You might need a little non-PIMCO exposure.
Do your clients own Harbor Bond
Total Return everywhere may be a case of too much of a good thing. The fund's insanely large asset base of $252 billion (plus another $236 billion that PIMCO runs with the same approach elsewhere) has led manager Bill Gross and his team to increase their use of derivatives to execute their strategy. Clearly, they know what they're doing, and they continue to make savvy big-picture calls--such as anticipating the housing downturn in 2007 and, recently, shifting into Treasury bonds, which have delivered fine results this year.
Given the size of the fund, it makes sense for Gross to rely on top-down forecasts to manage it. Adding a few corporate bonds here and a few foreign issues there just won't have much impact on the fund's performance.
How to Build a Bond Portfolio
A smart way to invest is to make Total Return the core of a bond portfolio and complement it with other funds. So, let's talk about PIMCO helpers. Begin with Dodge & Cox Income
With income tax rates potentially set to rise, tax-free municipal bonds have a lot of appeal. Vanguard and Fidelity are the best fund families in this neighborhood. I'd go with Fidelity Tax-Free Bond
I'd also want a bolder fund that invests in high-yield and foreign bonds. So, I'd add Loomis Sayles Bond
You'll need protection against rising interest rates, so take a look at Fidelity Floating Rate High Income
If you're really concerned about inflation, you might also consider a fund that invests in Treasury Inflation-Protected Securities. PIMCO runs a good TIPS fund, but I prefer Vanguard Inflation-Protected Securities
Finally, make sure that you're not investing your emergency cash in PIMCO Total Return and its clones. You should use a money-market fund and maybe a short-term-bond fund for that purpose. Yes, yields are lousy, but you want to have something that is unlikely to suffer big losses when you need your money the most. Because of its ultra-low costs, Vanguard is a good family to look at for both types of funds.
This article originally appeared in Kiplinger's.