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: 811-07816

PCM Fund, Inc.

(Exact name of registrant as specified in charter)

1633 Broadway, New York, NY 10019

(Address of principal executive offices)

William G. Galipeau

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: December 31

Date of reporting period: December 31, 2014

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.

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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).

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Your Global Investment Authority

 

Annual Report

December 31, 2014

PCM Fund, Inc.

 

PIMCO Dynamic Credit Income Fund

 

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Table of Contents

 

		Page
Letter from the Chairman of the Board & President			2
Important Information About the Fund			5
Financial Highlights			14
Statement of Assets and Liabilities			16
Consolidated Statement of Assets and Liabilities			17
Statement of Operations			18
Consolidated Statement of Operations			19
Statements of Changes in Net Assets			20
Consolidated Statements of Changes in Net Assets			21
Statement of Cash Flows			22
Consolidated Statement of Cash Flows			23
Schedule of Investments			24
Consolidated Schedule of Investments			36
Notes to Financial Statements			60
Report of Independent Registered Public Accounting Firm			86
Glossary			87
Federal Income Tax Information			88
Management of the Fund			89
Shareholder Meeting Results			92
Changes to Boards of Trustees/Changes to Portfolio Managers			94
Investment Strategy Updates			95
Dividend Reinvestment Plan			97
Privacy Policy			99

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Letter from the Chairman of the Board & President

 

Dear Shareholder:

 

As previously announced on September 26, 2014, prior to the close of the reporting period, William “Bill” Gross, PIMCO’s former chief investment officer (CIO) and co-founder, resigned from the firm. PIMCO’s managing directors then elected Daniel Ivascyn to serve as group chief investment officer (Group CIO). In addition, PIMCO appointed Andrew Balls, CIO Global; Mark Kiesel, CIO Global Credit; Virginie Maisonneuve, CIO Global Equities; Scott Mather, CIO U.S. Core Strategies; and Mihir Worah, CIO Real Return and Asset Allocation. On November 3, 2014, PIMCO announced that Marc Seidner returned to the firm effective November 12, 2014 in a new role as CIO Non-traditional Strategies and the head of Portfolio Management in its New York office. Under this leadership structure, Andrew and Mihir have additional managerial responsibilities for PIMCO’s Portfolio Management group and trade floor activities globally. Andrew oversees portfolio management and trade floor activities in Europe and Asia-Pacific, while Mihir oversees portfolio management and trade floor activities in the U.S.

 

Douglas Hodge, PIMCO’s chief executive officer, and Jay Jacobs, PIMCO’s president, continue to serve as the firm’s senior executive leadership team, spearheading PIMCO’s business strategy, client service and the firm’s operations.

 

These appointments are a further evolution of the structure that PIMCO established earlier in 2014, reflecting PIMCO’s belief that the best approach for its clients and the firm is an investment leadership team of seasoned, highly-skilled investors overseeing all areas of PIMCO’s investment activities.

 

During his 43 years at PIMCO, Mr. Gross made great contributions to building the firm and delivering value to PIMCO’s clients. Over this period, PIMCO developed into a global asset manager, expanding beyond core fixed income, and now employs over 2,400 professionals across 13 offices, including more than 250 portfolio managers. Mr. Gross was also responsible for starting PIMCO’s robust investment process, with a focus on long-term macroeconomic views and bottom-up security selection—a process that is well institutionalized and will continue into PIMCO’s future.

 

For the 12-month reporting period ended December 31, 2014

 

Following a period of weakness early in 2014, the U.S. economy was highly resilient and expanded at a strong pace as the year progressed. Looking back, gross domestic product (GDP), the value of goods and services produced in the country, the broadest measure of economic activity and the principal indicator of economic performance, contracted at an annual pace of 2.1% during the first quarter of 2014. However, this was a temporary setback, since the U.S. Commerce Department reported that GDP expanded at a 4.6% annual pace during the second quarter. The economy then gathered further momentum, with GDP expanding at a 5.0% annual pace during the

 

2		PIMCO CLOSED-END FUNDS

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third quarter—its strongest growth rate since the third quarter of 2003. According to the Commerce Department’s initial estimate released on January 30, 2015, GDP expanded at an annual pace of 2.6% during the fourth quarter of 2014.

 

The Federal Reserve (the Fed) began tapering its monthly asset purchase program in January 2014. At each of its next seven meetings, the Fed announced that it would further taper its asset purchases. Following its meeting in October 2014, the Fed announced that it had concluded its asset purchases. However, the Fed again indicated that it would not raise interest rates in the near future. Finally, at its meeting in December 2014, the Fed stated, “Based on its current assessment, the Committee judges that it can be patient in beginning to normalize the stance of monetary policy. The Committee sees this guidance as consistent with its previous statement that it likely will be appropriate to maintain the 0%–1/4% target range for the federal funds rate for a considerable time following the end of its asset purchase program in October, especially if projected inflation continues to run below the Committee’s 2% longer-run goal, and provided that longer-term inflation expectations remain well anchored.”

 

Outlook

 

PIMCO expects global growth to accelerate in 2015, from approximately 2.5% (year over year) in 2014 to 2.75% in 2015. The majority of this improvement, in PIMCO’s view, will come from supply-driven declines in oil prices serving as a fundamental positive for a majority of global economies, as well as consumer spending. Furthermore, declining oil prices are expected to have a clear impact on global inflation readings. In most developed economies, PIMCO feels headline inflation will likely go into negative readings in the early part of 2015, only to bounce back toward positive core inflation readings as we head into late 2015 and early 2016. Against this backdrop, the firm’s baseline expectation remains for the Fed to raise interest rates sometime between June and September of 2015. This view is widely embedded in market prices and expectations of economic divergence between the U.S. and other major developed market economies in 2015.

 

On the following pages of this PIMCO Closed-End Funds Annual Report, please find specific details regarding investment performance and a discussion of factors that most affected the Funds’ performance over the 12-month reporting period ended December 31, 2014.

 

Thank you for investing with us. We value your trust and will continue to work diligently to meet your 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 or (844) 337-4626. We also invite you to visit our website at pimco.com/investments to learn more about our views and global thought leadership.

 

		ANNUAL REPORT		DECEMBER 31, 2014		3

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Letter from the Chairman of the Board & President (Cont.)

 

 

We remain dedicated to serving your investment needs.

 

Sincerely,

 

Hans W. Kertess		Peter G. Strelow
Chairman of the Board of Trustees		President/Principal Executive Officer

 

4		PIMCO CLOSED-END FUNDS

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Important Information About the Fund

 

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 trend upward, rising rates would negatively impact the performance of most bond funds, and fixed-income securities held by a Fund are likely to decrease in value. A number of factors can cause interest rates to rise (e.g., central bank monetary policies, inflation rates, general economic conditions, etc.). Accordingly, changes in interest rates can be sudden, and there is no guarantee that Fund Management will anticipate such movement.

 

As of the date of this report, interest rates in the U.S. are at or near historically low levels. As such, bond funds may currently face an increased exposure to the risks associated with rising interest rates. This is especially true since the Federal Reserve Board has concluded its quantitative easing program. Further, while the U.S. bond market has steadily grown over the past three decades, dealer inventories of corporate bonds have remained relatively stagnant. As a result, there has been a significant reduction in the ability of dealers to “make markets” in corporate bonds. All of the factors mentioned above, individually or collectively, could lead to increased volatility and/or lower liquidity in the fixed income markets, which could result in increased losses to a Fund. Bond funds and individual bonds with a longer duration (a measure of 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.

 

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, management risk and the risk that a Fund could not close out a position when it would be most advantageous to do so. 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 a derivative instrument may cause an immediate and substantial loss or gain, which translates into heightened volatility in the Fund’s net asset value. A Fund may engage in such transactions regardless of whether a Fund owns the asset, instrument or components of the index underlying a 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 directly own.

 

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 the Fund’s portfolio, the interest and other costs to the Fund of leverage could exceed the rate of return on the debt obligations and other investments held by the Fund, thereby reducing return to a 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

 

		ANNUAL REPORT		DECEMBER 31, 2014		5

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Important Information About the Fund (Cont.)

 

 

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.

 

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. Risks associated with investing in foreign securities may be increased when a Fund invests 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 emerging market.

 

Investments in 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 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. The Funds may be subject to heightened or additional risks and potential liabilities and costs by investing in mezzanine and other subordinated loans or acting as an originator of 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. To the extent that a Fund originates a loan, it may be responsible for all or a substantial portion of the expenses associated with initiating the loan, irrespective of whether the loan transaction is ultimately consummated or closed. This may include significant legal and due diligence expenses, which will be indirectly borne by the Fund and its shareholders.

 

Mortgage-related and other asset-backed securities often involve risks that are different from or 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

 

6		PIMCO CLOSED-END FUNDS

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changes in interest rates. As a result, in a period of rising interest rates, if a Fund holds mortgage-related securities, it may experience 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.

 

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, markets for lower-rated bonds are typically less liquid than for higher-rated bonds, and public information is usually less abundant in such markets. Thus, high yield investments increase the chance that a Fund will lose money on its investment. 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 securities are often illiquid and may not be actively traded. Sale 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.

 

Certain Funds may invest in securities and instruments that are economically tied to Russia. Investments in Russia are subject to political, economic, legal, market and currency risks, as well as the risk of economic sanctions 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 a Fund’s performance and/or ability to achieve its investment objective. For example, certain transactions may be prohibited and/or existing investments may become illiquid (e.g., in the event that transacting in certain existing investments is prohibited).

 

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.

 

The Funds may be subject to various risks in addition to those described above. Some of these risks may include, but are not limited to, the following: asset allocation risk, credit risk, stressed securities risk, distressed and defaulted securities risk, corporate bond risk, market risk, issuer risk, liquidity risk, equity securities and related market risk, mortgage-related and other asset-backed securities

 

		ANNUAL REPORT		DECEMBER 31, 2014		7

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Important Information About the Fund (Cont.)

 

 

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.

 

The geographical classification of foreign 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.

 

On each individual Fund Summary page in this Shareholder Report the Common Share Average Annual Total Return table and Common Share Cumulative Returns (if applicable) measure 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 of a Fund:

 

Fund Name				Commencement of Operations
PCM Fund, Inc.					9/02/93
PIMCO Dynamic Credit Income Fund					1/31/13

 

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.

 

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 a 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 (844-337-4626), on the Funds’ website at www.pimcofunds.com/closedendfunds, and on the Securities and Exchange Commission’s (“SEC”) website at http://www.sec.gov.

 

8		PIMCO CLOSED-END FUNDS

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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 a 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 (844-337-4626) and on the Fund’s website at www.pimco.com/investments. Updated portfolio holdings information about a Fund will be available at www.pimco.com/investments approximately 15 calendar days after such Fund’s most recent fiscal quarter end, and will remain accessible until each 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.

 

		ANNUAL REPORT		DECEMBER 31, 2014		9

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PCM Fund, Inc.		Symbol on NYSE -  PCM

 

 

Average Annual Total Return for the period ended December 31, 2014
		1 Year				5 Year				10 Year				Commencement of Operations (09/02/93)
Market Price			0.34%				17.52%				8.80%				8.53%
NAV			5.45%				18.79%				10.00%				9.20%

 

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. Total return, market price, NAV, market price distribution yield, and NAV distribution yield will fluctuate with changes in market conditions. For performance current to the most recent month-end, visit www.pimco.com/investments or call (844) 33-PIMCO.

(2)

Distribution yields 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, 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 composition of distributions. Please visit www.pimco.com/investments 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 regulatory leverage outstanding, as a percentage of total managed assets. Regulatory leverage may include preferred shares, tender option bond transactions, reverse repurchase agreements, and other borrowings (collectively “Leverage”). Total managed assets refer to total assets (including assets attributable to Leverage that may be outstanding) minus accrued liabilities (other than liabilities representing Leverage).

 

10		PIMCO CLOSED-END FUNDS

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Portfolio Insights

 

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PCM’s primary investment objective is to achieve high current income. Capital gain from the disposition of investments is a secondary objective of the Fund.

 

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Securitized credits, including non-agency mortgage-backed securities (MBS), commercial mortgage-backed (CMBS) and asset-backed securities (ABS), all generated positive returns during the reporting period. Specifically, the Barclays Non-Agency CMBS Index returned 4.15% and the fixed rate Barclays Asset-Backed Securities Index gained 1.88%. Securitized credits continued to benefit from strong investor demand amid the low yield environment, relatively limited supply and continued fundamental performance. Although the CMBS and ABS markets experienced some supply pressure from increasing new issuance, new issue supply volumes remain well below the pre-crisis peak. CMBS also benefited, as the recovery in commercial property values continued. Within CMBS, lower-rated securities generally outperformed higher-rated securities; the Barclays Baa Non-Agency CMBS Index returned 4.76% during the reporting period, versus 4.27% for the Barclays Aaa Non-Agency CMBS Index. An allocation to super senior CMBS benefited performance, as the sector had positive returns in 2014 due to improving fundamentals and strong investor demand.

 

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A substantial allocation to non-agency MBS, coupled with attractive levels of coupon and price appreciation, was positive for performance as the asset class saw price appreciation during the reporting period. An improving U.S. housing market, driven by continued recovery in home prices, as well as favorable demand relative to supply, supported the sector. Exposure to ABS was also beneficial for performance, as these securities continued to benefit from strong investor demand for high quality yield.

 

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The Fund’s overall exposure to interest rates contributed positively to performance, as yields declined at middle and long end parts of the yield curve in 2014.

 

»

On the negative side, the Fund’s allocations to below-investment-grade energy related issues detracted from performance, as prices of those bonds declined sharply in the second half of the year on lower oil prices.

 

		ANNUAL REPORT		DECEMBER 31, 2014		11

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PIMCO Dynamic Credit Income Fund		Symbol on NYSE -  PCI

 

 

Average Annual Total Return for the period ended December 31, 2014
		1 Year				Commencement of Operations (01/31/13)
Market Price			2.68%				-0.10%
NAV			5.19%				7.40%

 

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. Total return, market price, NAV, market price distribution yield, and NAV distribution yield will fluctuate with changes in market conditions. For performance current to the most recent month-end, visit www.pimco.com/investments or call (844) 33-PIMCO.

(2)

Distribution yields 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, 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 composition of distributions. Please visit www.pimco.com/investments 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 regulatory leverage outstanding, as a percentage of total managed assets. Regulatory leverage may include preferred shares, tender option bond transactions, reverse repurchase agreements, and other borrowings (collectively “Leverage”). Total managed assets refer to total assets (including assets attributable to Leverage that may be outstanding) minus accrued liabilities (other than liabilities representing Leverage).

 

12		PIMCO CLOSED-END FUNDS

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Portfolio Insights

 

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PIMCO Dynamic Credit Income Fund’s primary investment objective is to seek current income. Capital appreciation is a secondary objective of the Fund.

 

»

The overall fixed income market generated a positive return during the reporting period. The fixed income market was volatile at times as investor sentiment was impacted by incoming economic data, changing expectations regarding future monetary policy and a number of geopolitical issues. All told, longer-term U.S. Treasury yields declined during the 12-month period, with the yield on the benchmark 10-year Treasury bond falling from 3.03% to 2.17%. Over that period, the global fixed income markets, as measured by the Barclays Multiverse Index, rose 7.30%.

 

»

Substantial allocation to non-agency residential mortgage-backed securities, coupled with attractive total return, was a major contributor to performance as the asset class saw price appreciation during the reporting period. Improving U.S. home prices, driven by favorable demand relative to supply and strong employment data, supported the sector. Allocations to the banking sector via investments in junior parts of the capital structure were also additive to returns, given continued improvement in asset quality and broad deleveraging imposed by regulators on the banking sector. Elsewhere, the Fund’s exposure to utility and pipeline bonds was additive for results. The bonds’ coupon income and defensive performance profile helped it to achieve positive return, especially in the context of increased market volatility that negatively impacted risk assets during the second half of 2014. Finally, the Fund’s interest rate exposure in the eurozone, U.K. and Australia helped performance, as their rates generally declined during the year.

 

»

The Fund’s exposure to high yield credits contributed to positive returns during the year.

 

»

Redemptions from high yield mutual funds and exchange-traded funds, which caused those funds to sell high yield bonds, as well as declining oil prices, weighed on the high yield sector in the second half of the year.

 

»

The Fund’s exposure to U.S.-dollar denominated Russian corporate and quasi-sovereign debt detracted from performance. These securities sold off, given the slowdown in the Russian economy on lower oil prices and the impact of Western sanctions.

 

		ANNUAL REPORT		DECEMBER 31, 2014		13

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Financial Highlights

 

Selected Per Share Data for the Year or Period Ended:		Net Asset Value Beginning of Year or Period				Net Investment Income (a)				Net Realized/ Unrealized Gain (Loss)				Net Increase from Investment Operations				Distributions from Net Investment Income				Distributions from Net Realized Gain				Total Distributions
PCM Fund, Inc.
12/31/2014		$	11.17			$	0.94			$	(0.34	)		$	0.60			$	(1.05	)		$	0.00			$	(1.05	)
12/31/2013			11.35				1.12				(0.20	)			0.92				(1.10	)			0.00				(1.10	)
12/31/2012			9.48				1.06				1.93				2.99				(1.12	)			0.00				(1.12	)
12/31/2011			9.88				1.13				(0.47	)			0.66				(1.06	)			0.00				(1.06	)
12/31/2010			7.73				1.12				2.29				3.41				(1.26	)			0.00				(1.26	)
PIMCO Dynamic Credit Income Fund (Consolidated)
12/31/2014		$	24.04			$	1.79			$	(0.53	)		$	1.26			$	(2.47	)		$	0.00			$	(2.47	)
01/31/2013 - 12/31/2013			23.88				1.33				0.76				2.09				(1.68	)			(0.24	)			(1.92	)

 

*	Annualized

^	Reflects an amount rounding to less than $0.005

(a)	Per share amounts based on average number of shares outstanding during the year or period.

(b)

Total investment return is calculated assuming a purchase of a share at the market price on the first day and a sale of a share at the market price on the last day of each year reported. Dividends and distributions, if any, are assumed, for purposes of this calculation, to be reinvested at prices obtained under the Fund’s dividend reinvestment plan. Total investment return does not reflect brokerage commissions in connection with the purchase or sale of Fund shares.

(c)	Interest expense primarily relates to participation in reverse repurchase agreement transactions.

 

14		PIMCO CLOSED-END FUNDS				See Accompanying Notes

---

Offering Costs Charged to Paid in Capital in Excess of Par				Net Asset Value End of Year or Period				Market Price End of Year or Period				Total Investment Return  (b)				Net Assets End of Year or Period (000s)				Ratio of Expenses to Average Net Assets (c)				Ratio of Expenses to Average Net Assets Excluding Interest Expense				Ratio of Net Investment Income to Average Net Assets				Portfolio Turnover Rate
	N/A			$	10.72			$	10.65				0.34	%		$	123,633				1.89	%			1.40	%			8.38	%			11	%
	N/A				11.17				11.65				6.49				128,672				2.05				1.52				9.75				6
	N/A				11.35				12.02				23.34				130,461				2.59				1.76				10.05				13
	N/A				9.48				10.77				10.43				108,810				2.44				1.75				11.30				26
	N/A				9.88				10.80				54.01				113,020				2.41				1.75				11.91				28
$	(0.00	)^		$	22.83			$	20.65				2.68	%		$	3,132,146				2.36	%			1.91	%			7.29	%			35	%
	(0.01	)			24.04				22.48				(2.79	)			3,298,673				1.52	*			1.42	*			6.06	*			76

 

		ANNUAL REPORT		DECEMBER 31, 2014		15

---

Statement of Assets and Liabilities

 

December 31, 2014

 

(Amounts in thousands, except per share amounts)		PCM Fund, Inc.
Assets:
Investments, at value
Investments in securities*		$	218,920
Cash			1,003
Deposits with counterparty			1,573
Receivable for investments sold			13,133
Interest and dividends receivable			1,500
Other assets			8
			236,137
Liabilities:
Borrowings & Other Financing Transactions
Payable for reverse repurchase agreements		$	107,194
Financial Derivative Instruments
Exchange-traded or centrally cleared			6
Over the counter			1,889
Payable for investments purchased			1,153
Deposits from counterparty			50
Distributions payable to shareholders			1,953
Accrued management fees			174
Other liabilities			85
			112,504
Net Assets		$	123,633
Net Assets Consist of:
Shares:
Par value ($0.001 per share)		$	12
Paid in capital in excess of par			143,822
(Overdistributed) net investment income			(540	)
Accumulated net realized (loss)			(42,413	)
Net unrealized appreciation			22,752
		$	123,633
Shares Issued and Outstanding			11,531
Net Asset Value Per Share		$	10.72
Cost of Investments in securities		$	199,218
Cost or Premiums of Financial Derivative Instruments, net		$	(5,017	)
* Includes repurchase agreements of:		$	3,600

 

16		PIMCO CLOSED-END FUNDS				See Accompanying Notes

---

Consolidated Statement of Assets and Liabilities

 

December 31, 2014

 

(Amounts in thousands, except per share amounts)		PIMCO Dynamic Credit Income Fund
Assets:
Investments, at value
Investments in securities*		$	5,434,745
Financial Derivative Instruments
Exchange-traded or centrally cleared			1,747
Over the counter			35,062
Cash			19,487
Deposits with counterparty			66,672
Foreign currency, at value			7,748
Receivable for investments sold			45,735
Interest and dividends receivable			53,597
Other assets			72
			5,664,865
Liabilities:
Borrowings & Other Financing Transactions
Payable for reverse repurchase agreements		$	2,345,529
Financial Derivative Instruments
Exchange-traded or centrally cleared			1,125
Over the counter			34,330
Payable for investments purchased			22,416
Deposits from counterparty			19,272
Distributions payable to shareholders			104,109
Accrued management fees			5,685
Other liabilities			253
			2,532,719
Net Assets		$	3,132,146
Net Assets Consist of:
Shares:
Par value ($0.00001 per share)		$	1
Paid in capital in excess of par			3,274,225
(Overdistributed) net investment income			(24,101	)
Accumulated undistributed net realized (loss)			(62,765	)
Net unrealized (depreciation)			(55,214	)
		$	3,132,146
Shares Issued and Outstanding			137,221
Net Asset Value Per Share		$	22.83
Cost of Investments in securities		$	5,508,243
Cost of Foreign Currency Held		$	7,822
Cost or Premiums of Financial Derivative Instruments, net		$	(6,844	)
* Includes repurchase agreements of:		$	76,900

 

		ANNUAL REPORT		DECEMBER 31, 2014		17

---

Statement of Operations

 

 

 

Year Ended December 31, 2014
(Amounts in thousands)		PCM Fund, Inc.
Investment Income:
Interest		$	13,243
Dividends			1
Total Income			13,244
Expenses:
Management fees			1,681
Trustee fees and related expenses			8
Interest expense			630
Operating expenses pre-transition (a)
Custodian and accounting agent			26
Audit and tax services			31
Shareholder communications			20
New York Stock Exchange listing			13
Transfer agent			17
Legal			4
Insurance			1
Total Expenses			2,431
Net Investment Income			10,813
Net Realized Gain (Loss):
Investments in securities			(95	)
Exchange-traded or centrally cleared financial derivative instruments			(423	)
Over the counter financial derivative instruments			582
Net Realized Gain			64
Net Change in Unrealized Appreciation (Depreciation):
Investments in securities			(3,968	)
Exchange-traded or centrally cleared financial derivative instruments			(77	)
Over the counter financial derivative instruments			45
Net Change in Unrealized (Depreciation)			(4,000	)
Net (Loss)			(3,936	)
Net Increase in Net Assets Resulting from Operations		$	6,877

 

(a)	These expenses were incurred by the Fund prior to the close of business on September 5, 2014. Subsequent to the close of business on September 5, 2014, any such operating expenses are borne by PIMCO.

 

18		PIMCO CLOSED-END FUNDS				See Accompanying Notes

---

Consolidated Statement of Operations

 

 

Year Ended December 31, 2014
(Amounts in thousands)		PIMCO Dynamic Credit Income Fund
Investment Income:
Interest		$	320,629
Dividends			4,810
Total Income			325,439
Expenses:
Management fees			63,222
Trustee fees and related expenses			197
Interest expense			15,058
Operating expenses pre-transition (a)
Custodian and accounting agent			674
Audit and tax services			62
Shareholder communications			131
New York Stock Exchange listing			67
Transfer agent			17
Legal			86
Insurance			13
Total Expenses			79,527
Net Investment Income			245,912
Net Realized Gain (Loss):
Investments in securities			74,282
Exchange-traded or centrally cleared financial derivative instruments			(61,931	)
Over the counter financial derivative instruments			199
Foreign currency			372
Net Realized Gain			12,922
Net Change in Unrealized Appreciation (Depreciation):
Investments in securities			(134,022	)
Exchange-traded or centrally cleared financial derivative instruments			25,530
Over the counter financial derivative instruments			12,753
Foreign currency assets and liabilities			9,887
Net Change in Unrealized (Depreciation)			(85,852	)
Net (Loss)			(72,930	)
Net Increase in Net Assets Resulting from Operations		$	172,982

 

(a)	These expenses were incurred by the Fund prior to the close of business on September 5, 2014. Subsequent to the close of business on September 5, 2014, any such operating expenses are borne by PIMCO.

 

		ANNUAL REPORT		DECEMBER 31, 2014		19

---

Statements of Changes in Net Assets

 

 

		PCM Fund, Inc.
(Amounts in thousands)		Year Ended December 31, 2014				Year Ended December 31, 2013
(Decrease) in Net Assets from:
Operations:
Net investment income		$	10,813			$	12,859
Net realized gain			64				224
Net change in unrealized (depreciation)			(4,000	)			(2,501	)
Net increase in net assets resulting from operations			6,877				10,582
Distributions to Stockholders:
From net investment income			(12,094	)			(12,602	)
Total Distributions			(12,094	)			(12,602	)
Fund Share Transactions**:
Reinvestment of distributions			178				231
Net increase resulting from Fund share transactions			178				231
Total (Decrease) in Net Assets			(5,039	)			(1,789	)
Net Assets:
Beginning of year			128,672				130,461
End of year*		$	123,633			$	128,672
* Including undistributed (overdistributed) net investment income of:		$	(540	)		$	15
** Fund Share Transactions:
Shares issued as reinvestment of distributions			16				20

 

20		PIMCO CLOSED-END FUNDS				See Accompanying Notes

---

Consolidated Statements of Changes in Net Assets

 

 

		PIMCO Dynamic Credit Income Fund
(Amounts in thousands†)		Year Ended December 31, 2014				Period from January 31 to December 31, 2013
Increase (Decrease) in Net Assets from:
Operations:
Net investment income		$	245,912			$	182,615
Net realized gain			12,922				75,578
Net change in unrealized appreciation (depreciation)			(85,852	)			30,638
Net increase in net assets resulting from operations			172,982				288,831
Distributions to Shareholders:
From net investment income			(339,486	)			(230,873	)
From net realized capital gains			0				(33,559	)
Total Distributions			(339,486	)			(264,432	)
Fund Share Transactions**:
Receipts for shares sold			0				3,275,757
Offering costs charged to paid in capital in excess of par			(23	)			(1,895	)
Reinvestment of distributions			0				312
Net increase (decrease) resulting from Fund share transactions			(23	)			3,274,174
Total Increase (Decrease) in Net Assets			(166,527	)			3,298,573
Net Assets:
Beginning of year or period			3,298,673				100
End of year or period*		$	3,132,146			$	3,298,673
* Including (overdistributed) net investment income of:		$	(24,101	)		$	(13,704	)
** Fund Share Transactions:
Shares Sold			0				137,204
Shares issued as reinvestment of distributions			0				13
Net increase in common Fund shares outstanding			0				137,217

 

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

 

		ANNUAL REPORT		DECEMBER 31, 2014		21

---

Statement of Cash Flows

 

 

Year Ended December 31, 2014   (Amounts in thousands)		PCM Fund, Inc.
Cash flows (used for) operating activities:
Net increase in net assets resulting from operations		$	6,877
Adjustments to reconcile net increase in net assets from operations to net cash (used for) operating activities:
Purchases of long-term securities			(67,463	)
Proceeds from sales of long-term securities			33,458
Purchases of short-term portfolio investments, net			(1,230	)
(Increase) in deposits with counterparty			(1,547	)
(Increase) in receivable for investments sold			(12,572	)
(Increase) in interest and dividends receivable			(322	)
(Increase) in exchange-traded or centrally cleared derivatives			(494	)
Decrease in over the counter derivatives			378
(Increase) in other assets			(3	)
Increase in payable for investments purchased			1,152
(Decrease) in deposits from counterparty			(210	)
Increase in accrued management fees			45
(Decrease) in other liabilities			(87	)
Net Realized (Gain) Loss
Investments in securities			95
Exchange-traded or centrally cleared financial derivative instruments			423
Over the counter financial derivative instruments			(582	)
Net Change in Unrealized (Appreciation) Depreciation
Investments in securities			3,968
Exchange-traded or centrally cleared financial derivative instruments			77
Over the counter financial derivative instruments			(45	)
Net amortization (accretion) on investments			481
Net cash (used for) operating activities			(37,601	)
Cash flows received from financing activities:
(Decrease) in overdraft due to custodian			(5	)
Cash dividend paid*			(12,439	)
Proceeds from reverse repurchase agreements			344,389
Payments on reverse repurchase agreements			(293,341	)
Net cash received from financing activities			38,604
Net Increase in Cash			1,003
Cash:
Beginning of year			0
End of year		$	1,003
* Reinvestment of distributions		$	178
Supplemental disclosure of cash flow information:
Interest expense paid during the year		$	561

 

22		PIMCO CLOSED-END FUNDS				See Accompanying Notes

---

Consolidated Statement of Cash Flows

 

 

Year Ended December 31, 2014   (Amounts in thousands)		PIMCO Dynamic Credit Income Fund
Cash flows (used for) operating activities:
Net increase in net assets resulting from operations		$	172,982
Adjustments to reconcile net increase in net assets from operations to net cash (used for) operating activities:
Purchases of long-term securities			(3,150,564	)
Proceeds from sales of long-term securities			2,418,925
Purchases of short-term portfolio investments, net			(294,705	)
(Increase) in deposits with counterparty			(4,232	)
Decrease in receivable for investments sold			110,706
(Increase) in interest and dividends receivable			(5,385	)
(Increase) in exchange-traded or centrally cleared derivatives			(40,212	)
Decrease in over the counter derivatives			7,028
(Increase) in other assets			(24	)
(Decrease) in payable for investments purchased			(23,833	)
Increase in deposits from counterparty			19,024
Increase in accrued management fees			1,263
Payments on currency transactions			(1,689	)
(Decrease) in other liabilities			(265	)
Net Realized (Gain) Loss
Investments in securities			(74,282	)
Exchange-traded or centrally cleared financial derivative instruments			61,931
Over the counter financial derivative instruments			(199	)
Foreign currency			(372	)
Net Change in Unrealized (Appreciation) Depreciation
Investments in securities			134,022
Exchange-traded or centrally cleared financial derivative instruments			(25,530	)
Over the counter financial derivative instruments			(12,753	)
Foreign currency assets and liabilities			(9,887	)
Net amortization (accretion) on investments			4,757
Net cash (used for) operating activities			(713,294	)
Cash flows received from financing activities:
Offering costs charged to paid in capital in excess of par			(23	)
Decrease in overdraft due to custodian			(42	)
Cash dividend paid			(306,843	)
Proceeds from reverse repurchase agreements			12,240,505
Payments on reverse repurchase agreements			(11,193,229	)
Net cash received from financing activities			740,368
Net Increase in Cash and Foreign Currency			27,074
Cash and Foreign Currency:
Beginning of year			161
End of year		$	27,235
Supplemental disclosure of cash flow information:
Interest expense paid during the year		$	13,356

 

		ANNUAL REPORT		DECEMBER 31, 2014		23

---

Schedule of Investments PCM Fund, Inc.

 

 

24		PIMCO CLOSED-END FUNDS				See Accompanying Notes

---

December 31, 2014

 

 

 

See Accompanying Notes		ANNUAL REPORT		DECEMBER 31, 2014		25

---

Schedule of Investments PCM Fund, Inc. (Cont.)

 

 

 

 

26		PIMCO CLOSED-END FUNDS				See Accompanying Notes

---

December 31, 2014

 

 

 

See Accompanying Notes		ANNUAL REPORT		DECEMBER 31, 2014		27

---

Schedule of Investments PCM Fund, Inc. (Cont.)

 

 

 

 

28		PIMCO CLOSED-END FUNDS				See Accompanying Notes

---

December 31, 2014

 

 

 

NOTES TO SCHEDULE OF INVESTMENTS (AMOUNTS IN THOUSANDS*):

 

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

^	Security is in default.

(a)	Interest only security.

(b)	Principal only security.

(c)	Payment in-kind bond security.

(d)	Coupon represents a weighted average yield to maturity.

 

(e)  RESTRICTED SECURITIES:

 

Issuer Description

Coupon

Maturity Date

Acquisition Date

Cost

Market Value

Market Value as Percentage of Net Assets

KGH Intermediate Holdco LLC

8.500%

08/07/2019 - 08/08/2019

08/07/2014 - 08/08/2014

$

1,463

$

1,491

1.21%

 

BORROWINGS AND OTHER FINANCING TRANSACTIONS

 

(f)  REPURCHASE AGREEMENTS:

 

Counterparty		Lending Rate		Settlement Date				Maturity Date				Principal Amount				Collateralized By		Collateral Received, at Value				Repurchase Agreements, at Value				Repurchase Agreement Proceeds to be Received (1)
RDR		0.100%			12/31/2014				01/02/2015			$	3,600			U.S. Treasury Notes 1.375% due 05/31/2020		$	(3,678	)		$	3,600			$	3,600
Total Repurchase Agreements																		$	(3,678	)		$	3,600			$	3,600

 

(1)	Includes accrued interest.

 

REVERSE REPURCHASE AGREEMENTS:

 

Counterparty		Borrowing Rate				Borrowing Date				Maturity Date				Amount Borrowed  (2)				Payable for Reverse Repurchase Agreements
BCY			(0.500	%)			10/02/2014				09/30/2016			$	(920	)		$	(919	)
			0.600	%			08/26/2014				02/26/2015				(1,077	)			(1,079	)
			0.710	%			08/26/2014				02/26/2015				(2,718	)			(2,725	)
			0.800	%			11/18/2014				02/18/2015				(924	)			(925	)
			0.820	%			10/30/2014				01/30/2015				(229	)			(229	)
			1.033	%			10/30/2014				01/30/2015				(1,458	)			(1,461	)
			1.048	%			12/03/2014				02/03/2015				(55	)			(55	)
			1.232	%			10/07/2014				01/07/2015				(802	)			(804	)
			1.430	%			10/02/2014				04/02/2015				(2,624	)			(2,634	)
			(2.000	%)			08/20/2014				08/19/2016				(2,222	)			(2,205	)
DEU			0.750	%			10/02/2014				01/02/2015				(2,767	)			(2,772	)
			0.750	%			10/08/2014				01/08/2015				(2,279	)			(2,283	)
			0.750	%			10/24/2014				01/26/2015				(1,856	)			(1,859	)
			0.750	%			10/30/2014				01/30/2015				(378	)			(379	)
			0.750	%			11/03/2014				02/03/2015				(2,103	)			(2,106	)
			0.750	%			11/12/2014				02/12/2015				(676	)			(677	)
			0.750	%			11/17/2014				02/17/2015				(444	)			(444	)
			0.750	%			11/18/2014				02/18/2015				(727	)			(728	)
			0.750	%			11/28/2014				01/30/2015				(542	)			(542	)

 

See Accompanying Notes		ANNUAL REPORT		DECEMBER 31, 2014		29

---

Schedule of Investments PCM Fund, Inc. (Cont.)

 

 

 

Counterparty		Borrowing Rate				Borrowing Date				Maturity Date				Amount Borrowed  (2)				Payable for Reverse Repurchase Agreements
			0.750	%			12/29/2014				01/02/2015			$	(605	)		$	(605	)
			0.800	%			12/23/2014				03/23/2015				(1,636	)			(1,636	)
			0.800	%			01/02/2015				04/02/2015				(3,257	)			(3,257	)
JPS			0.832	%			11/07/2014				02/09/2015				(1,977	)			(1,980	)
			0.929	%			10/14/2014				01/14/2015				(6,917	)			(6,931	)
			1.493	%			12/18/2014				03/18/2015				(2,725	)			(2,727	)
MSC			1.100	%			10/15/2014				01/15/2015				(1,949	)			(1,954	)
			1.150	%			10/15/2014				01/15/2015				(5,601	)			(5,615	)
RBC			0.700	%			08/26/2014				02/26/2015				(2,228	)			(2,234	)
			0.740	%			10/29/2014				04/29/2015				(544	)			(545	)
			0.750	%			11/13/2014				05/13/2015				(529	)			(529	)
			0.780	%			12/01/2014				06/01/2015				(630	)			(630	)
RDR			0.420	%			10/07/2014				01/07/2015				(553	)			(554	)
			0.420	%			11/13/2014				02/06/2015				(799	)			(799	)
			0.930	%			12/02/2014				02/02/2015				(949	)			(950	)
			1.030	%			11/06/2014				05/06/2015				(5,312	)			(5,321	)
			1.030	%			11/21/2014				05/21/2015				(1,262	)			(1,263	)
			1.230	%			12/02/2014				02/02/2015				(831	)			(832	)
			1.330	%			09/24/2014				03/24/2015				(1,995	)			(2,002	)
			1.330	%			11/10/2014				05/11/2015				(3,963	)			(3,971	)
RYL			1.226	%			11/07/2014				05/07/2015				(1,407	)			(1,410	)
SAL			0.982	%			10/06/2014				01/06/2015				(3,810	)			(3,819	)
			0.982	%			10/07/2014				01/06/2015				(6,050	)			(6,064	)
			0.982	%			11/03/2014				02/03/2015				(2,338	)			(2,342	)
			0.982	%			11/19/2014				02/19/2015				(3,743	)			(3,748	)
			0.983	%			11/12/2014				02/12/2015				(4,866	)			(4,873	)
			1.006	%			01/06/2015				04/07/2015				(9,244	)			(9,244	)
SOG			0.670	%			11/06/2014				02/06/2015				(1,043	)			(1,044	)
UBS			0.600	%			11/17/2014				01/21/2015				(1,632	)			(1,633	)
			0.650	%			10/02/2014				04/02/2015				(1,391	)			(1,393	)
			0.700	%			10/02/2014				04/02/2015				(1,651	)			(1,654	)
			0.750	%			11/12/2014				05/12/2015				(808	)			(809	)
Total Reverse Repurchase Agreements																		$	(107,194	)

 

(2)	As of December 31, 2014, there were no open sale-buyback transactions. The average amount of borrowings outstanding during the period ended December 31, 2014 was $70,483 at a weighted average interest rate of 0.827%.

 

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 (received)/pledged as of December 31, 2014:

 

(g)	Securities with an aggregate market value of $119,812 and cash of $1,300 have been pledged as collateral under the terms of the following master agreements as of December 31, 2014.

 

Counterparty		Repurchase Agreement Proceeds to be Received				Payable for Reverse Repurchase Agreements				Payable for Sale-Buyback Transactions				Payable for Short Sales				Total Borrowings and Other Financing Transactions				Collateral (Received)/ Pledged				Net Exposure  (3)
Global/Master Repurchase Agreement
BCY		$	0			$	(13,036	)		$	0			$	0			$	(13,036	)		$	14,783			$	1,747
DEU			0				(17,288	)			0				0				(17,288	)			18,703				1,415

 

30		PIMCO CLOSED-END FUNDS				See Accompanying Notes

---

December 31, 2014

 

 

Counterparty		Repurchase Agreement Proceeds to be Received				Payable for Reverse Repurchase Agreements				Payable for Sale-Buyback Transactions				Payable for Short Sales				Total Borrowings and Other Financing Transactions				Collateral (Received)/ Pledged				Net Exposure  (3)
JPS		$	0			$	(11,638	)		$	0			$	0			$	(11,638	)		$	13,633			$	1,995
MSC			0				(7,569	)			0				0				(7,569	)			8,567				998
RBC			0				(3,938	)			0				0				(3,938	)			4,191				253
RDR			3,600				(15,692	)			0				0				(12,092	)			14,759				2,667
RYL			0				(1,410	)			0				0				(1,410	)			1,582				172
SAL			0				(30,090	)			0				0				(30,090	)			34,055				3,965
SOG			0				(1,044	)			0				0				(1,044	)			1,107				63
UBS			0				(5,489	)			0				0				(5,489	)			6,054				565
Total Borrowings and Other Financing Transactions		$	3,600			$	(107,194	)		$	0			$	0

 

(3)

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 7, Principal Risks, in the Notes to Financial Statements for more information regarding master netting arrangements.

 

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

 

SWAP AGREEMENTS:

 

INTEREST RATE SWAPS

 

Pay/Receive Floating Rate		Floating Rate Index		Fixed Rate				Maturity Date				Notional Amount				Market Value				Unrealized (Depreciation)				Variation Margin
																								Asset				Liability
Receive		3-Month USD-LIBOR			3.250%				06/17/2045			$	4,300			$	(451	)		$	(77	)		$	0			$	(6	)
Total Swap Agreements																$	(451	)		$	(77	)		$	0			$	(6	)

 

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 December 31, 2014:

 

(i)

Securities with an aggregate market value of $168 and cash of $272 have been pledged as collateral for exchange-traded and centrally cleared financial derivative instruments as of December 31, 2014. See Note 7, Principal Risks, in the Notes to Financial Statements for more information regarding master netting arrangements.

 

		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			$	0			$	0					$	0			$	0			$	(6)			$	(6)

 

See Accompanying Notes		ANNUAL REPORT		DECEMBER 31, 2014		31

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Schedule of Investments PCM Fund, Inc. (Cont.)

 

 

 

 

(j)  FINANCIAL DERIVATIVE INSTRUMENTS: OVER THE COUNTER

 

SWAP AGREEMENTS:

 

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

 

Counterparty		Index/Tranches		Fixed Deal Receive Rate				Maturity Date				Notional Amount (2)				Premiums (Received)				Unrealized Appreciation				Swap Agreements, at Value (3)
																								Asset				Liability
RYL		ABX.HE.AA.6-1 Index			0.320%				07/25/2045			$	6,671			$	(3,920	)		$	2,529			$	0			$	(1,391	)
		ABX.HE.PENAAA.7-1 Index			0.090%				08/25/2037				2,217				(1,097	)			599				0				(498	)
																$	(5,017	)		$	3,128			$	0			$	(1,889	)
Total Swap Agreements																$	(5,017	)		$	3,128			$	0			$	(1,889	)

 

(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 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.

(2)	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.

(3)

The prices and resulting values for credit default swap agreements on credit indices serve as an indicator 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.

 

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 (received)/pledged as of December 31, 2014:

 

(k)	Securities with an aggregate market value of $1,972 have been pledged as collateral for financial derivative instruments as governed by International Swaps and Derivatives Association, Inc. master agreements as of December 31, 2014.

 

		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 (Received)/ Pledged				Net Exposure  (4)
RYL		$	0			$	0			$	0			$	0					$	0			$	0			$	(1,889	)		$	(1,889	)		$	(1,889	)		$	1,922			$	33

 

(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 7, Principal Risks, in the Notes to Financial Statements for more information regarding master netting arrangements.

 

32		PIMCO CLOSED-END FUNDS				See Accompanying Notes

---

December 31, 2014

 

 

 

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 December 31, 2014:

 

		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			$	0			$	0			$	0			$	6			$	6
Over the counter
Swap Agreements		$	0			$	1,889			$	0			$	0			$	0			$	1,889
		$	0			$	1,889			$	0			$	0			$	6			$	1,895

 

The Effect of Financial Derivative Instruments on the Statements of Operations for the Period Ended December 31, 2014:

 

		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			$	0			$	0			$	0			$	(423	)		$	(423	)
Over the counter
Swap Agreements		$	0			$	582			$	0			$	0			$	0			$	582
		$	0			$	582			$	0			$	0			$	(423	)		$	159
Net Change in Unrealized Appreciation (Depreciation) on Financial Derivative Instruments
Exchange-traded or centrally cleared
Swap Agreements		$	0			$	0			$	0			$	0			$	(77	)		$	(77	)
Over the counter
Swap Agreements		$	0			$	45			$	0			$	0			$	0			$	45
		$	0			$	45			$	0			$	0			$	(77	)		$	(32	)

 

See Accompanying Notes		ANNUAL REPORT		DECEMBER 31, 2014		33

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Schedule of Investments PCM Fund, Inc. (Cont.)

 

 

 

 

FAIR VALUE MEASUREMENTS

 

The following is a summary of the fair valuations according to the inputs used as of December 31, 2014 in valuing the Fund’s assets and liabilities:

 

Category and Subcategory		Level 1				Level 2				Level 3				Fair Value at 12/31/2014
Investments in Securities, at Value
Bank Loan Obligations		$	0			$	8,854			$	0			$	8,854
Corporate Bonds & Notes
Banking & Finance			0				18,411				2,291				20,702
Industrials			0				17,774				6,755				24,529
Utilities			0				4,918				0				4,918
Municipal Bonds & Notes
Arkansas			0				593				0				593
Virginia			0				130				0				130
West Virginia			0				749				0				749
U.S. Government Agencies