Kaufman refutes the notion that the fund’s heavy stake in high-yield bonds is riskier than other corners of the fixed-income markets, and adds that while a slow-growth economy, low inflation and pressure from the Federal Reserve will keep the pace of any rate increases measured, even a relatively small blip could spell trouble for certain types of securities.

“If rates go up 100 basis points, 30-year Treasury bonds would go down 17 points. I would call that pretty risky. If I can pick up 200 to 300 basis points over Treasurys without taking on too much risk, why not do that?”

Keeping It Simple
Given the fund’s ability to adjust stock and bond strategies to fit shifting markets, John Osterweis views it “as a core holding or as an alternative to alternative investments.” Although no one portfolio will be sufficient for most people, he says, “this fund will do as well or better than a more widely diversified portfolio people build around multiple asset classes.”

That viewpoint comes from an observation that the diversification benefits of alternative investments, which run the gamut from emerging market securities to commodities, have waned dramatically over the last decade as alternatives moved from the investment margins to the mainstream.

Now that more investors are using them, they tend to trace the ebb and flow of the U.S. equity market rather than move in the opposite direction. He believes many institutional investors and financial advisors have become over-diversified in myriad mutual funds and other structured products that, over the long term, are unlikely to provide superior diversification benefits or better returns than a balanced portfolio of stocks and bonds.

“We believe that the pendulum is likely to swing back in favor of U.S. equities and a simpler approach to diversification,” he said in a July 2014 report to shareholders. “This makes sense as long as the factors behind the bull market which emerged from the 2008 ashes are still in place. We believe this is the case and that the bull market will continue a while longer.”

Whether or not that happens, the fund’s equity strategy will continue to focus on what Osterweis views as the under-loved, underappreciated securities of companies with a catalyst for change and strong free cash flow, which he considers a better gauge of muscle than more easily manipulated earnings numbers. Companies can be any size, although Osterweis says the fund has a mid-cap bias. Equity exposure is fairly spread out among sectors, with the largest weightings going to health care (18%), consumer discretionary (17%) and financials (13%).

Over the last few years, Osterweis has been focusing his portfolio of 30 or so stocks on companies that have the ability to grow earnings in an environment of slow economic growth. He considers Johnson & Johnson, which he cites as the “highest quality stock in the portfolio” a prime candidate for doing that. He started buying the stock a few years ago when the price dropped amid concerns about patent expirations and product recalls. At the time, the stock had a dividend yield of 3.5%, double the yield of 10-year U.S. Treasury securities. Since then, the company has accelerated sales and generated ample free cash flow, which management has used to make tactical and strategic acquisitions. The stock yields 2.7% and sells at 16 times earnings.