Diversification Can Help to Limit Losses
Most funds stick to a narrow specialty, such as foreign small stocks or California municipal bonds. But a handful of funds take a different approach, holding broad collections of stocks and bonds.
During the 1990s bull market, the broadly diversified funds lagged hot technology funds. But in market downturns, diversification can help to limit losses. While one asset is falling, others may be rising.Lately diversification has proved to be a lifesaver. A top performer is PIMCO All Asset Fund, which returned 4.7% during the past year, about 15 percentage points ahead of the S&P 500. Portfolio manager Rob Arnott owns a range of assets, including commodities, real estate, and blue-chip stocks.
At the moment, Arnott is emphasizing Treasury Inflation-Protected Securities (TIPS). These rise in value as the consumer price index climbs. A rock-solid investment, TIPS have delivered positive returns throughout the market crisis of recent months. And in a time of high energy prices, the inflation securities can help to protect the purchasing power of portfolios.
PIMCO has a big stake in emerging-market bonds. These sometimes rise when U.S. investments are falling. Arnott says bonds from countries in Latin America and Asia pay relatively high yields and come with reasonable risk. At a time when the U.S. Treasury is struggling to borrow huge amounts, emerging economies are in relatively healthy shape. “While we have massive deficits, many of these countries have surpluses,” Arnott says.
Another diversified fund is Evergreen Asset Allocation. The fund currently holds foreign currencies, high-quality bonds, and emerging-market stocks. To limit risk, portfolio manager Ben Inker is holding some familiar blue-chip stocks, including Microsoft and Johnson & Johnson. “These companies are not going to go bankrupt, even if the economy slips into a serious recession,” Inker says.