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TINA may have some competition.

TINA, of course, is the acronym for There Is No Alternative, the description applied to U.S. common stocks, especially the large-capitalization variety that dominates the major indexes such as the S&P 500 and the Dow Jones Industrial Average.

Thats because of the Federal Reserves policies that have pushed interest rates to historic lowsand all the way to nearly 0% for short-term cash equivalents. Yet as the risk to the equity market has increased along with the averages sharp recovery from their March lows, Terri Spath, chief investment officer of Sierra Mutual Funds, recommends alternatives to TINA.

The Fed essentially created an all-you-can-eat buffet for investors by slashing rates and pumping in liquidity by purchasing Treasuries, agency mortgage-backed securities, and, for the first time, corporate debt securities, she says. Investors have gorged by sending the S&P 500 up over 36% from its March 23 low, even after Wednesdays 2.6% decline, which shows the need for investors to become more cognizant of risk.

While investors attempt to manage the risk of such sharp drawdowns, Spath suggested several other asset classes in a recent client note:

Emerging market debt over emerging market stocks. Much of the EM bond universe carries investment-grade credit ratings while providing yields comparable to U.S. high-yield corporate bonds. EM debt also is less volatile than its equity counterparts in part because of the formers income cushion.

Preferred stocks over financial common stocks. As Andrew Bary highlighted this past weekend, preferreds often are issued by financial institutions but have a better risk-return profile. Preferreds have relatively high yields that cushion against price declines and have a superior risk-return trade-off because of their higher standing in the capital structure.

High-yield bonds over small-cap stocks. These two seemingly disparate asset classes both tend to include domestic companies trying to grow. Their return profiles tend to be similar, but high-yield bonds also have the income cushion to reduce price declines.

But instead of using index-based instruments such as exchange-traded funds to effect these strategies, Spath uses actively managed mutual funds. These sectors tend to be inefficiently priced, unlike the stocks that make up the S&P 500, about which investors arguably have discounted all relevant public information.

High-yield managers can pick among credits rather than being stuck owning the biggest borrowers, which dominate the indexes. Thats especially important with bonds asymmetric risk profile; the upside is limited while the downside could be zero, Spath explains. Even with preferreds, shares with $1,000 par values tend to be less efficiently priced than $25 par preferreds given the broader market for latter among individual investors, she points out.

Among high-yield funds that Sierra favors are BlackRock High Yield Bond (ticker: BHYAX) and Pimco High Yield (PHYAX), both run by esteemed fixed-income managers, which Spath says ought to outperform the popular ETFs, iShares iBoxx $ High Yield Corporate Bond (HYG) and the SPDR Bloomberg Barclays High Yield Bond (JNK).

For EM bonds, she calls out the MFS Emerging Markets Debt fund (MEDAX). And for preferreds, her pick is the Cohen & Steers Preferred Securities Income fund (CPXIX.) All these funds carry top five-star ratings from Morningstar, except the Pimco fund, which gets four stars.

Finally, Spath also puts in a plug for high-yield municipal bonds, which are especially inefficiently priced, in part because some credits get placed in the category simply because they dont have a rating from one of the big credit-ratings firms. But this sector also has been subject to big risks such as the Puerto Rico debt debacle, which is another reason to opt for active management.

Among high-yield muni funds, Spath picks Nuveen High Yield Municipal Bond (NHMAX), managed by longtime muni veteran John Miller. She also likes Invesco Oppenheimer Rochester High-Yield Municipal Bond (ORNAX), which she said navigated through the Puerto Rican crisis by buying the credits that other funds had to dump at fire-sale prices. Both high-yield muni funds get five stars from Morningstar.

So, regardless of what TINAs many fans say, there are alternatives in this market.

Write to Randall W. Forsyth at randall.forsyth@barrons.com

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What to Invest Money in: There Are Lots of Alternatives to Stocks Out There - Barron's