What a month it has been. The jobs numbers for May and June were revised lower, and the July numbers were below expectations as a wakeup call to a slowing economy. Two weeks later, wholesale prices rose 3.3% compared to a year earlier, and the producer price index rose 0.9% compared to the month before as tariffs began to raise the cost of inputs. National debt hit $37 trillion in August. Underlying growth for the economy year-to-date is a weak 1.4%, but it is distorted by imports. Federal Reserve Chairman Jerome Powell gave his speech following the Jackson Hole Symposium, in which he expressed rising risks to employment, persistent inflation pressures, and an openness to interest rate cuts. The markets reacted enthusiastically to this “bad news is good news”. Federal Reserve Governor Lisa Cook is suing the Trump administration over the attempt to fire her, raising questions about the Fed’s independence. What a month it has been, and it is not over yet.

Figure #1 shows the yield curves for U.S. Treasuries just before President Trump announced tariffs, before the employment revisions, and the current yield curve. Investors are seeking higher, longer-term yields because of the higher risk of inflation and rising debt. They anticipate rate cuts to begin in September. After the employment numbers were revised lower, I have shifted more from short-term bond funds to intermediate bond funds in time for rates to drop.

Figure #1: U.S. Treasury Yield Curves

Source: Author Using St. Louis Federal Reserve FRED database.

Source: Author Using St. Louis Federal Reserve FRED database.

I finished reading “Our Dollar, Your Problem” by Kenneth Rogoff. I try to take away at least one concept that I can apply from each economics and investing book that I read. Dr. Rogoff describes the declining dominance of the dollar and the relationship between the dollar, interest rates, exchange rates, inflation, debt, and deficits. As I have written, my long-term view is of slower economic growth due in part to demographics, higher long-term interest rates because of high deficits and rising national debt, and below-average future domestic stock returns because of high valuations. I adjust this long-term view to include “a sustained period of global financial volatility marked by higher average real interest rates and inflation and more frequent bouts of debt and financial crises.”

This article describes the changes that I have been making to my portfolio, as it appears that we are reaching an inflection point in interest rates with a slowing economy and rising inflation. First, I have lowered my stock to bond allocation from 65% to 50% including lowering my risk profile of what Fidelity manages, which allows more flexibility in what I manage. Second, I have adopted a barbell approach, shifting money from short-term bond funds to intermediate bond funds. Third, I have shifted investments from funds with lower quality bonds to higher quality. Last but not least, I have added bond and flexible portfolio funds to protect against inflation.

iShares iBonds with Target Maturities

This year, I switched from adding individual bonds to iShares iBonds with target maturities to my bond ladder. I like them for diversification, simplicity, and liquidity. They hold bonds that mature near the target date, and the fund is liquidated on its maturity date, and pays interest monthly.

Table #1 shows the one-month return, the yield, and symbols for these funds through 2034, to reflect performance. While job numbers were revised lower, inflation shows signs of rising, and after Fed Chair Powell’s speech, short-term Corporate bond ETFs had about 0.37% one-month returns, while those maturing in 2033 and 2034 had 1.4% one-month returns. Inflation-protected bonds with longer durations have done even better.

Table #1: iShare iBonds One Month Returns and Yields

Author’s Recent Bond Fund Purchases

The economy is slowing, and bankruptcies are rising. Over the past several months, I sold all of my high-yield bond funds and many of my loan participation funds in order to focus more on quality. I shifted from shorter-duration bond funds to those with longer durations in a barbell approach. I diversified into more investment-grade corporate bond funds through core and total bond funds. Table #2 contains my latest changes over the past few months.

Table #2: Author’s Recent Bond Purchases – Metrics as of August 23rd

Source: Author using MFO Premium fund screener and Lipper global dataset.

Closing

Quantitative Easing suppressed long-term yields until inflation increased following the COVID pandemic. I agree with Dr. Rogoff’s comment in Chapter 26, “The Siren Call of ‘Lower Forever’ Interest Rates”, “My long-standing guess is that the average real interest rate on ten-year inflation-indexed U.S. Treasury bonds will be much higher in the 2020s and 2020s than the near-zero average level in 2012-2021.”

Federal Reserve Chairman has signaled a receptiveness to lowering rates in September because of a softening labor market. I use the barbell approach with short-term bonds and inflation-protected bonds to protect against rising inflation. I have locked in higher yields with intermediate bond funds to take advantage of a steepening yield curve and diversified into investment-grade bonds. I expect that longer-term rates will have to stay longer to finance the rising national debt and threats of higher inflation. Financing long-term debt with short-term debt is a major risk.

Out of curiosity, I calculated the average return of Lipper Categories during the 1970s when inflation averaged 6.6%. Most stocks and bonds did not beat inflation. Global equity funds and corporate bonds performed a bit better. I don’t expect inflation to be as severe in the coming decade; however, I believe that it is prudent to have a diversified portfolio.

Table #3: Lipper Category Performance During the 1970s.

Source: Author using MFO Premium fund screener and Lipper global dataset.

Traditionally, the job description for a core bond manager was numbing: (1) show up for work, (2) buy a bunch of Treasury bonds and some investment grade intermediate corporates, (3) celebrate the trading coup that allowed you to buy the same bond as everyone else but for a quarter basis point less – woohoo!, (4) go home and enjoy a fiber-rich dinner and small glass of red wine.

In reality, managers added negligible value. Over 10 years (through August 2025), the core bond fund trailing 75% of its peers returned 1.7% annually, the iShares Core US Aggregate Bond ETF (a proxy for “the market”) returned 1.8% annually, and a fund leading 75% of its peers returned 2.2%. Net difference between cellar and penthouse: 0.5% per year. (Source: MFOPremium calculations, Lipper Global Datafeed data.) And that’s pretty typical for other trailing periods. As a result, relative returns were highly dependent on efficiency: very large funds with very low expense ratios, able to place bids on very large lots of very efficiently priced bonds, had a nearly unbeatable structural advantage.

Cellar versus penthouse

10-year performance difference between
the top quartile and the bottom quartile

Core bond: 0.5% annually (per MFO Premium)

Core stock: 1.6% annually (per Morningstar)

In a world where US Treasury bonds are the world’s safest investment and among its most reliably profitable, it was an unbeatable recipe.

We might be leaving that world behind, which suggests we might need to consider possibilities where diversification and manager judgment might add substantial value.

That implies the possibility of considering an ongoing stake in credit rather than just investment grade, in international rather than just U.S., in special situations rather than just vanilla auctions, and in shorter durations.

The case for looking broadly

For intelligent investors—regardless of whether financial analysis is a daily habit or a distant interest—it’s becoming increasingly difficult to ignore the mounting alarm bells surrounding the United States’ fiscal outlook. In mid-2025, the national debt stands at over $37 trillion, a sum now greater than the entire American economy. This staggering figure reflects years of budget deficits and a political climate where policy decisions often appear driven more by ideology, self-interest and brinkmanship than any rational economic strategy. Even major investors, once reliant on U.S. Treasury bonds for security, are beginning to question how much longer the world’s largest borrower can sustainably fund its needs without consequence (Drew Desilver, “Key facts about the US national debt,” Pew Research, 8/12/2025).

(Sources: Historical Debt Outstanding, US Treasury; Federal Reserve Bank of St Louis, 9/2025)

These fiscal realities are not happening in isolation. As the U.S. government takes on more debt, with rising costs just to pay interest, confidence in federal bonds has begun to erode. Recent episodes of political gridlock over spending caps and the debt limit have highlighted just how reactive and unpredictable U.S. fiscal policy has become. The practical effect is a new era of vulnerability for traditional income portfolios anchored almost solely on U.S. Treasuries and investment-grade corporates. Investors are seeing the value of home-country assets increasingly shaped by fiscal risk and short-term fixes rather than predictable economic fundamentals.

In contrast, a growing number of foreign markets not only boast more attractive valuations but also signal ripening opportunities as non-U.S. economies chart their own paths out of stagnation. Diversification, therefore, isn’t simply about chasing higher yields or speculating abroad—it’s emerging as a necessary hedge against the potential excesses of U.S.-centric fiscal and market dynamics.

One measure of that changed dynamic is Research Affiliates’ estimates of the risks and returns, given a series of uniform economic assumptions, of dozens of asset classes. The following table gives the 10 highest Sharpe assets plus the US bond aggregate. Categories in black are fixed income (seven of 11), and blue are equity.

(Source: Research Affiliates, Asset Allocation Interactive, 9/2025)

By contrast, the three asset classes with negative expected 10-year Sharpe ratios are US Large-Cap stocks (-0.03), Developed Markets Large Growth stocks (-0.06), and US Large Growth stocks (-0.12).

Bottom line: investors need to consider looking for core exposure, not just 5% nibbles, in areas beyond the common.

Income beyond the ordinary

The bad news is that many of the most intriguing income investments are not easily accessible to most investors: closed-end interval funds such as RBC Blue Ray Destra International Event-Driven Credit (CEDIX) or Carlyle Tactical Private Credit (TAKNX), often have high minimums and limited brokerage access. Others, such as SEI Opportunistic Income (SIIT) Fund and GMO Emerging Country Debt, are institutional. Those structural quirks – the ability to use leverage and to lock large investments in place by denying investors the chance to redeem at will – give those managers exceptional advantages.

That said, there are intriguing options available to regular investors. We searched the MFO Premium database for funds that met six criteria:

1. They had a record of five years or more.
2. They were income-oriented.
3. They could invest globally and across asset classes.
4. They returned at least 4% annually. By comparison, the Vanguard Total Bond Market Index has lost 0.8% annually over the past five years.
5. They moved independently of the US bond market (downside capture of less than 50%, correlation of less than 75%).
6. They earned the MFO Great Owl designation (funds must have top 20% risk-adjusted returns for all the trailing measurement periods).

And, finally, they had to be purchasable.

Sixteen funds survived the cut. The funds are sorted by Sharpe ratio.

How to read that chart: The first three columns are easy. Name, Lipper fund category, and average yearly return over the past four years. Down capture is the percentage of the US bond market’s downside that the fund captured. A negative down capture means the fund tended to rise when the US bond market fell. The R-squared (R2) measures the degree of correlation between the fund and the US bond market: 100 means that the fund marches in lockstep with the bond market; 0 means the fund is completely independent of it. Finally, visual represents of three performance metrics: a maximum drawdown rating (how far the fund fell relative to its peers), downside deviation rating (called “bad deviation,” it’s a measure of how much a fund routinely falls relative to its peers) and Ulcer rating (our favorite: a measure of how far a fund falls and how long it takes to recover; deep fall + long recovery = massive investor ulcers). In each case, a blue cell signals top 20% performance.

Snapshots of the winning funds

1. CrossingBridge Low Duration High Income targets high current income and moderate capital appreciation by investing in short-maturity high yield debt, generally with maturity under three years, emphasizing principal protection and reducing credit and interest rate risks. The fund stands out for its active management in the short-duration segment and prioritizes risk mitigation over chasing yield, aiming for consistent income with lower volatility than typical high yield funds.
2. RiverPark Strategic Income pursues income and preservation of capital through a flexible, bottom-up portfolio of investment-grade and high-yield corporate debt, preferreds, convertibles, bank loans, and income-producing equities, with average duration from 2.5-4 years. Its opportunistic approach allows shifting between higher-yielding and more defensive assets as market conditions dictate, and it is noted for its ability to invest in special situations for potential excess yield during periods of market stress. Nota bene: four of the 16 funds on this list rely, at least in part, on the skills of the CrossingBridge/Cohanzik management team. It’s in Snowball’s personal portfolio.
3. Destinations Low Duration Fixed Income employs a multi-manager strategy, which currently includes CrossingBridge Advisors for event-driven high yield credit opportunities and DoubleLine Capital for low duration strategies. It’s focused on generating current income with low duration.
4. River Canyon Total Return Bond employs a bottom-up credit selection process with a top-down overlay and aims to identify securities that exhibit upside optionality with downside protection, focusing on selecting securities with a likelihood of outperformance across a wide range of macroeconomic and market scenarios. It focuses on exposure to securities and sectors that have historically low correlation to traditional asset classes.
5. Victory Pioneer Multi-Asset Income is a flexible, globally diversified fund investing across a wide spectrum of income-producing assets, including bonds, dividend-paying equities, and cash equivalents. Its strategic asset allocation balances income generation and long-term growth, making it suitable for moderate risk tolerance and dynamic market conditions. The managers are seeking to exploit low correlations of global fixed income and non-investment grade debt markets with US investment grade markets.
6. Credit Suisse Strategic Income combines leveraged loans and high-yield corporate bonds in a distinguished high-yield strategy with the managers adjusting its portfolio’s exposure among various types of debt instruments based on market conditions and outlook, currently primarily investing in bonds issued by domestic and foreign companies, senior secured floating rate loans, and mortgage-backed securities, asset-backed securities, and CLOs.
7. Saba Closed-End Fund ETF invests in closed-end funds trading at significant discounts to their net asset value, seeking to generate monthly income and capital appreciation. The fund distinguishes itself with an activist approach, aiming to narrow those discounts and unlock value, and utilizes hedging to mitigate interest rate risk; its diversified holdings provide exposure to both equity and fixed income closed-end funds.
8. American Beacon SiM High Yield Opportunities offers a flexible approach and a willingness to invest in edgier segments of the high yield market, which leads to periods of elevated volatility in exchange for higher potential payouts.
9. Eaton Vance Emerging Markets Debt Opportunities is a flexible emerging markets bond fund that invests across sovereign and corporate credits, local currencies, and off-benchmark opportunities in over 100 countries. Eaton Vance applies rigorous economic and political research to build a portfolio that captures diverse sources of emerging market debt income, often moving beyond conventional benchmarks for enhanced risk-adjusted returns and country-level diversification.
10. Destinations Global Fixed Income Opportunities uses a multi-manager, multi-sector approach to invest in global investment-grade and high-yield bonds, sovereign debt, bank loans, preferred securities, and convertibles. The subs include DoubleLine, Numeric, Man Group, and Cohanzick.
11. Osterweis Strategic Income pursues long-term capital preservation and moderate income by actively allocating across high-yield and investment-grade bonds, with frequent tactical shifts in response to market conditions. The fund is distinguished by an unconstrained, flexible approach from an experienced and lean management team, resulting in a strong historical record for risk-adjusted returns, albeit at a manageable volatility level.
12. American Beacon Developing World Income pursues income through a globally diversified in sovereign and corporate bonds from emerging and frontier markets. It stands out for using 16 managers and several sub-advisers (Global Evolution A/S, abrdn, Sydbank…) specializing in lesser-known country and sector exposures.
13. Eaton Vance Multi-Asset Credit invests across a broad spectrum of credit-related assets such as high-yield bonds, senior loans, structured credit, preferred and convertible securities, and emerging market debt. The fund’s core appeal lies in tactical allocation and an active focus on reduced downside and avoidance of permanent capital impairment.
14. Invesco Global ex-US High Yield Corporate Bond ETF tracks an index of US dollar-denominated, high-yield bonds issued by corporations outside the United States. Its distinguishing features include broad global diversification with a monthly rebalance.
15. Franklin Emerging Market Debt Opportunities invests predominantly in debt obligations from sovereign and sub-sovereign issuers in emerging countries, with a flexible approach that includes select corporate debt.
16. FPA Flexible Fixed Income pursues positive absolute returns over any three-year period – it’s an FPA hallmark – and strong risk-adjusted returns by investing across the fixed income universe, unconstrained by benchmark or sector, with a strong emphasis on capital preservation. Unique for its willingness to hold cash and reduce risk when opportunities are limited, FPFIX is run by a seasoned team at First Pacific Advisors.

Bottom line

MFO does not make “sell now!” or “buy now!” calls, much less predictions about “the 10 funds you absolutely must own!” Those calls are easy to make, impossible to make reliably. Our argument is simpler: we are in the midst of a fiscal mess, which is likely to get messier and messier. It would be prudent, before any panic sets in, to examine the question: are there ways to reduce my exposure to emerging risks and still earn a decent return?

The funds above have made money over the past five years; the US bond market has not. Those funds uniformly aim to provide high current income with admirably low exposure to the traditional income markets. And it reminds us, again, of the consistent independence and excellence of the CrossingBridge folks who are responsible for the two highest-rated funds on the list (CrossingBridge Low Duration and RiverPark Strategic Income).

We will try to profile three of these funds each month during the last three months of 2025.

Reducing my risk profile for accounts that Fidelity manages allows more flexibility in what I manage. In other words, the intermediate investment bucket aggressive sub portfolio that Fidelity manages became more conservative, while I added a little risk to the conservative sub portfolio that I manage.

I would like to design a low-risk sub-portfolio that has a low correlation to stocks and bonds, returns about 5%, and has some inflation protection. The objective is to always have at least one fund that is up while still having decent returns. I began with the MFO Premium fund screener and Lipper global dataset, limited by correlations to the S&P 500 and bonds, low losses for the minimum rolling three-year period, and an MFO Risk rating of average or lower. I trimmed the list using 2022 performance, in which both stocks and bonds did poorly, and the COVID bear market. I found BlackRock Tactical Opportunities (PCBAX) and BlackRock Systematic Multi-Strategy (BAMBX) worth further investigation.

In this article, I evaluate how a sub-portfolio including PCBAX and BAMBX might be able to meet my objectives. I have already purchased Victory Pioneer Multi-Asset Income (PMAIX) and Aegis Value Fund (AVALX) which David Snowball wrote about in When Reality Bites: Preparing for Market Turbulence Ahead and Aegis Value Fund (AVALX). I already own PIMCO Inflation Response Multi-Asset (PZRMX) and include it in this analysis.

Short List of Funds for This Investment Environment

I finished reading Our Dollar, Your Problem, by Kenneth Rogoff, which left me with more questions than answers, so I bought and am currently reading The Price of Money, by Rob Dix. I also dusted off The Demise of the Dollar, by Addison Wiggin, and Global Macro Trading, by Greg Gliner, which, fortunately, I highlighted when I first read and can skim again in a few hours. Since President Nixon took the U.S. off the gold standard in 1971, the US has gone through periods of stability, but also the 1970s decade of stagflation, the Great Financial Crisis (2008), Quantitative Easing (2009 to 2014, 2020 to 2021), and the COVID pandemic (2020). Gross Federal debt as a percentage of gross domestic product has risen from 34% to 120%, and the federal deficit has risen to 6% of GDP. Central banks have been experimenting with their own versions of stablecoin, which may further erode the dominance of the dollar. Domestic stock valuations are high, suggesting below-average long-term returns. I expect higher financial volatility and more frequent periods of inflation in the coming decade(s).

I selected the funds in Table #1 to evaluate further. They are sorted from the lowest correlation to the S&P 500 to the highest over the past seven years. Notice that PCBAX has the lowest correlation to both stocks and bonds. BAMBX pays a dividend of 3.8% while PCBAX does not currently have a dividend. PMAIX and FPACX have the potential to increase returns, but at higher risk. PCBAX had a maximum drawdown of 37% during the financial crisis compared to 29% for FPACX. This highlights the benefits of building a diversified portfolio.

Table #1: – Fund Candidates – Metrics 7 Years

Source: Author using MFO Premium fund screener and Lipper global dataset.

The past decade covers the COVID bear market, Quantitative Easing and Tightening, rising inflation and interest rates, and rising valuations of the S&P 500. In particular, I am interested in how funds performed during the COVID bear market and 2022, when stocks and bonds did poorly.  BlackRock Tactical Opportunities (PCBAX), BlackRock Systematic Multi-Strategy (BAMBX), and Victory Pioneer Multi-Asset Income (PMAIX) performed well during these two periods.

Figure 1 – Fund Candidates

Source: Author using MFO Premium fund screener and Lipper global dataset.

I extracted monthly returns for the past ten years for these funds using the MFO Premium fund screener. I selected periods with at least three months where stocks had negative returns, bonds had negative returns, and both stocks and bonds had negative returns. The results are contained in Table #2.

Table 2 – Cumulative Returns During Stock and Bond Downturns – 10 Years

Source: Author using MFO Premium fund screener and Lipper global dataset.

BlackRock Tactical Opportunities (PCBAX) has a lower correlation to stocks and bonds than BlackRock Systematic Multi-Strategy (BAMBX). Returns are similar, but PCBAX does not pay a dividend. BAMBX appears to outperform PCBAX when both stocks and bonds are positive, while PCBAX appears to outperform when neither stocks nor bonds are doing well.

PMAIX is less correlated to the S&P500 than FPACX and is a little less risky, but has lower returns than FPACX. FPA Crescent Fund is available with Fidelity in two share classes: FPACX with a $49.95 transaction fee and 1.06% expense ratio, and FPFRX without a transaction fee and 1.15% expense ratio. I don’t own the FPA Crescent Fund, but I want to purchase it at some point.

PORTFOLIO VISUALIZER

I wanted a little help evaluating a low-risk portfolio that is uncorrelated to stocks and bonds and returns 5%. I selected the funds in Table #3 as inputs in Portfolio Visualizer. The link is provided here. I selected the time period from January 2018 to December 2023 to capture the COVID bear market 2022, in which stocks and bonds did poorly, but excluded 2024, where stock market valuation increased significantly.

Table 3 – Funds Selected for Portfolio Visualizer Optimization

Source: Author Using MFO Premium fund screener and Lipper global dataset.

Table #4 shows the results of the optimization for maximum return at 6% volatility, maximum Sharpe ratio, and a simple allocation of my own. All three had returns of 4.8% to 6.1% with drawdowns of 8.7% to 13.1%.

Table 4 – Portfolio Visualizer Results

Source: Author Using Portfolio Visualizer

Figure #2 shows the results graphically adjusted for inflation. The drawdowns can be reduced by adding both BlackRock Tactical Opportunities (PCBAX) and BlackRock Systematic Multi-Strategy (BAMBX) without the return suffering significantly.

Figure 2 – Portfolio Visualizer Results Adjusted for Inflation

Source: Author Using Portfolio Visualizer

Table #5 contains the correlation matrix of the funds. Victory Pioneer Multi-Asset Income (PMAIX), Aegis Value Fund (AVALX), PIMCO Inflation Response Multi-Asset (PZRMX), and FPA Crescent Fund (FPACX) have correlations close to each other, which reduces their ability to diversify a portfolio.

Table 5 – Asset Correlations

Source: Author Using Portfolio Visualizer

A CLOSER LOOK

BlackRock Systematic Multi-Strategy (BAMBX)

About this Fund:

1. Allocates to three uncorrelated strategies, seeking consistent returns across all markets
2. Higher fixed income yields increase potential returns and income
3. Taps into defensive return streams that have outperformed in down markets, helping to diversify equity risk

Investment Approach: The BlackRock Systematic Multi-Strategy Fund is a diversified alternative strategy that seeks to provide total return comprised of current income and capital appreciation in both periods of strong market returns and periods of market stress.

Investors Who Might Be Interested in BAMBX: BlackRock’s systematic alternative strategies seek differentiated risk and return profiles with a low correlation to broad asset classes to help diversify portfolios.

Blackrock Tactical Opportunities (PCBAX):

About this Fund:

1. A liquid alternative fund with low correlation to stocks and bonds
2. Tactically allocates across 25+ countries in stocks, bonds, and FX
3. Combines complementary discretionary and systematic macro investment processes

Investment Approach: The BlackRock Tactical Opportunities Fund is a macro strategy that tactically allocates across global markets and asset classes and has achieved lowly correlated, stable growth.

Investors Who Might Be Interested in PCBAX: An alternative multi-asset strategy might be a good fit for investors seeking differentiated risk and return profiles with low correlation to broad asset classes to help diversify 60/40 portfolios.

MY STRATEGY

My conservative intermediate sub portfolio that I manage consists of bond ladders, short- and intermediate-duration bond funds. I have been shifting to a barbell approach, moving short-term bond funds into those with intermediate durations in order to lock in higher yields. My withdrawal strategy is to withdraw 4% from this sub portfolio when stocks are not performing well and more aggressive sub-portfolios when stocks are doing well.

At this point, as bond ladders mature, I favor BlackRock Systematic Multi-Strategy (BAMBX) over BlackRock Tactical Opportunities (PCBAX) as a long-term investment because it is more conservative and pays a dividend. PCBAX has been outperforming BAMBX year-to-date. I don’t expect to make changes until closer to the end of the year and will continue to monitor both.