Diversified Duo: Mixing Assets

06/23/2014 9:00 am EST

Focus: FUNDS

Robert Carlson

Editor, Retirement Watch

We're adding two new positions to our Income Growth Portfolio of mutual funds, explains Bob Carlson, editor of Retirement Watch; each is diversified among different asset classes and seeks to earn high returns with less risk than the stock market indexes.

The first is an old friend PIMCO All Asset (PASDX:US). The fund is managed by Rob Arnott who shifts the fund's assets among strategies offered by PIMCO, based on valuations and economic outlook.

All Asset is a bit conservative and produced good returns over the last year; the fund is up 1.86% in the last month and 4.71% for the year-to-date.

The fund increased its holdings of emerging market stocks and bonds in 2013. These are cheap relative to US stocks based on the fund's valuation methods. While the fund purchased these assets early, they recently rallied.

Arnott isn't saying the emerging markets have hit bottom or trying to time markets. He says only that they have higher long-term return potential than US stocks.

Arnott generally doesn't like US stocks now, but is investing part of the fund in them through low volatility equity income strategies that should provide higher returns with less risk. The fund also is diversified with various bond strategies and inflation hedges.

The other new fund recommendation is a new one for us: Bridgeway Managed Volatility (BRBPX:US). The fund seeks high current returns with less risk than the stock indexes, using a mix of assets. Its goal is to be more stable than stocks in most market conditions.

At least 25% of the fund will be invested in stocks at all times and up to 75% can be in stocks. The stocks are selected using Bridgeway's proprietary stock selection model, which changes the stocks held based on market conditions.

To reduce volatility, the fund changes its bond and cash allocations, which, normally, is at least 25% of assets. In addition, the fund might write options against its stocks to reduce volatility and generate income.

Recently, the fund was 43% in cash, 56% in stocks, and the rest in other assets or options strategies. In recent years, cash has been as high as 73% in 2012 and as low as 33% in 2011. Stocks ranged from 26% to 66%. The fund returned 1.03% in the last months and 3.7% for the year to date.

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