Nusbaum: Portfolio for a New Era

In this weeks Barron's there was an interview with Mohamed El-Erian from PIMCO that focused a lot on his book, When Markets Collide. The book included the model portfolio pictured to the left (click to enlarge).

As he spells it out, it seems like I am of a similar mind as him. I have been writing about many of these ideas for a while. I don't think this concept is crowded just yet, but it has been getting more popular.

Digging into these sorts of concepts put forth by the right people is always useful.

Having more than half of the usual (saying private equity is not usual) equity exposure in foreign stocks would require people to change their thinking. I am not saying El-Erian is wrong, not at all, I'm just conceding that it would be difficult for a lot folks to just jump into.

Ditto fixed income. Finding foreign fixed income is not that easy for reasons I've touched on before including order size issues and perceptions of risk. The (BWX) product is the only developed market fixed income ETF but I know for a fact that there are firms looking to do more in this area. There is no guarantee of follow through but they are on the drawing board.

I've been writing about using some short term sovereign debt in client accounts for about a year now and expect to work more in over time.

Private equity gets a little tricky. Some of what trades that is called private equity are stakes in the business of running private equity funds, not the funds themselves. The exchange traded vehicles that really are the pools of capital can trade away from their NAVs.

I think this farm land/plantation/dairy farm jag I am on can count toward the real estate allocation El-Erian advocates. Although I am incredibly early into researching these it seems that many of the ones I have looked at do not really correlate to US financial stocks as many US REITs do, disappointingly so, when things were really hitting the fan in late 2007. Whether they are good investments or lousy investments, I don't think it would take much convincing to believe that a coffee and palm oil farm in Indonesia has a low correlation to Wells Fargo (WFC).

He thinks highly of commodities. His number for pure commodity exposure (as I read the table) is more than I have ever had or am likely to have. Commodities, among other things, hedge equities and at some point the equities end up hedging the commodities. Probably not at 11% and of course El-Erian's concept obviously has less equity exposure than most traditional portfolios.

Inflation protected bonds stand to be a crucial component as the investment/retirement planning and management science evolves. Regardless of how cooked the inflation numbers are the inching up of the par value is a big deal for most portfolios.

Infrastructure? Sign me up, but separate from equities. It depends what he means, I think. A lot of the engineering stocks have done very well over the last year or so but I 'm not so sure that they are capable of delivering a zig to the market's zag in the future. Of course it may also be wrong to think a toll road or an airport could zig either.

The above graphic allocates a portion to what El-Erian labeled as special opportunities. Unless I missed it, I don't think the interview addressed exactly what he meant. Maybe it means going berserk ala Nassim Nicholas Taleb. I'm not sure.

El-Erian says one thing that I sort of disagree with. He talked about asking certain questions about the financial sector in order to side step what happened.

The market warned about the sector with the distorted yield curve. People who heeded that warning did not need any analysis to sidestep the full brunt.

One last thing about the article is that as I add up his allocation it only adds up to 98%. I checked several times and got the same number. Assuming I did not make a mistake I'm not sure if Barron's made a mistake or if it really is intended to add up to only 98%.

To update, I made some progress on the farm stock research but it is a slow process and I'm not done yet.

By the way on June 14, 1987, the day the last Celtics Lakers final ended the S&P 500 was at 301.62. So despite a crash, some wars, a few crises and an almost decade long round trip to nowhere the SPX has been better than a four-bagger in 21 years.

Comments

[LarryH]

Note the modest expectations for this "New Era" allocation--5 to 7%. Buffett, Soros, and many others have been lowering total return expectations for equities and bonds for the next several years. That is the real story. Buy quality and don't chase the latest hot idea. To aim for higher returns in the current world economic climate is to take on considerable risk.

[fxtrader07]

that makes for a stable portfolio - but it won't do much better than an equity index fund, by and large. and for anyone with at least 15-20 years out till retirement, it makes little sense imho.
i do not believe in these "macro-allocated&... portfolios. Just look at how differently the asset-class "us equities" performed over the past 10 years - if you look at the Nasdaq, the s&P, the Russel2000? So what then are 15% US-equities? They could mean 0% annualized return. Or 8% or 12%.
And buying any government bonds, especially treasuries, at this point is equivalent to throwing money away - by settling for mediocre returns barely above inflation. even 1% of the capital allocated inton treasuries ("inflation proteced" - LOL, or not) It simply doesn't make any sense.

[Don't get no respect]

I believe it was Carnegie who said "Its ok to put all your eggs in one basket and just watch that basket". I think the days of buy and hold are gone since the advent of computers and research things like sector rotation and momentum play larger parts in a composite portfolio with hedge funds making a bet. (Oil anyone?)

[bluesmoke]

In today's world, managing a portfolio is becoming a full time job. Doing my own research is fine, but I am now willing to pay for additional help, (ie newsletters, etc).

[TopForeignStocks]

I agree with User 197614.If one does not catch a sector at the right time they may end up holding the stock while it languishes. This is especially true with mid and small caps which don't pay any dividends or pay very little.

Bluesmoke - you are so correct.It takes a lot of work just to stay in the same place due to inflation.Forget about getting ahead.