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Stock Funds Draw CashFund Chief Is Wagering on TIPS

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For a star gazer, Robert Arnott has decidedly humdrum advice for investors.

The amateur astronomer and chairman of First Quadrant LP, a money management firm in Pasadena, Calif., thinks the glut of economic stimulus from the Federal Reserve’s interest rate cuts and President Bush’s tax cuts have given equities a short-term boost. But he worries that those moves might also spur inflation.

So he is forecasting zero returns from stocks, after inflation, over the next few years, and betting instead on bonds. Arnott, who also oversees the $825 million PIMCO Funds: All Asset Fund/Adm (PAALX), has the majority of the fund’s assets stashed in government Treasury Inflation Protected Securities. TIPS are Treasury bonds whose prices are tied to the consumer price index, thus offering fixed-income investors a high quality bond that won’t lag behind inflation if the cost of goods and services skyrockets.

Why does Arnott see little reason to own stocks, with the average stock mutual fund up nearly 30% since Jan. 1? His answers:

WSJ: What do you make of U.S. equities after such a strong year?

Arnott: Broadly I think we’re in the early stages of a long secular bear market. We had the largest secular bull market in U.S. history from 1982 through early 2000. It would be dangerous to assume that would be followed by a benign equity market. When we’ve (had) secular bear markets in the past, as in 1929 and 1965, they preceded a 17-year to 20-year bear market.

Of course, the bull market we’ve seen since October has been a real bull market and people have made money. But it’s dangerous to assume we’ve headed back to the races. I’m equivocal because the Fed and the Bush administration are pumping money into the economy so aggressively to hold things together until the election. So I wouldn’t be surprised if 2004 is a mildly up year. But I’m worried about 2005 and beyond.