In today's Barron's (sub. req.), which features that publication's annual roundtable of 'market luminaries', Pimco founder and chief investment officer Bill Gross makes four investment picks for 2006 -- two ETFs and two CEFs. In the macro, Gross believes the U.S. market is 'fairly valued' and that the dollar will weaken significantly in the next 1-2 years: 'U.S. investors should accelerate their exposure to non-dollar stocks, because the dollar as a currency is doomed.'
Note that one of Gross' picks, Powershares' PRF, has been covered in a particularly thorough manner here on ETF Investor. Gross' 4 picks:
● iShares MSCI EAFE Index Fund (ETF: EFA): 'one of the largest ETFs in volume and outstanding capitalization.... You're buying the EAFE [Europe, Australia, Far East] here. Japan represents 25% of total holdings; the U.K. has 22%. This is an international non-dollar-denominated index fund, which trades at a liquid price and with expenses an individual investor can afford. The average annual expense is 0.35%. It's an equity play as well as a weak-dollar play.'
● Power Shares FTSE RAFI U.S. 1000 (ETF: PRF): 'There's a new phenomenon in the index business, introduced by Rob Arnott, who technically is associated with Pimco but basically runs his own shop. He's a brilliant asset allocator and the man behind Pimco's All-Asset Fund. Normal equity indexes such as the S&P 500 are capitalization-weighted, which means that as they go up in value, an index fund has to buy more shares of the stocks in the index. He argues, and I would agree, that in many cases stocks in the S&P, and the S&P itself, are overvalued. Arnott created an index that isn't cap-weighted. His index and this fund are weighted by sales, income, book value and dividends. He has back-dated the concept relative to cap-weighted indexes, and its outperformance is measurable.'
● BlackRock Global Floating Rate Income Trust (CEF: BGT): 'These are recently created funds that invest in bank loans. In many cases the assets are rated BB, Baa. You're not investing in triple-A assets, but these are loans banks made to viable corporations. They were issued on a floating-rate basis, and yields have gone up as the Fed has raised rates. If the Fed lowered rates, they might drop a little.
'Typically, closed-end funds are issued at $15, or par. Within 12 to 18 to 24 months, they drop in value to a 10% to 15% discount to net asset value. The actual loans are selling at 85 or 90 cents on the dollar. The attraction here is the drop in price. Late last year, with tax selling, the price accelerated on the downside.... This particular fund is 30% invested outside the U.S. It's a currency play to some extent. Some of the largest holdings include emerging-market debt and Fannie Mae and Federal Home Loan Bank instruments. For the most part, it's double-B oriented. It's yielding about 8%. If I'm wrong and the Fed goes to 5% or 5½%, the fund will benefit because those loans are correlated with short-term rates.'
● Pimco Corporate Income Fund (CEF: PCN): 'Most Pimco closed-end funds sell at premiums to net asset value. This one trades at net asset value... The quality is a little better than the BlackRock holdings. For the most part it's a Baa investment-grade product. It can be purchased with decent liquidity, and yields 8.5%.
'Let me throw out this caveat, however. Closed-end-fund investors rush in when they see a recommendation and may pay market price or market ask in the first day or two after this is published. Make sure you don't put in a market-based order and pay 5% or 10% more than you should. That reduces the yield to 8% or 7.5%.'
