in the Fund’s Common Shares involves substantial risks arising from, among other strategies, the Fund’s ability to invest in debt instruments
that are, at the time of purchase, rated below investment grade (below Baa3 by Moody’s Investors Service, Inc. or below BBB- by either S&P Global
Ratings or Fitch, Inc.) or unrated but determined by PIMCO to be of comparable quality, the Fund’s exposure to mortgage-related and other asset-backed
securities, and the Fund’s use of leverage. Debt securities of below investment grade quality are regarded as having predominantly speculative
characteristics with respect to capacity to pay interest and to repay principal, and are commonly referred to as “high yield” securities or
“junk bonds.” The Fund’s exposure to municipal securities means it is particularly subject to the risk that a municipal issuer will be
unable to make timely payments of interest and principal, which risk will generally be higher during general economic downturns and may be adversely
impacted by litigation, legislation or political events, or by the bankruptcy of the issuer. Before investing in the Common Shares, you should read the
discussion of the principal risks of investing in the Fund in “ Principal Risks of the Fund.” Certain of these risks are summarized in
“Prospectus Summary—Principal Risks of the Fund.” The Fund cannot assure you that it will achieve its investment objective, and you could
lose all of your investment in the Fund.
Portfolio Contents. Under normal circumstances, the Fund will invest substantially all (at least 90%) of its net assets in municipal bonds which pay interest that, in the opinion of bond counsel to the issuer (or on the basis of other authority believed by PIMCO to be reliable), is exempt from federal and California income taxes (i.e., excluded from gross income for federal and California income tax purposes but not necessarily exempt from the federal alternative minimum tax). Subject to its other investment policies, the Fund may invest up to 20% of its total assets in investments the interest from which is subject to the federal alternative minimum tax.
The municipal bonds in which the Fund invests are generally issued by the State of California, a city in California, or a political subdivision, agency, authority, or instrumentality of such state or city, but may be issued by other U.S. states and/or U.S. territories, the interest from which is exempt from California and federal income taxes.
The Fund may also invest up to 10% of its net assets in municipal bonds issued by a U.S. state or territory, a city in a U.S. state or territory, or a political subdivision, agency, authority, or instrumentality of such state, territory or city, the interest from which is not exempt from California income taxes.
Also included within the
general category of municipal bonds in which the Fund may invest are participations in lease obligations.
The Fund invests at least 80% of its net assets in municipal bonds that are, at the time of purchase, rated
“investment grade” by at least one of Moody’s Investors Service, Inc (“Moody’s”), S&P Global Ratings (“S&P”) or
Fitch, Inc. (“Fitch”), or unrated but determined by PIMCO to be of comparable quality. “Investment grade” means a rating, in the case of
Moody’s, of Baa3 or higher, or in the case of S&P and Fitch, of BBB- or higher.
The Fund may invest
up to 20% of its net assets in municipal bonds that are, at the time of investment, rated Ba or B or lower by Moody’s, BB or B or lower by S&P or Fitch or that are
unrated but judged to be of comparable quality by PIMCO. In the event that ratings services assign different ratings to the same security, PIMCO will use the highest rating
as the credit rating for that security. Bonds of below investment grade quality are regarded as having predominantly speculative characteristics with respect to capacity to
pay interest and repay principal and are commonly referred to as “junk bonds.” Bonds in the lowest investment grade category may also be considered to possess
some speculative characteristics.
The Fund may invest in “structured” notes, which are privately negotiated debt obligations where the principal and/or interest is determined by reference to the performance of a benchmark asset or market, such as selected securities or an index of securities, or the differential performance of two assets or markets, such as indices reflecting taxable and tax-exempt bonds. The Fund may do so for the purpose of reducing the interest rate sensitivity of the Fund’s portfolio (and thereby decreasing the Fund’s exposure to interest rate risk).
The Fund may purchase
municipal bonds that are additionally secured by insurance, bank credit agreements, or escrow accounts. The credit quality of companies which provide such credit
enhancements will affect the value and overall credit risk posed by investments in such securities. Although the insurance feature reduces certain financial risks, the
premiums for insurance and the higher market price paid for insured obligations may reduce the Fund’s income and returns.
The Fund may buy and
sell municipal bonds on a when-issued, delayed delivery or forward commitment basis, making payment or taking delivery at a later date. The Fund may invest in floating rate
debt instruments (“floaters”), including inverse floaters, and engage in credit spread trades.
The Fund may invest
in trust certificates issued in tender option bond (“TOB”) programs. In these programs, a trust typically issues two classes of certificates and seeks to use the
proceeds to purchase municipal securities having longer maturities and bearing interest at a higher fixed interest rate than prevailing short-term tax-exempt rates. Service
providers of such trusts may have recourse against the Fund in certain cases.
The Fund may also invest up to 10% of its total assets in securities of other open- or closed-end investment companies that invest primarily in municipal bonds of the types in which the Fund may invest directly. The Fund may invest in other investment companies either during periods when it has large amounts of uninvested cash, during periods when there is a shortage of attractive, high-yielding municipal bonds available in the market, or when PIMCO believes share prices of other investment companies offer attractive values. The Fund may invest in investment companies that are advised by PIMCO or its affiliates to the extent permitted by applicable law and/or pursuant to exemptive relief from the