How to Gross Out Your Portfolio

You have to hand it to Bill Gross for putting his money where his mustache is.

Recently the managing director of Pacific Investment Management, or Pimco, said he trimmed his position in Pimco's signature Total Return bond fund and placed the proceeds in a series of inflation-averse funds such as Pimco's Commodity Real Return Strategy fund.

The money manager's statement shouldn't have been a surprise to Pimco investors who saw his December investment outlook. In that report, Gross ranked his five favorite asset categories in what he calls "this current reflationary reversal." Gross likes, in order: commodities, foreign currencies, real estate, Treasury inflation-protected securities and non-dollar-denominated foreign bonds.

Unfortunately for the average investor, Gross's top five isn't exactly flavored with the most vanilla of financial products. Even financial professionals might find these asset classes tricky to comprehend. And finding arcane investment instruments like non-dollar-denominated bonds might not be the average retail broker's strong suit.

So for those mutual fund investors looking for a simple yet effective strategy to follow Gross on his anti-inflation scavenger hunt, here are a few funds to consider:

1. Commodity Price Funds

Gross didn't have many choices when he started shifting his money toward commodity price funds six months ago. There are only two funds that offer direct exposure to commodity prices: Pimco's ( PCRAX Quote)Commodity Real Return Strategy fund and Oppenheimer's (QRAAX Quote)Real Asset fund, according to Morningstar's Langdon Healy.

Healy says that Gross' choice of Pimco's commodity fund was clearly a logical one for a Pimco managing director, but also that it's the better of the two funds. "We prefer the Pimco fund primarily because we think its benchmark, the Dow Jones-AIG Commodity Index, offers better commodity diversification than the Goldman Sachs Commodity Index, the benchmark for the Oppenheimer fund," says Healy. "The Goldman index is structured so that petroleum can completely overwhelm other commodities, but the Dow Jones Index caps energy exposure at one-third of assets."

Another relevant reason Healy chooses Pimco's fund over Oppenheimer's: Pimco knows how to beat the indices using bonds and derivatives. This is an especially important point because this is not your average natural resources equity fund. Instead of buying stock in energy providers such as Exxon Mobil(XOM Quote), the fund's managers use leveraged financial instruments such as futures contracts to provide exposure to oil prices. Therefore, at times when commodity prices are outpacing returns for commodity producing stocks, the fund will outperform equity funds that invest in natural resource company stocks.

Pimco has effectively been using Treasury inflation-protected securities, or TIPS, as collateral for its derivative-based exposure. (TIPS, which have been soaring as of late, are also included in Gross' favorite inflation-fighting asset classes.)

To be sure, Healy warns investors only to consider the Pimco fund as "an alternative asset class for a long-term commitment" due to its volatility and lack of correlation with equity markets. With a hefty front-end load of 5.5% and an expense ratio of 1.24%, it's not cost-effective to jump in and out of the fund anyway.