Robert Arnott, manager of the $2.3 billion Pimco All Asset Fund, can invest in almost any market, from commodities and real estate to emerging market bonds and U.S. stocks. Lately, little looks appealing to Arnott, so he's keeping one-quarter of the fund in cash and short-term debt.

"Almost everything is moderately to significantly expensive," said Arnott, 49, who uses mathematical models to evaluate markets. The mutual fund's cash "will let us pounce on opportunities if any market becomes attractive," he said in an interview in Boston.

Arnott, whose so-called core stock funds rose about 10.5 percent a year from 1997 to 2001 when he was running First Quadrant LP in Pasadena, Calif., makes investments for the All Asset fund by trading in and out of 14 Pimco funds, ranging from Pimco Real Estate to Pimco StockPlus to Pimco Emerging Markets.

While his bearish stance means he has lagged behind competitors the past 12 months, his fund is beating its stated investment objective of returning at least 5 percent more than the rate of inflation. The Pimco All Asset Fund has gained at an annual pace of 15 percent since it opened in July 2002, ranking 10th of 88 asset-allocation funds tracked by Bloomberg in the period.

At the moment, he isn't invested in Pimco's biggest fund, the $73.4 billion Total Return bond fund managed by Bill Gross. Arnott has cut his fund's holdings of U.S. stocks to 17 percent from 23 percent since the end of 2002, and his emerging market bonds to 4 percent from 24 percent.

Eighteen months ago, "there was a lot of low-hanging fruit," Arnott said. "Today, there isn't."

His market models compare expected rates of return using current prices and yields to those achieved in the past. The models also examine the anticipated returns of different markets against each other.

Arnott has about 3 percent of the fund's assets in junk bonds. He has no investments in long-term U.S. Treasury and investment-grade corporate bonds.

"Our models show that people will be surprised at the level of inflation," he said. Inflation, 2.3 percent in April, eats away at the value of fixed-income interest payments, lowering the value of bonds.

In the past two months, Arnott has boosted the fund's stake in real estate investment trusts to about 18 percent of assets from 14 percent. The Standard & Poor's REIT composite index fell 15 percent in April on concern that higher interest rates would reduce the appeal of the industry's dividend payments.

The average real estate trust had a dividend yield of more than 6 percent, or about 4 percent after inflation, when the market declined in April. That's "pretty interesting in the low-return environment we see," Arnott said. The REIT index rose almost 7 percent in May, and the dividend yield was about 5.8 percent.

The fund has 20 to 25 percent of its assets in global stock markets and the rest in emerging-market bonds, commodities and Treasury inflation-protected securities, which pay interest based on the inflation rate.

Rising interest rates may hurt stock returns next year, said Arnott, who may further reduce his fund's equity allocation.

"It's going to be a tough ride," he said.

Arnott came to Pimco after he was invited by Pimco Real Return Fund manager John Brynjolfsson to give a talk on his asset-allocation models in December 2001. At the meeting, Arnott said stocks would continue to decline -- an assessment that matched Pimco's outlook. The S&P 500 dropped 23 percent in 2002 after declining 13 percent in 2001 and 10 percent in 2000.

Arnott was picked to manage the All Asset fund in March 2002 after a breakfast with Brent Harris, chairman of Pimco's funds, at the Okura Hotel in Tokyo when they were both there on business. Arnott is the only outside manager overseeing a mutual fund for Pacific Investment Management Co. of Newport Beach, Calif. Pimco manages $400 billion, mostly in bonds.

Arnott founded Research Affiliates LLC to oversee the Pimco fund and stepped down as head of First Quadrant, owned by Affiliated Managers Group Inc. in Boston. Arnott sold his stake in First Quadrant to AMG in April.

"We had reached a point where First Quadrant was doing well enough that leaving wouldn't hurt them," Arnott said.

Arnott, who graduated from the University of California at Santa Barbara, doesn't always make investing allocations strictly by what his models suggest. He meets with Pimco fund managers at least once a month to get their thoughts about the markets.

"It's not about what do they like or what do I like," he said. "It's looking for what our models might miss. You can identify systematic errors in the models sometimes."

For example, Arnott has about 10 percent less invested in stocks than his models recommend. He and Pimco managers are concerned that companies are inflating earnings artificially by overstating future pension-fund returns and understating the costs of option-based compensation.

"There's a lot of fluff in those numbers," he said.

Richard Craig in Princeton contributed to this report.