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Robert Arnott,

Legend Financial Advisors'

Louis Stanasolovich and the editors of the influential

No-Load Fund Analyst

say it may be years, or even decades, before stocks return to their historic highs, making bonds more attractive investments.

After last year's stock-market crash, the long-term average returns of equities fell into the single digits. Large-company shares returned an annual average of 9.6% from 1926 through 2008, according to Ibbotson Associates. The gap to bonds has all but evaporated.

Financial advisers for years have clung to a key belief: Over the long term, stocks outdo bonds. While equities may suffer periodic slumps, they also produce tremendous growth. Now a growing minority of advisers and portfolio managers is taking a different view.

Among the most notable equity pessimists is Arnott, manager of

Pimco All Asset

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, an $11.7 billion fund that has returned 3.7% annually during the five years through May 15, beating the S&P 500 Index by about 6 percentage points and outperforming 96% of its peers in Morningstar's moderate-allocation category.

Arnott worries that Washington has changed the rules of the financial markets in recent months. That will hurt stock prices for years to come, he says.

When companies defaulted in the past, secured bond holders were first in line to receive whatever assets remained, he says. Stock holders never worried that government interference would dilute the value of their holdings. But the Obama administration appears ready to stiff stock and bond holders as banks and auto makers restructure.

"We need to recognize that centuries of contract law have far less meaning than in the past," Arnott says. "This means that assets must be priced lower, with higher yields, to compensate for this new layer of risk."

To protect his shareholders, Arnott has been underweighting stocks, keeping most assets in bonds. A fund of funds, Pimco All Asset invests in other funds overseen by Newport Beach, California-based Pimco, the world's largest bond manager. A big holding has been

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Pimco High Yield

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. Arnott says high-yield bonds were driven to unrealistically low levels last year when investors fled risky assets. The fund also holds

Pimco Real Return

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, which owns Treasury Inflation-Protected Securities. Those will keep their value if inflation reappears.

Stanasolovich, president of Pittsburgh-based Legend Financial Advisors, figures stocks won't surpass bonds for at least a decade. He says share prices tend to rise along with increases in profits. If profits of S&P 500 member companies climb at their historical annual rate of 6%, share prices should increase that much in the next decade. In addition, the S&P 500 currently pays a dividend yield of 2.6%. Combining dividends and capital appreciation, the index could produce a total return of 8.6%. Corporate bonds, which currently yield around 8%, should deliver about the same results.

But Stanasolovich worries that stocks could surprise on the downside. The price-to-earnings ratio on the S&P 500 is currently around 12 and has fallen to seven in bear markets. To reach that, the market would have to suffer a huge drop. "Stocks are still not cheap," he warns.

Crushing debt levels could slow the economy and hurt stocks, says Stanasolovich. The total debt of consumers, corporations and government is equal to 370% of gross domestic product, he says. The normal debt load is around 120% to 160%. To reduce their debt burdens, consumers will cut back on purchases. That will hurt stocks. "This is a time to underweight equities," he says.

Until the outlook improves, Stanasolovich is staying away from conventional equity funds. Instead, he is buying funds that sell short or use other strategies to boost returns in difficult markets. A favorite holding is

Caldwell & Orkin Market Opportunity

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, a long-short fund that returned 6.7% during the past five years. The fund recently had 52% of its assets in stocks, including such blue chips as


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(HPQ) - Get HP Inc. Report

. The rest was in short positions and fixed income.

Litman/Gregory, publisher of the newsletter

No-Load Fund Analyst

, recently sounded a bearish note, arguing the S&P 500 would likely return less than 0.5% annually during the next five years.

The newsletter says S&P 500 members' earnings fell 75% from peak to trough during the Great Depression. In the current cycle, earnings will fall 65%, hitting a trough in the middle of 2009. Even though unemployment now is not as severe as it was in the Depression, the earnings slump will be nearly as steep because of the impact of debt. In recent years, heavy leverage enabled corporations to earn unusually fat profit margins. As companies and consumers now must reduce their borrowing, demand will plummet and profits will fall sharply back to more normal levels.

In its balanced portfolio, which aims to avoid big losses in any year, the newsletter currently has 43.5% of assets in equities and 56.5% in fixed income. That compares with the neutral weighting of 60% in stocks and 40% in bonds. While the portfolio normally has no high-yield bonds, the current weighting is 15%. High-yield bond holdings include

Fidelity High Income

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JP Morgan High Yield Bond

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. The newsletter expects bond defaults to increase sharply. But prices have gotten so cheap, high-yield bonds should outdo stocks.

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