One Pro's Take On Asset Allocation

Includes: FLOT
by: Roger Nusbaum

For the last couple of weeks Barron's has run profiles of wirehouse advisors from their annual top 100 advisors list. Joe Montgomery was the advisor this week and has the following target allocation for clients:

Domestic Equities 10.8%

Foreign Developed Equities 10.9%

Emerging Market Equities 4.8%

US Bonds 15%

Foreign Developed Bonds 19%

Emerging Market Bonds 8.9%

Floating Rate 3%

Alternatives 25.9%

Cash 2%

To be clear, the above is not a recommendation from me. It is what some guy, who has been successful enough for Barron's to want to profile, recommends.

The article is very thin on details like there being no explanation as to what alternatives means. It could include things like commodities, REITs, absolute return and market neutral. It is not clear how the asset classes are built in the portfolios, but there is a hint of fund use as they do use the Eaton Vance Emerging Markets Local Income Fund (MUTF:EEIIX) for that exposure.

Clearly foreign exposure is preferred but there was no fundamental explanation, just a colorful quote about US centric investing being antiquated.

In the profile Montgomery used the word democratizing and clearly anyone wanting to emulate the above mix could easily do so with ETFs which is democratizing. If you are unfamiliar, there are floating rate ETFs including one from iShares with symbol FLOT. The 3% weighting to floating rate seems reasonable from the stand point that paper in this space tends to be lower quality.

In terms of the equity and fixed income space with ETFs, that is ground we've covered countless times before and obviously there is infinite content with ideas all over the interweb. Using individual issues may or may not be in your wheelhouse, which is of course why the existence of ETFs is democratizing.

Back to what alternatives might be, there are ETFs for most of those spaces too. You know about the various commodities funds which includes all encompassing funds that own everything to funds that own narrower segments like grains or industrial metals to many individual commodities. Index IQ has quite a few alternative strategy funds to replicate various market neutral-ish strategies. There are some ETFs in the long short arena but many more with the traditional mutual fund wrapper.

One final point of interest is how little equity exposure there is. Equities provide an opportunity for growth yet a large segment of Montgomery's client base appears willing to forgo that opportunity. Anyone willing to forgo that opportunity should either already have a lot of money accumulated relative to their needs or have a very high savings rate.