Typically, balanced or asset allocation fund managers maintain a fairly consistent 50/50 or 60/40 split between stocks and bonds, with the latter side of that ratio diversified into investment-grade, international, Treasurys and high-yield securities of varying maturities. Billed as a flexible allocation fund, the Osterweis Strategic Investment Fund can keep as much as 75%, and as little as 25%, on either side of the fence. The fund’s current 65/35 allocation reflects manager John Osterweis’s “reasonably constructive view” of the equity markets.

“If we were extremely bullish about the stock market, we would have a 75% position there,” says the 71-year-old Osterweis. “But after a long bull market, there aren’t a lot of drop-dead bargains or truly mispriced stocks.” Nonetheless, he’s still managing to find buying opportunities among stocks that have dropped on some disappointing news or are misunderstood by the investing public.

Another indicator of management sentiment is the fund’s fixed-income position, which consists almost entirely of short-term high-yield corporate securities and convertible bonds. These below-investment-grade notes and bonds tend to be more sensitive to stock market movements and less sensitive to changes in interest rates than Treasury securities or investment-grade securities. In explaining the position, Carl Kaufman, who manages the fixed-income side of the portfolio, observes that in the current environment he prefers taking calculated, well-researched credit risks to making what he considers more potentially harmful interest rate bets.

“When we invest in the bond market, we look at where the risks and opportunities are,” says Kaufman, 58. “With yields on Treasury and investment-grade securities so low, and the potential for rates to go up, we see more risk than opportunity in those areas of the market.”

Despite a long run-up in the high-yield sector, Kaufman observes that the bonds “aren’t super-rich,” and that much of the hot money has gravitated to the longer end of the yield curve. “At the shorter end, we’ve been able to layer in some very nice yielding paper on companies we have researched thoroughly.”

In a recent report, Morningstar analyst Kevin McDevitt noted that while rising equity markets have benefited the five-star fund’s large position in high-yield bonds, the aggressive stance “leaves little buffer since equities and high-yield bonds tend to move in tandem when things get tough.” But he also pointed out that in the past, “management has shown with its other charges that it can get defensive, as was the case with equity sibling Osterweis (OSTFX) in 2008. It may be worth waiting to see how that’s applied here over the course of a full market cycle.” So far, the fund has proved its mettle by delivering a 17.5% annualized return for the three years ending September 30, putting it ahead of 98% of its Morningstar peers.