With the various global debt situations and slowing economic growth continuing to rattle investors, many are looking for ways to power their portfolios through the mess. To that end, following the advice of various market gurus could be a timely solution. As the manager of the PIMCO's $240 billion Total Return Fund (ARCA:BOND), when Bill Gross speaks about the global markets, investors tend to listen. Aside from his recent bullish bets on mortgage backed securities, the PIMCO head honcho has recently been making recommendations outside his norm. For investors, that means adding a dose of hard assets.
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Gross' Latest Missive
The PIMCO chief's latest investment outlook comes as sort of a departure from his normal realm. While he has been bearish on sovereign fixed income investments for some time, the manager recently made the case for hard assets and commodities to be in portfolios. Gross believes that the various policy responses made by fiscal and monetary authorities have managed to increase the risk and lower the return of sovereign securities, especially when factoring in inflation of 2 to 3%. The various quantitative easing programs in the United States and Europe, which have cost trillions, have directly caused yields and future returns to plunge.
Gross estimates that it's only a matter of time before creditor nations and various bond vigilantes will see the light and realize that a -2% real interest rate will fail to compensate them for buying sovereign bonds. For example, China has already begun to shift out of U.S. Treasury bonds and into higher returning commodities and real assets. Overall, this reconfiguration of our current dollar-based credit system into one that is likely to be more hard money based is likely to be "disruptive and an ill omen for seafaring investors."
This transition will ultimately lead towards higher global inflation and Gross believes that metals as well as real assets such as farmland, timber and real estate should take precedence in portfolios over the next few years.
Following the Bond Kings Advice
With such a prominent fixed income investor now calling for portfolios to begin holding hard assets, retail investors may finally want to take his advice. With nearly $1.4 billion in assets, the iShares S&P GSCI Commodity-Indexed Trust (ARCA:GSG) could be a good place to start. The underlying index tracks a basket of hard asset futures across the various commodities sub-sectors including energy, metals and agriculture. The fund, which is considered a partnership, charges 0.75% in expenses and could make a great broad-play on the commodities. Likewise, the United States Commodity Index (ARCA:USCI) could be used as well.
The obvious winner in a shift from a fiat-based money system to one backed by hard assets is gold. The SPDR Gold Shares (ARCA:GLD) still reigns supreme as the No. 1 gold play for investors. However, the ETFS Physical PM Basket Shares (ARCA:GLTR) may make a better bet. Cute ticker aside, the exchange-traded fund (ETF) tracks a basket of physical gold, silver, platinum and palladium. Offering both a safe-haven play and a chance to gain from rising industrial production, the ETF makes a great bet on the shift to a hard asset-based monetary system.
Finally, with the Bond King now waxing poetic about real estate and farmland, a dose of real estate investment trusts could be in order. The SPDR Dow Jones Global Real Estate (NYSE:RWO) offers a broad play on global real estate. Holdings in the fund include American stalwarts like Simon Property Group (NYSE:SPG) and international giants like Unibail-Rodamco. The ETF yields 2.96%. Both the Guggenheim Timber (ARCA:CUT) and Adecoagro (NYSE:AGRO) can be used to add a dash of farm and timberland to a portfolio.
The Bottom Line
When PIMCO's Bill Gross speaks, the markets generally listen. His latest missive could serve as a portfolio wake-up call for those investors without commodity or hard asset holdings. To that end, adding a dose of natural resources seems prudent. The previous picks, along with futures-base funds like the UBS E-TRACS DJ-UBS Commodity ETN (ARCA:DJCI) or hard asset equity funds like the Market Vectors RVE Hard Assets Producers ETF (ARCA:HAP), make ideal selections for playing the trend.
At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.