Regular readers know that when Research Affiliates’ Rob Arnott speaks, I pay attention.
Here are some details of his current postioning from a larger article about Go-Anywhere managers at Investment News:
Go-anywhere managers are worth paying attention to because they have no biases toward any country, sector or asset class. Right now, many of the best ones are decidedly bearish. Rob Arnott of the $28.5 billion Pimco All Asset All Authority Fund says it is “reasonably likely” the U.S. will enter into a recession in 2013 and “a near certainty that we at least have a major slowdown.” Arnott and his peers favor assets ranging from short-term emerging-markets bonds to preferred stock to gold bullion.
Arnott’s Defensive Play
Arnott, whose fund can invest in stocks, bonds or commodities and can short (bet against) securities, is avoiding the U.S. in favor of emerging markets. Those markets, he says, aren’t overleveraged and have better growth prospects. Almost 40 percent of his fund is invested in Pimco’s emerging-markets funds; almost 80 percent of that is in emerging-markets bonds and currency, and the remainder in emerging-markets stocks.
The shortest-maturity emerging-markets bonds, which have the least downside volatility, hold the most appeal for Arnott. “Emerging-markets currency bonds with maturities of one to three years enjoy a premium yield of 2 to 3 percent over comparable U.S. bonds,” he says. “And by owning them you move your money away from the U.S. dollar, which is vulnerable to devaluation.” That explains his fund’s 12 percent weighting in the Pimco Emerging Markets Currency Fund.
Arnott is also betting that high-yield bonds will continue to rally, and has 16 percent of his fund in them. Yet he’s cognizant of their potential for volatility should the U.S. slip into recession, and views them more as equity substitutes than as conventional bonds. To counteract the downside risk in junk bonds and emerging-markets stocks, he’s hedging his exposure with the Pimco StocksPlus TR Short Strategy Fund, which bets against large U.S stocks. That short position reduces the fund’s overall volatility.
That bit about using high-yield bonds as an equity proxy is something I’ve heard a lot since last summer – it’s also something I’ve seen other financial advisors doing as a half-way measure toward coaxing their risk-averse clients off the sidelines without putting them into a higher equity weighting.