Monday, January 09, 2006

The purpose of R&D

The companies I invest in tend to have a high rate of R&D expenses. I suppose some of that is rub-off from where I work. I'd like to have a part in developing cool new technology like fuel cells.

But creating new products is only part of what I look for in a company's R&D. I also would like to see research that makes existing products better and cheaper to manufacture. Not only is it lower risk, it also is harder for other companies to copy. This sort of research can lead to long-term competative advantages.

Why I'm buying the PIMCO Total Return bond fund

For the past year or so, I've been concerned about my original strategy of investing heavily in an S&P 500 index fund. For one thing, I've been investing in active funds that beat their index over the course of several years. Also, it seems like the index is biased toward expensive stocks. I still like the low fees, but I'm concerned that the indexing strategy will be costly if there is a recession—especially since P/E ratios are so high.

Recently, the yield curve inverted slightly. So I decided to move about half my index fund "ballast" into a bond fund.

I only considered funds with expense ratios < 0.5% and manager tenure of 10 years or more. Here are the returns for all candidates in my 401(k) plan:

Investment Name   1 Yr 3 Yr 5 Yr 10 Yr LOF
PIMCO Total Return Inst CL 2.58% 4.89% 6.84% 6.98% 8.54%

PIMCO Total Return is the largest of all bond funds in terms of net assets. For a stock fund, that would be a huge negative, but a bond fund should scale better. Costs are everything in bond funds, since there is little room to differentiate on the basis of picking individual bonds. Unlike stock funds, size doesn't lock bond funds out of the best investments.