1. MARKET OVERVIEW
Battered and bruised, U.S. investors hobbled out of May nursing the worst one-month loss in
nearly two years. The period began pleasantly enough. Through May 9, better-than-expected
retail sales, surging merger and acquisition activity and back-to-back analyst upgrades for
General Motors propelled the Dow Jones Industrials Average to within sniffing distance of the
all-time high set in January 2000. The troubles began on May 10, when the Federal Open
Market Committee (FOMC) raised interest rates a sixteenth consecutive time. Although the rate
hike itself was widely anticipated, the FOMC statement that “further policy firming may yet be
needed to address inflation risks” was not. Fears that continued tightening would result in
economic cooling stoked a three-day, 2.6% drop in the S&P 500 and tipped the Nasdaq
Composite into a two-week tailspin. Underscoring bearish sentiments, a week following the
FOMC move, government reports revealed consumer prices had accelerated faster than
expected in April.
Beyond interest rates and inflation, the economy appeared relatively healthy in May.
Unemployment held near a structurally low 4.7%, first quarter GDP growth was revised upward
to 5.3%, consumer confidence slid off a near four-year high, but remained favorable, and
manufacturing unexpectedly accelerated.
Softening in the housing market is
ongoing, but evidence of a hard landing
has yet to materialize. Existing homes sales
fell 2% in April, but prices are still up more
than 4% over the past year.
U.S. corporations reported solid profits last
month. According to Thomson Financial,
with 96% of companies reporting, earnings
growth for the S&P 500 for the first quarter
is estimated at 14.2%. Almost 70% of the
companies that have already reported sur-
prised on the upside, with corporate profits
averaging in aggregate more than 5%
higher than analysts originally predicted.
The energy sector is still expected to see the
strongest first quarter earnings growth at
36%, led by Chevron, ExxonMobil and
ConocoPhillips. Consumer staples is
expected to see the weakest growth
at 5%.
S U M M E R 2 0 0 6
at the margin
G L O B A L E Q U I T Y M A R K E T O V E R V I E W
IN THIS ISSUE
Perspective . . . . . . . . . . . . .2
Equity Update . . . . . . . . . . .2
Firm Update . . . . . . . . . . . .3
Portfolio Manager Insights:
Looking for Alpha? Broaden
Your International Equity
Exposure . . . . . . . . . . . . .4
Feature:
Consistency and
Constraints . . . . . . . . . . . .6
Focus:
Energy Markets: Shifting
Dynamics, New
Opportunities . . . . . . . . . .8
Chartbook . . . . . . . . . . . . .12
May YTD
S&P 500 -2.9 2.6
NASDAQ Composite -6.1 -0.8
Dow Jones Industrials -1.5 5.3
MSCI EAFE -3.8 10.5
MSCI EAFE Growth -4.1 9.4
MSCI EAFE Value -3.4 11.5
MSCI EM -10.5 7.6
MSCI ACWI xUS -4.6 10.1
MSCI Europe -2.6 13.6
MSCI Japan -6.2 3.1
Russell 1000 -3.0 2.6
Russell 1000 Growth -3.4 -0.5
Russell 1000 Value -2.5 5.9
Russell Midcap -3.4 4.7
Russell Midcap Growth -4.7 3.0
Russell Midcap Value -2.1 6.4
Russell 2000 -5.6 7.5
Russell 2000 Growth -7.0 6.0
Russell 2000 Value -4.1 9.1
ML High Yield Master II -0.1 3.5
As of 31-May-06
Market Performance
VOL. 10 NO. 5

2. PERSPECTIVE
Horacio A. Valeiras,
CFA
Managing Director
and Chief Investment
Officer
EQUITY UPDATE
GROWTH/VALUE EQUITY
Value stocks outshined growth stocks again in
May. This marked the third out of the past four
months where low P/E shares have dominated
high P/E shares. The difference in performance in
investment styles was most notable among small
caps, where value led in seven of ten sectors.
Overweighting and underperformance in the
information technology sector contributed
markedly to growth's poor relative performance
across capitalization ranges.
LARGE/MID/SMALL EQUITY
Inflation and interest rate jitters sent shock waves
through financial markets in May, depressing
equity prices across capitalization ranges and
investment styles. Commonly in such environ-
ments, short-term investors take risk off the table
and move into larger, better-known names. This
was discernible in May in the substantial outper-
formance of large- and mid-cap stocks relative to
small-cap stocks. From a sector point of view, large
caps saw better performance than small caps in
nine out of ten categories, most notably among
healthcare and industrials businesses.
INTERNATIONAL EQUITY
Similar to the U.S., stocks in international markets
retreated in May. Within the MSCI EAFE Index,
every country lost ground except Italy, where the
hotly contested election of the nation’s new prime
minister was finally resolved. After hitting a record
high early in the month, the MSCI Emerging
Markets Index fell sharply in the weeks following
the Federal Reserve decision to increase U.S.
interest rates on inflation concerns. Although the
index rebounded some by month end, it still closed
with greater losses than those in the U.S. or
international developed markets.
2
 Copyright 2006
....Nicholas-Applegate
....Capital Management
The last six weeks have been particularly
painful for equity investors. Is the market
telling us something that the economic data
are not? In 2000, the stock market began
declining well before economic indicators
headed down. The Federal Reserve and
European Central Bank (ECB) had been
raising interest rates and that, together with
overinvestment, caused economies to tilt
towards recession. Today, the yield curve is
flat, the Fed has raised interest rates sixteen
times, the ECB has started to raise rates, and
the Bank of Japan has been draining excess
liquidity. In addition, emerging market central
banks have been increasing interest rates to
help contain inflation. Is this the start of the
next recession?
We don’t believe so, contingent upon the
Fed’s curtailing U.S. rate increases. Yield
curves and real interest rates are telling the
central bank to stop. Implied inflation in U.S.
government inflation protected notes (TIPS)
has started to decline slightly. Real interest
rates at the short end of the yield curve are
above historical averages, and at the ten-year
end of the yield curve, are slightly below
average, again implying inflation is not a
problem. Commodity prices have corrected
from their highs, amid demand slowdowns
for materials and oil around the world.
Notwithstanding the doom and gloom, which
has appeared about this time for the past two
years, we maintain that inflation will not
spiral out of control, that the Fed has reached
a level of interest rates that will slow down
the U.S. economy but not result in a
recession, and that European and Japanese
economic recoveries are on track. Look for
equities to have a good year, as we have
stated before in this column.

3. FIRM UPDATE
At The Margin is a
monthly publication of:
Nicholas-Applegate
Capital Management
600 West Broadway
San Diego, CA 92101
PHONE (800) 656-6226
(619) 687-8000
FAX (619) 744-5545
3
NICHOLAS-APPLEGATE WELCOMES NEW EMPLOYEES
Nicholas-Applegate invests in intellectual capital by hiring top-notch talent. This quarter, the
following professionals joined our investment team:
Sinclair Gomes, Associate, Analyst, Systematic — Sinclair Gomes joined Nicholas-Applegate in
2000 as a software engineer in our Technology Department. His previous experience includes
consulting assignments in software development for CapitalOne; Sempra Utilities; Donaldson
Lufkin & Jenrette; PepsiCo; Fleet Bank and Manitoba Public Insurance. He has extensive knowl-
edge of various programming languages, databases, operating systems, hardware and applica-
tions, including SeeBeyond 4.52 Middleware, Java 2.0, PowerBuilder, MS SQL Server 2000,
Oracle 7.2, Informix 5.0 SQL, Sun Solaris, HP Unix, and IBM AIX Unix. Sinclair received his
diploma from the Institute for Computer Studies, Toronto, Ontario.
Juncai Yang, Vice President, Analyst, Systematic — Juncai Yang joined the firm in 2006 with
research responsibilities for the systematic Large Cap and Mid Cap portfolios. His prior experience
includes working in Canada for Sun Life Financial, where he was a quantitative analyst with the
public equities group. He was also a quantitative analyst for Scivest Capital Management and a
quantitative research analyst for Synergy Asset Management. Juncai earned his Post Graduate
Diploma in financial engineering and an M.B.A. from the Schulich School of Business, York
University, Toronto. He received his M.A. in economics from York University, and completed a pre-
master program in economics at the University of Manitoba. He completed his B. Eng. in
engineering economics from Shanghai Jiao Tong University, Shanghai, China. He is also a CFA
Level III candidate.
LARGE CAP VALUE CELEBRATES TEN-YEAR ANNIVERSARY
The Nicholas-Applegate U.S. Large Cap Value Fund recently celebrated its ten-year anniversary.
The fund, which seeks long-term capital appreciation through investments in a diversified port-
folio of U.S. companies, has performed strongly against its benchmark, the Russell 1000 Value,
since inception.
KIDS’ ADOPT-A-BEACH COMMUNITY EVENT
On May 22, Nicholas-Applegate partic-
ipated in the Kids’ Adopt-A-Beach
Program, sponsored by I Love A Clean San
Diego (ILACSD) and Ocean Day 2006.
Approximately twenty Nicholas-Applegate
employees volunteered with 1,500 children
from San Diego County elementary schools
at a cleanup at Oceanside City Beach. After
the cleanup, volunteers lined up in the sand
to create an aerial picture of two sea turtles
and the theme of the event, “Help Us
Thrive.” (http://www.oceanday.net/2006)
continued on page 10

4. 4
In the quest for alpha, institutional investors
often look to new asset classes and strategies.
The international small-cap asset class is one of
them and a natural extension of a non-U.S.
equity allocation. Investors may assume that by
having exposure to a non-U.S. equity mandate,
they have exposure to growth opportunities
overseas. They do not realize the additional
benefits presented by investing in international
small-cap equities.
With top-quartile peer rankings and more than
ten years of investment experience in inter-
national small-cap equities, it may come as no
surprise that Vincent Willyard, CFA, Portfolio
Manager for Nicholas-Applegate’s International
All Cap Growth and International Small Cap
Growth strategies, realizes these benefits. “It’s
a fallacy to assume that investing in a non-U.S.
large-cap mandate gives investors access to the
largest opportunity set,” explained Mr.
Willyard. “If you use the S&P/Citigroup World
Broad Market Index (BMI) ex U.S. as a proxy for
the non-U.S. equity universe and dissect the
composition of its constituents by market capi-
talization, investors will discover that only 793
stocks account for the top 80% of the index,
whereas 4,519 companies make up the bottom
20%. Investors are missing out on a large num-
ber of opportunities,” he continued.
Investors may sidestep this asset class based on
a misperception that international small-cap
stocks are illiquid. It is true that compared to
non-U.S. large caps, the international small-cap
universe has less total liquidity — $20.4 million
average daily trading volume for non-U.S. large
caps versus $3.0 million for their small-cap
counterparts — so investors perceive the asset
class as potentially more expensive due to
liquidity. However, this also makes non-U.S.
small caps less efficiently priced, offering poten-
tially higher upside returns. “This argument is
reminiscent of the case against U.S. small caps
during their infancy,” Mr. Willyard commented.
Dedicated U.S. small-cap equity mandates are
standard allocations in institutional plans today,
so it's a natural assumption that as investors
look beyond U.S. borders for alpha oppor-
tunities, expansion into international small-cap
markets will evolve similarly.
To support his premise, Mr. Willyard points to a
comparison between the non-U.S. small-cap
universe, which Nicholas-Applegate defines as
the bottom 20% market cap of the
S&P/Citigroup World BMI ex U.S., and the U.S.
small-cap universe (using the Russell 2000
Index as a proxy). In terms of size, the total
market capitalizations and average market cap-
italizations for the two indexes are similar. As of
March 31, 2006, the non- U.S. small-cap uni-
verse had a total market capitalization of
$2,783 billion versus $1,209 billion for the U.S.
small-cap universe. The average market capital-
ization was $615 million for the non-U.S. index
versus $737 million for the U.S. small-cap
index, as of December 31, 2005. In terms of
coverage, 3,015 non-U.S. small-cap stocks ver-
sus 1,823 U.S. small-cap equities have at least
one EPS estimate in the I/B/E/S universe.
Additionally, the bottom 20% of the market
cap of the S&P/Citigroup World BMI ex U.S.
traded on average $3 million a day relative to
$8.7 million on average daily for the stocks in
the Russell 2000 Index, as of year-end 2005.
“On the surface it does not quite make the case
that there is as much liquidity as for U.S. small-
cap stocks, but investors need to look a bit
deeper,” noted Mr. Willyard. For example, Mr.
Willyard and the International Small Cap
Growth team focus on companies with greater
than $1 million average daily trading volume
Vincent Willyard,
CFA
Managing Director,
Portfolio Manager,
International Small
Cap Growth
PORTFOLIO MANAGER INSIGHTS: LOOKING FOR ALPHA?
BROADEN YOUR INTERNATIONAL EQUITY EXPOSURE

5. over a one-month period. According to their research, there
were more than 2,772 non-U.S. small-cap stocks that traded
over an average $1 million a day, versus 1,664 U.S. small-cap
stocks in 2005. Those 2,772 non-U.S. small-cap companies
traded an average $6.9 million a day.
“Once the myth of illiquidity and size are dispelled, we can
focus on the real alpha opportunity of broadening the client’s
non-U.S. allocation by investing in an international small-cap
equities mandate,” noted Mr. Willyard. “International small-
cap stocks provide great investment opportunities and diver-
sification benefits, as well as a favorable risk/reward profile.”
As depicted in Exhibit 1, international small-cap stocks have
lower correlations to U.S. equities relative to international
large-cap, providing diversification benefits. Additionally,
international small-cap stocks have been less volatile than U.S.
small-cap stocks for the last five years. Mr. Willyard also
believes that the small-cap cycle outside the U.S. could poten-
tially last longer. “Although international small-cap stocks
have outperformed over the last five years, it is possible that
they could continue outperforming as long as risk appetite
does not shrink for investors.” Mr. Willyard commented. “The
large-cap cycle lasted for ten years, and small caps have only
been outperforming for about five years. It is true that the
valuation discount is not as attractive as it was five years ago,
but small-cap stocks still offer superior earnings growth. With
a projected one-year earnings growth rate of 13.8% for the
non-U.S. small-cap universe versus 9.7% for the non-U.S.
large-cap universe, it is our opinion that there is still room for
non-U.S. small-cap equities to outperform.” Add a com-
pelling risk/return profile, as illustrated in Exhibit 2, and the
alpha opportunity presented by an international small-cap
equity mandate becomes more apparent.
5
*Median Manager Return
Callan Associates
s of 31-Mar-06
Source:
A
15-YearAverageAnnualReturn*
Active vs. Passive Outperformance
10.7
14.6
8.0
12.1
0
4
8
12
16
International Domestic
Active
Passive
Exhibit 3
Exhibit 1
Risk/Reward Profile
Source:
A
Nicholas-Applegate; Returns are calculated gross of fees
s of 30-Apr-06
S&P
500
MSCI
EAFE
S&P/Citigroup
World PMI ex-
U.S.
Russell
2000 Index
S&P/Citigroup
World EMI ex -
U.S.
5-YearAnnualizedReturns
0.0
5.0
10.0
15.0
20.0
5.0 10.0 15.0 20.0
Annualized Standard Deviation
Exhibit 2
continued on page 11
S&P/Citigroup S&P/Citigroup MSCI Russell 2000 S&P 500
World EMI World PMI xUS EAFE Index Index
xUS Index
1.000
0.918 1.000
0.923 0.996 1.000
0.634 0.620 0.613 1.000
0.566 0.711 0.689 0.701 1.000
Source: Nicholas-Applegate
As of 30-Apr-06
Correlations — U.S. vs. Non-U.S. Indexes
S&P/Citigroup World EMI xUS Index
S&P/Citigroup World PMI xUS
MSCI EAFE
Russell 2000 Index
S&P 500 Index

6. 6
FEATURE: CONSISTENCY AND CONSTRAINTS
s investors, we seek high risk-adjusted
returns. To achieve our goal, we may
overlay sets of guidelines or restric-
tions on our portfolios in order to guide our
efforts to the desired outcome. In other areas
of our lives, we may pursue similar strategies.
But how do we know if those guidelines are
moving us toward our goal?
As an illustration, consider the following case
from outside the world of investing: A couple
enters a restaurant, eager to experience the
tastes of its celebrated new chef. They order
the day’s special offerings with wine selected
personally by the chef. The normally taciturn
waiter smiles approvingly. As he turns to leave,
one of the diners stops him.
“Oh, by the way,” asks the patron. “Would
you please instruct the chef not to fry or sauté
any of our food and to please use only fresh
ingredients — nothing dried, canned or
frozen?”
The waiter is crestfallen. The patron means
well, of course, but the chef's signature dishes
mix sautéed, grilled and raw ingredients. They
make use of the chef's own preserved truffles,
herbs and compotes, each gathered at the
height of season. The restaurant and chef
honor the request, and the couple leaves the
restaurant disappointed, never realizing that by
limiting the chef’s choices and skills they were
served something less than his best work.
Investing can be like eating out. Many investors
bring their own set of expectations to the table
from a risk-and-reward perspective. These are
typically conveyed to an active manager in the
form of specific investment guidelines or con-
straints. Of course, it’s not only investors who
impose constraints. Many portfolio managers
also design constraints into their strategies in
an effort to enhance consistency.
GOOD INTENTIONS
The objectives may seem clear and consistent;
however, the hidden consequence of restric-
tions on tracking error, concentration,
turnover, position size, sector and industry
exposure and other measures may have unin-
tended consequences.
In a study of the effect of portfolio constraints
on risk-adjusted returns, Mark Roemer,
Portfolio Manager on the Nicholas-Applegate
systematic team, evaluated the impact of
common portfolio constraints on breadth.
“In the struggle to deliver consistent excess
return, breadth and risk control are inextricably
linked through portfolio construction,” Mr.
Roemer explained. “And in the battle between
breadth and risk control, breadth is often the
casualty.”
Breadth refers to the number of investment
decisions a manager is allowed to make within
a specific period of time. Breadth is restricted
when the size of the manager’s investment uni-
verse decreases or when constraints are
imposed on the portfolio.
A
Sometimes our best intentions lead to
unexpected results.
Mark P. Roemer
Senior Vice President,
Portfolio Manager,
Systematic

7. 7
For illustration purposes, consider that the manager of a
global hedge fund may be seen to have perhaps the greatest
breadth in the investment industry; the manager exercises dis-
cretion over many thousands of investment opportunities. At
the other end of the spectrum, managers of passive portfolios
have little if any discretion and their actions are dictated by
the most restrictive portfolio construction rules in the market-
place. Between these extremes, active managers of tradi-
tional, long-only equity strategies exercise within the bound-
aries of well-defined asset classes, subject to the constraints
on portfolio construction.
Active managers are hired for their investment insight with
the expectation that it will be applied consistently over time to
achieve stated investment goals, noted Mr. Roemer.
Consistency is a key issue in the relationship. “Investors
impose constraints to improve consistency,” he explained
“when in fact, these constraints are often weakly associated
with risk and may actually reduce consistency by limiting
breadth.”
EASING RESTRICTIONS
But what would happen if the constraints were relaxed?
Mr. Roemer decided to find out. He created a base, hypo-
thetical portfolio in the Russell 2000 Index capitalization
range. He applied common constraints covering industry con-
centration, position size, capitalization and turnover. Using an
optimizer, he constructed simulated portfolios for a period
from June 1993 to January 2003.
A recent paper by Roger Clarke, Harindra de Silva and Steven
Thorley introduced the concept of the transfer coefficient.
This tool would prove useful in Mr. Roemer’s study, serving as
a measure of the level of a portfolio manager’s insights that
are reflected in a portfolio. The portfolio’s consistency would
be measured by realized information ratio, based on research
by Richard C. Grinold.
Over the 127-month test period, the base portfolio posted a
solid information ratio and the level of portfolio manager
insights reflected in the portfolio registered about halfway up
the scale from the practical, upper limit for a long-only
manager in the small-cap universe.
Next, Mr. Roemer tested each of the common individual con-
straints at various levels to see how they affected the con-
struction and performance of the base portfolio.
UNEXPECTED RESULTS
The most profound effects were found to have resulted from
constraints on portfolio turnover (See Exhibit 4). As turnover
restrictions were eased, the portfolio’s transfer coefficient and
realized information ratio both increased. At the highest
levels of turnover, the transfer coefficient continued to rise,
but realized information ratio declined, an effect, Mr. Roemer
suggested, that may have resulted from transaction costs
exceeding the marginal improvement in returns.
“We’ve always known — especially in growth accounts —
that if we don’t turn the portfolio fast enough we won’t
realize all potential alpha,” noted Mr. Roemer. “Transaction
costs present a practical limitation. Ideally, we should be able
to optimize turnover to achieve optimal alpha and informa-
tion ratio based on expected transaction costs.”
Remarkably, the easing of constraints did not result consis-
tently in increases in the level of portfolio manager insight
represented in the portfolio. For example, in the case of limits
on individual position size, the easing of constraints con-
tributed to the counterintuitive effect of a declining transfer
coefficient. The easing of constraints on capitalization
produced only minor changes.
However, other patterns did emerge. Where the easing of
constraints did not boost the transfer coefficient, it did result
in increased portfolio concentration. “These two effects are
interrelated and compete with one another in influencing
consistency,” Mr. Roemer noted. Where the easing of
constraints caused greater concentration rather than a sub-
stantially higher transfer coefficient, the portfolio’s best alphas
tended to carry higher weights and play larger roles, he
explained.
continued on page 10
Exhibit 4
Summary of Findings
Constraint Industry Market Position Turnover
Relaxed Cap Size
Transfer Improves Improves Declines Improves
Coefficient Marginally Marginally Significantly
(TC)
Portfolio Increases Similar Increases Similar
Concentration Significantly
Information Similar Improves Similar Improves
Ratio (IR) Marginally Significantly
Source: Nicholas-Applegate

8. 8
FOCUS: ENERGY MARKETS: SHIFTING DYNAMICS, NEW
OPPORTUNITIES
It is no secret that the energy market is hot. In
January 2002, a barrel of light sweet crude cost
$18.02. On April 21, 2006, the cost hit $75.35.
The economic implications of the quadrupling
in prices are sweeping, yet the dynamics driving
the spike are frequently misunderstood,
attributed to simple supply disruptions in the
Gulf Coast, the Middle East and elsewhere.
While supply disruptions have thrust the energy
sector into the limelight, they are just one
component in a rapidly changing market.
EMERGING DEMAND
According to Pedro Marcal, Portfolio Manager,
a key driver behind $75/barrel oil is the recent
massive upswing in global energy demand.
Between 1998 and 2003, global oil consump-
tion rose from 74 million barrels per day to 77
million barrels per day — a 4% increase over 60
months. Currently, global oil consumption is
about 84 million barrels per day — a 9% spike
in 36 months. Much of the change is due to
accelerating economic growth in emerging
countries. For example, in China, which is now
the world’s second-largest energy consumer
and fourth-largest
economy, oil con-
sumption has jumped
more than 140% since
2002. Between 1985
and 2001, in aggre-
gate, industrialized
economies consumed
about six million
barrels of oil per day
more than emerging
economies. Since May
2005, emerging econ-
omies have taken and
held the lead.
CLASSIC MACROECONOMICS
From a macroeconomic perspective, the forces
behind oil supply and oil demand have arrived
at a volatile juncture. Oil demand is by nature
inelastic — few substitutes exist that allow con-
sumers to displace their need for petroleum-
based products, particularly in the near-term.
When excess capacity is drained from the
market, oil supply also becomes inelastic. It can
take years of exploration and facilities develop-
ment to bring new product online. The inelastic
properties of oil supply and demand mean large
price adjustments can be required to elicit any
significant change in the quantities of oil
provided or consumed. We are seeing those
large adjustments today. Between 1985 and
2002, OPEC had on average 3.3 million barrels
per day of spare production capacity. By 2005,
that cushion had shrunk to 0.8 million barrels
per day, most of which is heavy sour crude, the
most difficult type of oil to refine.
SWEET LIGHT VS. HEAVY SOUR
Not all oil is the same. There are many variations
of crude, commonly identified by geographic
Source: Pira.com, IEA, DOE, OGJ and A.G. Edwards & Sons Inc.
As of 31-Dec-05
OilDemand:MillionsBarrelsperDay
OPECSpareCapacityasPercentof
GlobalOilDemand
Growing Oil Demand vs. Shrinking
OPEC Capacity
60.0
65.0
70.0
75.0
80.0
85.0
85 87 89 91 93 95 97 99 01 03 05
0%
3%
6%
9%
12%
15%
18%
Exhibit 5

9. 9
origin and graded by density (API Gravity)
and sulfuric content (sour = more sulfur;
sweet = less sulfur). The lighter and sweeter
the oil, the easier it is to refine into gasoline.
For example, West Texas Intermediate,
which is considered sweet and light, can be
processed by simple refineries and typically
yields about 30% gasoline. Mexican
‘Mayan’ oil is heavy and sour and yields
about 14% gasoline at a simple refinery, if it
can be refined. Complex refineries have the
ability to ‘coke’ or ‘crack’ crude through a
sophisticated process of hydrogen infusion.
This process produces a yield of almost 60%
gasoline, even from heavy sour oil.
THE OIL REFINING BUSINESS
Historically, the energy business has been notable by long
stretches of low returns. As such, underinvestment through-
out the energy industry food-chain has been rampant. The
last major grass-roots oil refinery built in the U.S. was the
Marathon facility in Garyville, Louisiana, constructed the year
Jimmy Carter was elected president. At the same time,
demand for gasoline has steadily risen and the proportion of
global oil inventories comprised of light sweet crude has
steadily fallen, reaching about 14% today. Rising energy
prices, and a shortage of refineries, particularly complex
refineries, have resulted in a widening price differential
between sweet light crude and heavy sour crude. Alan Trice,
Analyst, has successfully monetized this dynamic. “High
barriers to entry for the complex refining business,
coupled with a light-heavy spread as large as $20 per
barrel, have increased the margins for complex oil
refiners.” Mr. Marcal concurs. “We like complex
refiners. If you think of it purely from a volume stand-
point, if supply limitations force us to buy more Mayan,
and 50% of oil demand is for cars, the energy market
will be short on gasoline and heavy on the stuff that is
most difficult to process.”
THE ETHANOL SOLUTION?
Ethanol has been advanced as a sexy ‘green’ alternative
to petroleum-based fuel. However, the economics
behind ethanol relegate the distillate as a marginally
useful tool for curtailing high energy costs. On average, U.S.
gasoline is currently comprised of about 3% ethanol. The
technology to use 85% ethanol exists for modified flex-fuel
vehicles, but the large majority of vehicles in the U.S. are not
flex-fuel capable and can run on at most 10% ethanol. Even
if it were possible to bring U.S. gasoline standards to 10%
ethanol, the move would require nearly 40% of the entire
annual U.S. corn harvest be diverted to ethanol production.
This would displace oil price inflation to other areas of the
U.S. economy. Foreign, sugar-based ethanol is another
option, but if thirteen pounds of sugar are required to make
one gallon of gas, and sugar retails at $0.16/pound, the cost
Source: Oil Market Intelligence
As of 31-Jan-06
China: Crude Oil Demand
0
20
40
60
80
100
85 87 89 91 93 95 97 99 01 03 05
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
Chinese Imports
12-month average
3-month average
Feb
Jan
SAARIndex3-monthSum
BillionsofDollars
MillionsofBarrelsperDay
Exhibit 6
Source: A. G. Edwards
OPEC
Restricted
Supply
Oil Supply & DemandP
D
Rapidly
Rising
Prices
Incremental
Productive
Capacity
OPEC Productive
Capacity Fully
Utilized
S
S-1
Q
Exhibit 7
continued on page 10

10. 10
Consistency and Constraints
continued from page 7:
Energy Markets
continued from page 9:
LESSONS LEARNED
Perhaps most importantly, the exercise showed that the
easing of constraints resulted in neutral-to-positive effects on
the portfolio’s realized information ratio; none of the easing
patterns caused the realized information ratio to decline. Or,
stated another way, increasing portfolio constraints was never
shown to help and at times clearly hurt the portfolio’s risk-
adjusted returns. In the terms of our restaurant analogy,
unless one of our diners has a significant food allergy,
imposing constraints on meal construction would appear to
have no chance of improving their dinner and would present
a strong possibility of detracting from their hoped-for dining
experience.
Mr. Roemer said the results were a bit different than he antic-
ipated. While relaxing constraints did, in general, have the
desired effect of improving consistency, he’s not ready to
recommend that investors remove all constraints.
“Broad boundaries and constraints may provide an effective
safety net in periods where market conditions deviate signifi-
cantly from historical observations,” concluded Mr. Roemer,
“but investors are probably well advised to keep them as loose
as possible.”
To read Mark Roemer’s paper, “Effective Breadth: The Link
Between Portfolio Constraints and Consistency,” please visit
http://www.nacm.com. A link is available on our home
page.
By Rick Shaughnessy
for sugar-based ethanol has a floor of $2.08/gallon.
Moreover, the U.S. government taxes sugar-based ethanol
imports an additional $0.54/gallon. For the time being, the
ethanol industry offers interesting investment opportunities,
but as a large-scale substitute for oil, an ‘ethanol solution’ is
many years away.
CAPITALIZING ON CHANGE
For years we lived in a world where cheap energy was taken
for granted. Today, surging demand, underinvestment in the
energy supply food chain and production disruptions among
oil suppliers are a harsh reality, and the driving forces behind
spiking energy prices. The ongoing pace of global economic
expansion is at odds with the current environment, indicating
costly oil will likely persist, perhaps for several years. A focus
on short-term adjustments in oil and gas inventories ignores
this bigger picture. Although in the future the energy sector
will likely again revert to being a poor place for investment,
today’s market landscape is wrought with opportunity,
particularly for informed portfolio managers with bottom-up
stock-picking experience.
By Greg Meier
Firm Update
continued from page 3:
COMMUNITY OUTREACH CELEBRATES
CHAMPIONS
For the seventh consecutive year, Nicholas-Applegate was a
sponsor for the Celebration of Champions, a fund-raising
event for the La Playa Pediatric Care Center at Children's
Hospital, oncology unit. The main part of the event included a
relay, in which current and former patients, their families,
sponsors and local celebrities pass the Torch of Life. Last year,
Children's Hospital raised more than $400,000 from the
event, and hopes to surpass that amount this year, with the
funds earmarked for service programs for patients and their
families during treatment.
By Cathy Bramlage

11. Nicholas-Applegate Capital Management (NACM) is a registered investment
advisor with the Securities and Exchange Commission. The Firm is defined as all
actual, institutional and mutual fund accounts (including sub-advisory
relationships) managed by NACM. The managed (wrap) account business of
NACM is held out separately as Nicholas-Applegate Managed Accounts (NAMA).
The effective date of NACM’s firm-wide compliance with the AIMR-PPS standards
is January 1, 1993. NACM claims compliance with the AIMR Performance
Presentation Standards (AIMR-PPS), the U.S. and Canadian version of GIPS. AIMR
has not been involved with or reviewed NACM’s claim of compliance. To receive
a complete list and description of NACM’s composites and/or a presentation that
adheres to the AIMR-PPS standards, contact our Performance Measurement
Group at (619) 687-2800, or write Nicholas-Applegate Capital Management, 600
W. Broadway, 29th Floor, San Diego, CA 92101, Attn: Performance
Measurement Group.
Under no circumstances does the information contained within represent a
recommendation to buy or sell securities.
Investments in overseas markets pose special risks, including currency
fluctuation and political risks, and the portfolio is expected to be more volatile
than that of a U.S. only portfolio. These risks are generally intensified for
investments in emerging markets.
Small-cap stocks may be subject to a higher degree of risk than more estab-
lished companies’ securities. The illiquidity of the small-cap market may adversely
affect the value of these investments.
Unless otherwise noted, equity index returns reflect the reinvestment of all
income dividends and capital gains, if any, and bond index returns include all
payments to bondholders, if any. Index return calculations do not reflect fees,
brokerage commissions or other expenses of investing. Investors may not make
direct investments into any index.
Securities, sectors, countries and representative buys and sells herein illustrate
companies, sectors and countries in which portfolios may invest. Portfolio holdings
are subject to change daily. Unless otherwise noted, Nicholas-Applegate is the
source of all performance data, characteristics, charts and illustrations. Past
performance is not an indication of future performance.
The source of the peer ranking data was obtained from Callan Associates, an
independent consultant. Results may vary. Currency conversions are provided by
Russell Performance Universe and are based on monthly linked performance
converted from U.S. dollar. Exchange rates are provided by the Federal Reserve
Statistical Release as of month end.
Carefully consider the investment objectives, risks, and charges and expenses of
the fund before investing. This and other information can be found in the fund’s
prospectus, which may be obtained at www.nacm.com or by calling (800) 551-
8043. The prospectus should be read carefully before investing. The Distributor
of the Nicholas-Applegate Institutional Funds is Nicholas-Applegate Securities.
11
DISCLOSURE:
Portfolio Manager Insights: Looking for Alpha? Broaden Your International Equity Exposure
continued from page 5:
To maximize an allocation to international small-cap
equities, investors should look to active management.
According to calendar returns for the Citigroup World
Extended Markets Index (EMI) ex U.S., the most representa-
tive benchmark for the non-U.S. small-cap universe, versus
the median manager in the Callan International Small Cap
Equity Universe, active managers outperform the bench-
mark seven of the last ten years. “In fact,” Mr. Willyard
remarked, “the outperformance of active international
small-cap managers versus the Citigroup World EMI ex U.S.
is more pronounced than active U.S. small-cap managers
relative to the Russell 2000 Index.” See Exhibit 3.
In summary, the facts support the benefits of expanding
into international small-cap assets, including:
Larger, more complete global opportunity set of growth
ideas;
Sufficient market size and liquidity;
Lower correlation to U.S. equities than international large
caps;
Favorable international small-cap trends;
Compelling risk/reward profile; and
Active management works well.
It’s surprising that there are only thirty-five U.S. institutional
separate account managers with stand-alone international
small-cap products, managing $33 billion, compared to 331
with U.S. small-cap products, managing $353 billion. “This
is a wonderful area to pick stocks,” commented Mr.
Willyard, “and we expect that as investors realize the alpha
potential of this under-owned asset class, more assets and
managers will convert.” With over fifteen years experience
in this asset class, Nicholas-Applegate is at the forefront of
this trend.
By Tammy Wiseman

12. 12
IndexSpotPrices
Source: Bloomberg
As of 26-May-06
Rising Commodity Prices
110
210
310
410
510
77 79 81 83 85 87 89
Goldman Sachs Commodity Index
91 93 95 97 99 01 03 05
%ChangeYOY
Source:
A
BLS.gov, Bloomberg
s of 30-Apr-06
Core Inflation
1.0
1.5
2.0
2.5
3.0
99 00 01 02 03 04 05 06
U.S. Core CPI (x Food and Energy) Core consumer prices advanced 0.3%
for the second straight month in April.
The unwelcome figure was higher
than analysts expected, and puts the
year-over-year gain in prices near the
top end of the Federal Reserve’s
comfort zone. Inflation is running at
a 5.1% annual rate so far in 2006,
significantly higher than the 3.4%
annual rate recorded in 2005.
Thousands
Source:
A
BLS.gov, Factset
s of 28-Apr-06
Nonfarm Payrolls
0
100
200
300
400
5/04 8/04 11/04 2/05 5/05 8/05 11/05 2/06
Job growth slowed last month, with
138,000 new workers added to non-
farm payrolls. The monthly figure
was well below the 199,000 additions
economists expected. Forthcoming job
figures will be watched closely for
signals that a more moderate pace
of economic expansion will allow the
Federal Reserve to pause after almost
two years of continuous policy
tightening.
CHARTBOOK — RESEARCH FROM THE FIELD
Commodities prices have soared to
unprecedented levels (in nominal
terms) over the past two years. The
Goldman Sachs Commodity Index,
comprised of 48% energy, 18%
agricultural, 6% industrial metals,
25% livestock and 3% precious metals,
offers some context on how today’s
raw materials costs compare with
historical costs. While livestock and
agricultural products have remained
relatively stable, oil, copper, zinc,
nickel and platinum have all broken
records in the past sixty days.
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