In May (2005) US short term money market funds were yielding ~2.4%. At that time I evaluated higher yield alternatives of several types. Some were very short term bond funds with very low costs (Vanguard). Others were bond funds with an accent or a "kicker".
A little over three months later, Vanguard's Prime Money Market Fund is yielding 3.24%. I mention Vanguard again because when one is dealing in instruments with low yields, costs are extremely important to net yield. If your money market fund is being billed 0.80% per year by the fund's advisor, your net yield will be 0.5% less yield per year than at Vanguard's fund which is billed 0.3% by its in-house advisor. Thus your net yield will be ~15% less at "Fund X" than at Vanguard Prime in this example, no small matter.
You may be unable to get into Vanguard's Prime where you trade, but if your short term cash balances are important enough to you, you can still shop around for money market funds with low costs and conservative principles. This is easily done with Google or other search engines.
Another reason at this time for digressing into discussion of money market funds is the yield curve: on Friday before this weekend, the three month T Bill yielded 3.48% and the two year T note yielded 3.72%. http://www.ustreas.gov/offices/domestic-finance/debt-management/interest-rate/yield.shtml
It no longer makes sense tofor me to leave fixed income funds in short term bonds funds with effective durations of 2-4 years. If you haven't done so already, you may wish to consider putting your shorter term fixed income money or cash balances into a good money market fund. Some day, month, or year in the future, when the yield curve is inverted and rates are much higher than now, it will make sense to venture out of money market funds.
But if we cannot safely go out the yield curve to bonds or bond funds yielding 4.31% or less (for the 20 year T bond), we can still revisit the alternatives I listed in the May blog post plus one other I've been looking at.
Each of these funds is different, posited as they are on different long term outlooks on both interest rates and the US dollar. An excellent site for initial evaluation of all mutual funds is MSN's: http://moneycentral.msn.com/investor/research/fundwelcome.asp?Funds=1 One of the features of this site is that it gives you not just the ten largest holdings of a fund, but the 25 largest. It's still better to go to the fund's website and look at the latest quarterly or semi-annual report to fund holders for full particulars, but MSN is a good first stop on your reasearch path.
Someone reminded me recently of Peter Lynch's remark that most people spend more time researching an electric toaster they are buying than a stock or mutual fund, so I hope you will prove him wrong.
Hussman Strategic Total Return Fund holds primarily short duration Treasury Inflation Protected T notes (TIPS) plus cash, a few utilities, and some gold stocks. The idea here is safety plus some exposure to higher yield (utes) and dollar erosion (golds). HSTRX has been operating for about 2.5 years. (As always, click on the image for a larger pop-up version.)
Permanent Portfolio Fund PRPFX and Prudent Bear Global Income PSAFX have been operating since the 1980's and early 2001 respectively, and have total return yields of 11.0% and 9.4% for the past five and 4.5 years. Both funds feature exposure to non-US sovereign T bills, US T bills, gold, and some stocks. I like both of these funds for their yields, histories, and their focus.
PIMCO has taken a different tack, as befits this dominant bond house advisor. If you read, and you should, Bill Gross's and Paul Mc Culley's monthly posts at http://pimcoadvisors.com, you'll understand why a US bond house needs to think long and hard about the implications both of inflation and US dollar erosion. Neither event is cause for joy amongst regular long term bondholders.
In my May post I mentioned PIMCO Commodity Real Return Fund PCRDX, which I have been in for several years. It is basically a US TIPS fund with a Dow Jones AIG Commodity Index option (unleveraged) on top. I like the Dow Jones AIG Index for several reasons, compared to the CRB Index and the Goldman Sachs Commodity Index. First of all DJAIG is a broader index not excessively weighted to crude oil as is the Goldman Sachs index. The Dow Jones AIG includes 23 different commodities including all US-traded commodities plus three metals traded in London. DJAIG bests both the CRB and and GSI by having an annual rebalancing, which is an automatic way of taking profits in one sector and re-deploying them in sectors which haven't had runs. If this fund interests you (19.4% annualized returns for 2.4 years), and you believe commodities have a long run ahead of them, as I do (but not necessarily a straight line up), check out the background papers on the concept at the PIMCO Advisors site.
What PIMCO did for commodities they have also done real estate and a host of other asset classes and fixed income sectors. In most cases PIMCO overlays a TIPS basket as above with an index option or swap in an unleveraged fashion. With fixed income they have some exotic actively-managed bond funds, for which they are famous, with short durations. The MSN URL gives the current list of sub-funds they are putting into the master PIMCO All Asset Fund:
They have hired sub-advisor Robert D. Arnott, Chairman of Research Affiliates L.L.C. and an expert on tactical asset allocation, to choose which sub-funds and how much of each to allocate to the master fund. While "funds of funds" have a mixed mutual fund history (read up on Bernie Cornfeld of the 1960's some time), I believe PIMCO is doing a great service making this fund available to those of us who are not throwing institutional million dollar increments into hedge funds. The sub-funds being used ARE institutional which gives one enormous advantages in costs, especially if we purchase the no load All Asset D class fund, PASDX. This gets us into an extremely well-conceived and well-run interest rate hedge fund for 1.50% per year.
If this approach fits into your investment scenario, as I have briefly outlined, and you do your homework, as I always recommend, you can buy PASDX through many brokerages for no transaction fee ("NTF") if held for a year, with an initial minimum of $5000 or $2500 for self-directed retirement funds (IRA's, etc.).
My history, bias, and research has led me to buy three of the above funds as I have gradually become aware of them and bearing in mind my outlook on inflation and dollar erosion over time. However, such an outlook is compatible with intermediate term (months to a year or more) contra-trend moderations or reversals of those trends. As with most investments it's better to buy them when they are down from highs or to buy them in pieces over time ("dollar averaging").
As always this report is only research which I have done for myself, and NOT investment advice. I am not employed or paid by anyone in the investment industry, and I do NO consulting except for myself and close family investing.
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