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Freeman varies the mix, emphasizing cheap holdings and steering away from investments that seem rich. He had 41% of assets in bonds in 2006. At the time, the federal funds rate was at 5.25%, and fixed-income yields seemed compelling. Now that the fed funds rate is close to zero, yields look puny, and Freeman has only 20% in bonds. As markets rallied in 2007, he had 14% in stocks. Now the stock allocation stands at 38% because price-to-earnings ratios seem modest.

Freeman looks for out-of-favor stocks with improving earnings and balance sheets. "We like stocks that face skepticism from investors," he says.

One holding is Microsoft (MSFT). In the past, the stock was too expensive for Freeman's taste.

But these days the P/E is at 9 because investors figure that the software giant is stuck in slow-growth markets. But Freeman says that the company can grow 10% annually, a solid rate. Another technology giant he likes is Dell (DELL), which sells for a P/E of 8. The shares trade for around $15, even though the company has more than $7 a share in cash. Investors fear that Dell's consumer business is slipping, but Freeman says that Dell's corporate sales remain solid. "Their profits don't depend heavily on consumers," he says.

Yield-oriented investors should take note of Thornburg Investment Income Builder. The fund aims to pay a substantial yield that will grow consistently. To accomplish the goal, portfolio manager Brian McMahon buys bonds and dividend-paying stocks from around the world. McMahon has a big stake in Europe because companies there tend to pay richer dividends. The recipe has generally succeeded. The fund currently yields 6.4%. During the past five years Thornburg has returned 4.3% annually, outdoing 78% of competitors in the world allocation category.

McMahon varies his allocations as market conditions change. He has raised equity holdings from 58% of assets in 2009 to 75% now. Based on yields, stocks appear unusually cheap compared to bonds, he says. For most of the last 50 years, stock yields were higher than bond yields. But in recent years, bond prices climbed, and the yields fell. Now there are instances where a company's bond yield is the same or lower than the stock yield.

McMahon likes the stock of AT&T (T). "The dividend yield on AT&T is around 6%, and it is hard to find a 6% yield on one of the company's bonds," he says.

Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.
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