Blackrock fund manager Dennis Stattman says government bonds aren’t risk-free, and that equities are the best bet for those looking to generate positive total returns going forward.

Stattman tells Morningstar that he’s been minimizing direct exposure to government bonds, especially in areas where the credit risk outweighs the potential rewards. “With inflation risks growing stronger, government bonds are looking less attractive,” he says. “Given the low level of government bond yields right now, inflation would not have to be much higher than where it is today for government bond returns to become negative on a real basis.”

Stocks are reasonably valued, Stattman says, “and relative to bonds and cash, stocks appear even more attractive. Compared with the alternatives, we do believe stocks are the best choice from an overall risk/reward perspective.” Stattman also indicates that, with interest rates so low, stocks may in fact be a safer investment than asset classes traditionally considered “safe”, like bonds and cash. “We are willing to accept the risks that come with equities for the significantly more appealing reward potential,” he says. “Our job is to provide our clients with a positive real rate of return, and we think equities as an asset class stand the best chance of doing that.” One area in particular where he’s finding good value: stocks with high dividend yields.