by Jeff Reeves | May 3, 2012 5:30 am
Many normal Americans only have exposure to the investment world via their 401(k) or IRA mutual funds. And most of these folks are stuck in rather vanilla, stock-based investments, focused on large stocks that could be “value” buys or small stocks that could be “growth” buys.
But what if the stock market in general isn’t going anywhere? Or worse, what if there are concerns that could drive Wall Street lower? In those cases, unless you have an elite fund with a genius manager, you are going to pay the price.
That’s why it might be worth looking beyond stocks entirely and into different investment classes. I’m not talking sleepy Treasury bonds either, which yield a meager 3% annually for your portfolio. Those are safe investments to preserve capital, but aren’t a way to grow your retirement nest egg.
If you’re concerned about diversification beyond stocks and don’t want to settle for the paltry returns of long-term U.S. Treasury bonds, consider these eight clever ways to save your 401k or IRA mutual fund portfolio by investing in real estate, gold, corporate debt and even short-side investments that profit as the market crashes.
Take a look:
Want to invest in the market but don’t want to be tied to the hopes that it will always go up? Consider the Wasatch Long/Short Fund (MUTF:FMLSX). Just as the name implies, longtime managers Michael Shinnick and Ralph Shive stake out investments they think are best based on the direction of the market as much as the underlying fundamentals of the investments themselves. That involves going long when a stock looks good, or going short when things look particularly ugly.
Explaining the methodology is like dissecting a hedge fund. To find gaps in pricing, the Wasatch fund uses just about every approach to valuation. There is macro analysis to get a sense of the overall economic environment. Next, Wasatch uses fundamental analysis — such as discounted cash flows — on companies. The fund even will use technical analysis to get further confirmation on a trade.
It’s a lot of work, but it is highly profitable. The fund has five-year returns of 3% annually and three-year returns of 16% annually. All with a reasonable 1.3% expense ratio, considering the brain calisthenics necessary for such a sophisticated strategy.
PIMCO Commodity Real Return Strategy (MUTF:PCRDX) invests in “commodity-linked derivative instruments backed by a portfolio of inflation-indexed securities and other fixed income instruments.” In short, it keeps a firm foundation in high-yield investments like preferred stock and Treasuries while chasing returns in commodity investments.
Instead of investing in physical commodities, this PIMCO commodity fund purchases derivatives linked to the Dow Jones-UBS Commodity Total Return Index, helping it diversify without committing substantial capital. The fund then “collateralizes” these derivatives with an actively managed TIPS portfolio, according to the fund’s prospectus. It occasionally invests in leveraged notes to juice returns.
The biggest appeal of this fund should be to investors concerned about inflation. Because PCRDX is capitalizing on the inflation-hedging properties of both commodities and inflation-indexed bonds, this is a great place to stow your cash if you’re worried about inflationary pressures.
It has been managed since 2007 by Mihir Worah. The fund boasts the top five-star rating from Morningstar, a reasonable 1.24% expense ratio and no transaction fees.
Performance admittedly has been weak, lagging the market with just 4% returns year to date and a meager five-year return of just 0.5% annually. But that partially is because of plummeting interest rates, rather modest inflation and a drop in commodity demand. Again, an inflation hedge is the biggest draw here, so if you want to protect against a future inflationary trend, consider PIMCO Commodity Real Return Strategy.
One reason people like many low-risk stocks is the income potential of high dividends. But you don’t have to get into stocks to find yield. Let Fidelity Capital & Income Fund (MUTF:FAGIX) provide income for you via corporate bonds instead. This fund has a low expense ratio of 0.76% and a very impressive 10-year return of more than 10% annually.
Manager Mark Notkin has been at the helm since 2003 and has spread around the $9.5 billion under management in high-yield investments like corporate debt — including GMAC notes yielding 8%, and Sprint (NYSE:S) bonds returning 8.75% right now.
There are risks with high-yield corporate debt, but clearly Notkin and FAGIX have navigated these waters very shrewdly.
In a growth environment, you want to be in stocks. But if the economy and the market are moving sideways, a surefire way to seek out huge returns is to seek out huge yield. That’s exactly what Fidelity Capital & Income does.
We all know about the rise of the SPDR Gold Trust (NYSE:GLD) ETF, with some $67 billion under management. But don’t think that means gold mutual funds are dead money. For centuries, gold has represented a safe haven in times of crisis or inflation, and investors are always looking for creative ways to use the precious metal to preserve capital.
Investors looking to put some gold into their portfolios — but perhaps not link performance directly to the ups and downs of the commodity — should look at the First Eagle Gold Fund (MUTF:SGGDX).
First Eagle has small exposure to other commodities like copper, silver and aluminum while focusing heavily on gold. More than 15% of the portfolio is invested in bullion — a significant amount, but not so much that you move in lockstep with the metal like GLD. SGGDX also holds substantial positions in miners like Goldcorp (NYSE:GG) and AngloGold (NYSE:AU) for diversification across the gold mining industry without losing its strategic focus.
First Eagle has returned about 6% annually during the past three years and 7.5% annually over the past five years, while expenses run at a low 1.2%. Unfortunately, performance year-to-date hasn’t been so hot as gold has fallen out of favor, with First Eagle’s fund off 20% while the broader market has rallied.
It’s pretty much impossible to find a pure real estate mutual fund out there. After all, what would you do if you owned 100 pieces of property, then a big portion of clients went to withdraw funds while real estate was tanking? Owning property isn’t the kind of liquid investment strategy that can be applied to mutual fund investing.
But real estate investment trusts, or REITs, are a common way to play real estate indirectly. These are big property owners that could either be apartment operators, commercial real estate companies or even a timber or energy producer that happens to own a lot of acreage. They’re also income-hunter favorites because REITs are required to pay out 90% of all taxable income to investors.
A variety of mutual funds invest in REITs, but one of the standouts is the CGM Realty Fund (MUTF:CGMRX). The portfolio manager is Ken Heebner, who is one of Wall Street’s top investors. But he also is a quick trader, which can mean CGMRX can experience lots of volatility. Still, over the long haul, CGM Realty’s results have been impressive.
For the past decade, CGMRX has posted an average return of about 10% — even across the worst housing downturn in history. CGMRX also sports a lean 0.88% expense ratio with no load.
Short selling is a way for investors to make money when an asset falls in value. But even sophisticated traders can be intimidated by the practice.
So take the guesswork out of short-side trading by getting into PIMCO StocksPLUS Short Strategy (MUTF:PSSAX). The portfolio manager is none other than the “Bond King,” Bill Gross, who operates the world’s largest bond fund, PIMCO Total Return (MUTF:PTTAX). Only instead of looking for investments he thinks will go up based on decades of experience, he’s playing the downside.
The PIMCO StocksPLUS takes a short position on the the S&P 500 Index, providing an effective way to hedge a portfolio against a bear market. For example, during a crushing 2008 where the S&P 500 lost 41%, PSSAX was up a jaw-dropping 47%!
Of course, investors should be warned that when times are good, PSSAX is bad. This year, the fund is off 3% year-to-date as the market has rallied — with a roughly 1% expense ratio charged for the privilege of those losses to boot.
But if you’re afraid the music is going to stop, you might want to consider PIMCO’s short fund as a hedge against decline — or as a profit opportunity if you expect extended trouble for the market.
If you want another rock-solid gold investment, consider the Van Eck International Investors Gold Fund (MUTF:IIGCX). Manager Joe Foster actually is a geologist by training, so this is the perfect way to play gold mining from a boots-on-the-ground production standpoint instead of a Wall Street speculation standpoint. This can be especially helpful when investing in early-stage gold companies.
Foster’s track record has been sturdy. The fund has produced average annual returns of 18% in the past three years and 9% in the past five — though admittedly, performance lately has been ugly as miners and gold have fallen out of favor. The fund is 33% in the red during the past year. It’s also worth noting the expense ratio is hefty, coming to about 2%.
But if you’re a speculator looking for the next company to cash in on a big gold rush, Van Eck’s gold fund might be the right choice for you.
Commodity demand in the West is subject to ups and downs. As industrial production flags, energy commodities like oil and raw materials like copper aren’t needed as much. However, the emergence of the BRIC countries has baked in significant organic growth for commodities as regions like Latin America, India and China have undergone aggressive industrialization.
One way to play this trend is with the Credit Suisse Commodity Return Strategy Fund (MUTF:CRSOX), which does not invest in stocks. Rather, it focuses on futures, which are complex contracts that allow investors to bet on the direction of the prices on individual commodities.
If you don’t feel comfortable picking which commodities will rise and which will fall, trust Credit Suisse Commodity Return Strategy to do the picking for you. CRSOX has a comprehensive approach, with exposure to categories including agriculture, energy, industrial metals, precious metals and livestock.
What’s more, the fund has a reasonable expense ratio of 0.79%. The performance can be volatile; however, over the past year CRSOX is off more than 16%. But in the past three years, the fund has managed a nearly 10% average annual return.
With $5.7 billion under management, CRSOX is closed right now to new investors, but that could change if conditions in the market improve.
Jeff Reeves is the editor of InvestorPlace.com, and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace??.com or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff Reeves did not own a position in any of the investments named here.
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