How to Gross Out Your Portfolio

Investors who prefer exchange-traded funds to mutual funds might also investigate the iShares Dow Jones (IYM Quote)US Basic Materials fund, (IGE Quote)iShares Goldman Sachs Natural Resources fund, or the (XLB Quote)Select Sector SPDR Materials fund.

2. Foreign Currencies

Gross favors nondollar-denominated global bonds to their U.S. counterparts in a rising inflation environment. Gross says in his December report that "U.S. bonds, aside from TIPS, currently offer less in the way of real interest rates than global bonds."

Aside from yield, one of the advantages Gross sees in non-dollar-denominated global bonds is the added currency kick from the dollar's demise. Or, in Nietzscheian terms: What doesn't kill the dollar makes foreign currencies stronger.

One fund that concentrates on strengthening foreign currencies is the ( ICPHX Quote)Franklin Templeton Hard Currency Fund. The Franklin Templeton Hard Currency Fund invests primarily in high quality, short-term money market instruments (and forward currency contracts) denominated in currencies of foreign countries and markets that historically have experienced low inflation rates.

The fund is currently yielding 7.35%, but cost-conscious investors might beware of the 2.25% front-end load on top of the 1.50% expense ratio. After all, despite its global focus, the Franklin Templeton Hard Currency Fund is still a bond fund, and higher fees hurt bond fund returns more than equity funds.

3. Real Estate

"Like politics, most home prices are local so you should know more than I do," writes Gross in his December note to investors. Gross' wisdom is appreciated, but not especially practical for those trying to pick a real estate fund to hedge against impending inflation.

Morningstar's REIT analyst Dan McNeela, however, was generous in providing some real estate fund offerings, most notably his No. 1 choice, the ( TAREX Quote)3rd Avenue Real Estate Value Fund.

"3rd Avenue Real Estate Value Fund has compiled an attractive record and has gone off the beaten path to discover real estate companies that find land and develop it," says McNeela. "The fund is unlike traditional REIT funds which focus on REITs that collect rents from office buildings."

3rd Avenue Portfolio Manager Michael Winer says his fund's goal is long-term capital appreciation through real estate, as opposed to investing in REITs simply to collect the yield. The 3rd Avenue fund yields only 2.11% compared with 3.2% for Morningstar's real estate category. "We look for companies that have owned land for a long time at a low-cost basis. These companies can develop agricultural, ranch and forest land into higher and better uses," says Winer. "The key is having a terrific balance sheet so they can reposition land without incurring huge debt."

For a traditional yet aggressive real estate fund, McNeela suggests the ( SUSIX Quote)Security Capital US Real Estate Fund. It has an above-average yield of 4.11%, but investors who are averse to concentrated funds might want to steer clear of it, since it holds fewer than 30 stocks in concentrated proportions.

Top 10 Holdings - Franklin Templeton Hard Currency Fund
U.S. Treasury Bill, 1/15/04	13.60%
New Zealand Treasury Bill, 6/16/04	9.80
U.S. Treasury Bill, 1/08/04	9.30
U.S. Treasury Bill, 1/02/04	7.40
New Zealand Treasury Bill, 3/17/04	4.80
U.S. Treasury Bill, 9/15/04	2.80
Sweden Treasury Bill	2.70
Canada Treasury Bill	2.60
Denmark Treasury Bill	2.60
Portugal Treasury Bill	2.60
Source: Franklin Templeton