How Does Your Portfolio Stand Up To This Diversified Model?

 |  Includes: AUD, ELD, EMIF, IJJ, IJS, IVE, KKR, OZM, RSP
by: George Fisher

Professional money managers are advocating an increase in Equity and Alternative Investments while reducing Cash and Fixed Income asset allocations. How do your investment moves stack up?

Barron's publishes annually the model portfolio asset allocation for the 40 largest private wealth-managing firms. While this is usually a starting point for individual client discussions, it can be helpful in understanding not only asset class diversification but also subtle movements in the thinking of these wealth managers. This year, Barron's has added a new line - the average of each asset class (and made my job a bit easier, as I have been tracking these averages for a few years).

I highly recommend all investors who manage their own portfolios read this informative article. You may not agree with the premise nor agree with the allocation model, but it is important to at least analyze your own portfolio along these asset classes. Below is a table of the average allocation this year and last year, along with a percentage change year-over-year:

Asset Classification




Stocks Total




Stocks US




Stocks Developed




Stocks Emerging




Income Total




Income US




Income High Grade




Income High Yield




Income Developed




Income Emerging




Alternative Total




Alternative Real Estate




Alternative Commodities




Alternative Hedge Fund, PE, Other








Click to enlarge

Source: Barron's March 4 2013, Barron's March 2012

Below is the highest and lowest allocation by asset group, along with the wealth manager:

Stocks Total - 57.0% Charles Schwab; 36.5% UBS

Stocks: US - 47.0% LPL Financial; 17.0% GenSpring

Stocks: Developed - 20.0% RBC Wealth Management; 4.0% Brown Advisory

Stocks: Emerging - 15.0% Constellation Wealth; 2.0% PNC Asset Management, Raymond James

Income Total - 44.5% UBS; 10.0% Constellation Wealth

Income: US - 37.5% UBS; 7.0% Constellation Wealth

Income: High Grade - 36.0% Fidelity Investment; 5.0% William Blair

Income: High Yield - 17.0% City National Bank; 0.0% Charles Schwab, Constellation Wealth, Fidelity, US Bank Wealth Management

Income: Developed - 6.0% GenSpring, 0.0% 24 firms

Income: Emerging - 13% Citi Private Banking, 0.0% 13 firms

Alternative Total - 35.0% Constellation; 5.0% Fidelity Investments

Alternative: Real Estate - 10.0% Constellation; 0.0% 7 firms

Alternative: Commodities - 8.0% Neuberger Berman, Northern Trust, PNC Wealth Management; 0.0% 8 firms

Alternative: Hedge Fund, Private Equity, Other - 28.0% Silvercrest Asset Management, 0.0% 6 firms

Cash - 10.0% LPL Financial; 0.0% 10 firms

How can this information be of service to individual investors?

First, it is important to analyze individual portfolios along asset allocations so the investor has a better understanding of broad based allocations and where undue risks may lie. Second, individual investors may decide to reallocate assets based on this better understanding. Thirdly, individual investors may find it helpful to research the premises behind shifts in allocation, such as reducing interest rate risk by moving away from US bonds to Emerging Market bonds.

Within this broad based allocation, individual investors may find no exposure to specific allocations within their portfolios. For instance, in the emerging market stocks and income allocation, investors may feel inadequate to research individual countries and opportunities, and may pass on any allocation. However, with the proliferation of low-cost ETFs, it is easier to find such investments. The same can be said for hedge fund assets where many individuals lack exposure. Owning stock in the hedge fund managers will add exposure to this asset class.

For example, the PIMCO Australian bond ETF, (NYSEARCA:AUD) and WisdomTree Local Currency Emerging Market Bond ETF (NYSEARCA:ELD) can be used to gain exposure to developed and emerging bonds. Och Ziff (NYSE:OZM) and KKR Financial (KFN) can be used to gain exposure to hedge fund assets and are structured as tax-advantaged LLCs (similar to MLPs). Either Brussels-based investment holding companies Groupe Bruxelles Lambert (GBLBF.PK, GBL.BR) or Stockholm-based Investor AB (IVSBF.PK, INVE-A.ST, INVE-B.ST) could be used to gain wide exposure to developed Europe without paying hidden mutual fund management fees. GBL has recently announced structural plans to raise capital to diversify their holdings into more private equity than publicly traded assets. S&P Emerging Market Infrastructure ETF (NASDAQ:EMIF) invests in operators of utilities, telecommunications, and general infrastructure in emerging markets.

Another advantage of this type of analysis is its flexibility. Within each category there is the opportunity to customize based on individual risk profiles and investment goals. For instance, a value investor who is not comfortable selecting individual securities may choose S&P 500 Equal Weighted ETF (NYSEARCA:RSP), S&P 500 Value ETF (NYSEARCA:IVE), S&P Mid-Cap Value ETF (NYSEARCA:IJJ) and S&P Small-cap Value ETF (NYSEARCA:IJS). Individuals seeking income may have a majority of assets in dividend/interest paying securities.

How does your portfolio diversification compare to this model? With as few as 11 investments, an investor could replicate this broad based asset allocation exposure.

Author's Note: Please review important disclaimer in author's profile.

Disclosure: I am long RSP, OZM, EMIF, AUD, ELD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.