Guarding against inflation
top picks top pro robert arnott
Robert Arnott
Fund: Pimco All Asset All Authority Fund (PAUAX)
Manager: Robert Arnott
Tenure: 7 years
Fund type: World allocation

The strategy

In addition to owning stocks for growth and bonds for income and ballast, you need a "third pillar" in your portfolio at all times, argues money manager Rob Arnott, chairman of the investment consulting firm Research Affiliates. To fully diversify your portfolio and to fight against inflationary money printing, you also need exposure to alternative assets such as commodities and currencies, he says.

Trouble is, it's often difficult to manage assets such as this on your own. Rather than bury a tin of Krugerrands in the backyard, you're better off investing in alternatives via professionally managed funds, Arnott argues. That's what his portfolio, Pimco All Asset All Authority, does -- it buys other Pimco funds that specialize in specific alternatives. The funds he selects aren't the cheapest around, yet Arnott has still managed to beat 98% of his peers over the past five years.

The opportunities

This year will be a challenge because "nothing is cheap" in alternatives. So patience is in order. Arnott, for instance, is looking for pockets of under-valued commodities. He is investing in emerging-market bonds, which are yielding more than the going rate of inflation, unlike U.S. Treasuries. And he's parking cash globally so "we can pounce on opportunities when people are terrified" -- and prices on alternatives fall to more attractive levels.

His picks

Pimco Emerging Markets Currency Fund (PLMAX): Over the long term, money is likely to flow to fiscally healthy emerging markets, Arnott says. This fund is invested in the currencies of countries with low debt-to-GDP ratios, such as Brazil and Kazakhstan.

PIMCO Commodity Real Return Strategy Fund (PCRAX): Like many commodity funds, this one uses options contracts to mimic a diversified basket of real assets. In doing so, though, Real Return underweights energy commodities, which Arnott thinks are fully valued.

PIMCO Emerging Markets Bond Fund (PAEMX): Despite the strong balance sheets of countries in Asia and Latin America, "emerging-market bonds are paying a 3.5-point spread over U.S. Treasuries," Arnott says. Yet "their quality is better than a lot of developed-world sovereign debt. That is pretty cool."

  @Money - Last updated February 05 2013 09:19 AM ET
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