Allocation Funds Are on the Rise

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Managers should also have the ability to invest beyond stocks and bonds into real estate and commodities, says Faber, whose book offers a do-it-yourself guide for asset allocation.

Legg Mason's new fund, the Legg Mason Permal Tactical Allocation Fund, is taking a different approach from most. The money manager's Permal unit, which offers funds that invest in a range of hedge funds, will oversee it. Permal will make asset allocation decisions and mix Legg Mason funds with those of rivals, index funds, exchange-traded funds, and closed-end funds. With a minimum of just $1,000 and the ability to let investors withdraw money at any time, it's a change for Permal, which typically sets up funds of hedge funds that have minimums of millions of dollars per investor and allow limited withdrawals.

Where are the tacticians putting money? Avery, the Ivy co-manager, thinks U.S. consumers are unlikely to return to their free-spending ways any time soon. And since the U.S. consumer accounted for almost 25% of global gross domestic product in the good times, the world economy may struggle until consumers in regions like China take up the slack. To hedge his fund's 55% exposure to stocks, Avery has added put options, which pay off if stocks sink, as insurance against a decline. The options cover slightly more than half the value of his stock position, leaving the fund with a 25% exposure. The rest of the fund is split almost equally among cash, gold, and bonds.

First Eagle co-manager Abhay Deshpande is finding the best values in Japanese equities. About 80% of stocks there trade for less than book value, and 20% for less than the amount of cash and other short-term assets minus interest-bearing liabilities. And at the Thornburg Income Builder Fund, managers like the telecommunications sector, particularly outside the U.S., says co-manager Brian McMahon. High-yielding choices include Vodafone (CHL) and Telefónica (TEF).

with Lauren Young and David Bogoslaw

Pressman is a correspondent in BusinessWeek's Boston bureau.

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