not equally weighted in the index but instead are market weighted The sectors shown represent the broad components of the index Excess Return is a duration-adjusted measure of performance relative to a term structure-matched position The predominate method for calculating excess return uses U.S Treasuries and key rate durations It measures the amount by which the return on an investment credit exceeds the equivalent “risk free” rate of return All investments contain risk and may lose value

Past performance is no guarantee of future results Graphs are for illustrative purposes only and are not indicative of the performance of any particular investment

0.0 0.5 1.0 1.5 2.0 2.5

0.0 0.5 1.0 1.5 2.0 2.5

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5

U.S Credit Financials Industrials Utilities

Real Return Commentary and Outlook Fourth Quarter 2012

10

Market Commentary

ƒ Treasury Inflation-Protected Securities (TIPS) returned 0.69

percent during the fourth quarter, as represented by the Barclays

Capital U.S TIPS Index The real yield curve remained relatively

unchanged during the fourth quarter with the largest move

happening at the front of the curve as the 1-year real yield

increased just over 30 basis points

ƒ During October and November, real yields rallied on the back of

the new round of bond purchases that the Federal Reserve

announced in September; however, decreasing marginal

effectiveness of further quantitative easing did not have a

dramatic effect on real yields December witnessed a slight sell-off

in real yields resulting in longer-dated yields being relatively

unchanged for the quarter Shorter maturity real yields were hurt

by lower commodity prices.

ƒ Inflation accruals were positive at 0.96 percent over the quarter

Increases in crude oil and gasoline prices were reflected in CPI

numbers for August, September and October, which were passed

through to TIPS in the fourth quarter

ƒ TIPS outperformed nominal Treasuries as nominal yields

increased more than real yields across the term structure,

resulting in higher inflation expectations as represented by wider

breakeven inflation (or the difference between nominal Treasury

yields and yields on maturity matched TIPS) Continued

accommodative policy by the Fed helped feed higher inflation

expectations

Market Outlook

ƒ Expectations that the Fed will remain accommodative for an

extended period are likely to translate into real rates remaining

low for a long time

ƒ Shorter-term, we foresee subdued inflation given excess capacity

and restrained wage growth However, we expect inflation to trend

higher longer-term on the back of poor fiscal conditions and heavy

debt loads in the U.S and other developed countries, prolonged

accommodative and unconventional monetary policies, and

continued stress on global commodity supplies from emerging

market demand growth

SOURCE: Bloomberg

Past performance is no guarantee of future results Graphs are for illustrative

purposes only and are not indicative of the performance of any particular investment The negative real rates in U.S TIPS Yield Curve chart are directly observable in market traded TIPS The yield curves represent TIPS yields at specific points in time

as referenced in the chart

SOURCE: Barclays

-6 -5 -4 -3 -2 -1 0 1 2 3 4