Pimco

Daniel Ivascyn is Pimcos group chief investment officer. Reuters

Pacific Investment Management Co. best known for its bond funds, runs $27.7 billion in stock mutual funds, according to researcher Morningstar. But the vast majority of those dollars aren’t invested in individual stocks.

Instead, most of Pimco’s 18 stock funds get their stock exposure by buying derivatives linked to indexes. That ties up only a small portion of the funds’ assets—and the firm then aims to boost returns by investing the remaining dollars in a variety of bonds.

Pimco said Thursday that it is launching seven new equity strategies in partnership with Research Affiliates. which provides the indexes used in Pimco’s three biggest stock funds.

The derivatives-plus-bonds strategy is one that Pimco, a unit of Allianz, has employed for more than 20 years. Early on, Pimco’s flagship stock fund bought futures contracts or other derivatives tied to the S&P 500  and then attempted to beat that index by managing the remaining dollars. These days, its biggest stock funds aim to beat conventional market benchmarks in two ways: by following alternative types of indexes as well as through fixed-income investing.

Earlier this week, the Financial Industry Regulatory Authority indicated it has some concerns about funds linked to alternative indexes and how they are marketed to investors.

Pimco’s biggest stock fund, according to Morningstar, is the Pimco EMG Intl Low Volatility RAFI-PLUS AR Fund, an emerging-markets fund launched just over a year ago, which recently had $4.6 billion in assets. Its performance ranks in the top 30% of Morningstar’s diversified emerging-markets category for the past year.

Second-biggest is the Pimco Fundamental IndexPLUS AR Fund, a $4.1 billion U.S.-stock fund that ranks in the top 2% of its Morningstar peer group over the past three years. Next: the $3.2 billion Pimco EM Fundamental IndexPLUS AR Strategy Fund, another emerging-markets fund, which ranks in the top 40% of its peer group for the past three years.

The “AR” in each fund name indicates the fixed-income strategy: it’s an “absolute return” approach that seeks to generate positive returns regardless of overall bond-market trends.

Pimco hasn’t had as much success from an effort that began in 2010 to add traditional actively managed stock funds to its lineup. Its oldest such fund, Pimco EqS Pathfinder Fund, ranks in the bottom 10% of Morningstar’s world-stock category for the past three years and has $1.0 billion in assets.