Tweaking Nusbaum's El-Erian Portfolio via ETFs

Great article on TheStreet.com by Roger Nusbaum last week highlighting how simple it is to create an 'El-Erian' styled portfolio using simply exchange-traded funds (ETFs). If you're unfamiliar with Mohamed El-Erian, he is the CEO of the largest bond manager in the world, PIMCO. And, he's a pretty smart guy. You should definitely check out El-Erian's book When Markets Collide. It discusses the current fundamental changes going on in the global economy and financial markets/systems. This book also recently won the Business Book of the Year for 2008. In the book, he touches on a new type of portfolio and this is what Roger has sought to re-create in simple form.

The breakdown of the portfolio is as such:

• 15% Domestic Equities: 10% PBP (S&P BuyWrite), 5% IJR (S&P Small Cap)
• 15% Foreign Developed Equities: 10% DOL (Intl Large Cap), 5% GWX (S&P Intl Small Cap)
• 12% Emerging Markets Equities: 12% ADRE (Emerging Market index fund)
• Private Equity: Traditionally, this would garner a % by El-Erian, but it is very hard for a retail investor to replicate such an investment.
• 9% Domestic Bonds: 6% SHY (1-3 yr treasury), 3% AGZ (agency fund)
• 15% Foreign Bonds: 15% IGOV (S&P Intl treasury)
• 5% Real Estate: Also hard to replicate, but you can use REITs if you wish. DRW (Real estate ETF)
• 11% Commodities: 6% GLD (Gold trust), 5% DBA (Agriculture)
• 5% TIPS: TIP (TIPS fund)
• 5% Infrastructure: IGF (Global infrastructure fund)
• 8% Special Opportunities: Roger suggests a myriad of options for this category. GXG (Colombia ETF), VXX (VIX futures), PHO (Water).

It's a great overall write-up from Roger with easy implementation of ETFs into El-Erian's new model portfolio. In terms of expanding upon his suggestions, here's our take: On the commodities front, we would try to add some SLV (Silver) or other types of commodities into the mix. In special opportunities, there are literally a myriad of ETFs that could fall into this category. We might suggest something exotic like a Carbon Trading fund (ASO or GRN) or possibly some currency exposure through FXA, FXC, FXF, etc. Other than that, all the other ETFs are pretty self-explanatory as to what they track. Check out Roger's article.

Comments

[Mad Hedge F...:]

Gold finally hit a wall just above $1,000, and instantly melted $50. For many traders who got in just above $700 three months ago, it’s time to say thank you very much to Mr. Market and either wait for a substantial pull back, or go on to the next trade. It was taking increasingly larger purchases of physical gold by ETF’s and coins by individuals to push the price up. CME statistics showed the speculators’ position soared to a net long of 215,661 contracts ($21.5 billion). The SPDR Gold Trust ETF (GLD) added five tonnes of the barbaric relic to 1,029 tonnes in just one day. The turnaround neatly sets up a double top on the long term charts with the high set last year. It may take a couple of more runs, and more bad news, which seems in abundant supply, to get the yellow metal to a true new high.

Feb 25 12:14 PM

[Alan Young:]

I'm an avid reader of Nusbaum, and commented on this model when he posted it on his blog. One big disparity is that IGF is not really a way to own infrastructure (an asset class which delivers steady cash flow with minimal risk); a high percentage of this ETF is in industrial stocks.

But more essentially, there's more to El-Erian's asset management than having a diversified portfolio. A great deal of the book is about risk management, which ETFs don't do at all; and "secular" or long-term shifts in the predominance of asset classes, which require the ability to analyze long-term economic trends and adjust the asset balances accordingly. The percentages you list are an often-quoted AVERAGE of El-Erian's proposed allocations; using fixed allocations would make for only a crude imitation of his model.

And then, of course, as we learned a few months ago, there are times when asset allocation doesn't help you at all, and you need much broader risk-control techniques which are simply foreign to any kind of passive investment model.

Feb 25 01:02 PM

[Steve in TN:]

I wonder if this represents El-Erian's personal portfolio?
Or is this what he would invest his customer's money in. Two completely different questions.

Feb 25 01:24 PM

[Mad Hedge F...:]

Exchange traded funds, or ETF’s, were one of the hot financial products of 2008, and enable investors to go 100% or 200% long or short any number of indexes, sub indexes, industry groups, bonds, currencies, and commodities. The largest issuers have been Barclay’s iShares, State Street’s StreetTracks SPDR’s, Rydex, and PowerShares. Sponsors of ETF’s have filed for registration of another 850 such products, including ETF’s for many new single country funds for Columbia, Egypt, Argentina, Peru, and the Nordic countries. Charles Schwab (SCHW) has also announced that it is entering this field for the first time. These will allow fund managers to make more narrow and specific bets in the capital markets. But they will also increase market volatility, as they obviously did last year.

Feb 25 02:06 PM

[Dirty Dog:]

What's the difference between an El-Erian portfolio and a diversified portfolio? I don't think there are any and I certainly couldn't tell from reading the book.

He does a great job of analysing what happened but I felt that anyone looking to build a portfolio would have been better off with the intelligent asset allocator than reading the second half of When Markets Collide.

Feb 26 03:38 AM