rudi

El-Erian's Recommended Allocation vs. Harvard, Yale

I completely agree with you, Foust. I admit, the sentence you quoted was not the best I wrote ;)
Of course most asset classes does not mean the best allocation. To be more concrete, I like the high yield bonds in the harvard portfolio, and the higher percentage of inflation-linked bonds. Also, they have less stocks then El-Erian.
All portfolios in my opinion underweight bonds drastically!

Seafarer: The domestic stocks are in ACWI (international stocks). As far as I remember they hold 40% US stocks.
To your question: I would add stocks, which are quite unrelated to S&P500 for example. This could be "defense", like LMT. Other ideas are holdings, e.g. BRK.B and shipping, e.g. OSG. Secondly, I would add carry trades to the portfolio. Check out DBV. Since DBV is too expensive, I would make the carry trades manually via forex trading. Thirdly, I would have a look at covered calls, like BEO. If you have some more ideas, please let me know, I am alway looking for some >6% return investments, which are a stand-alone asset class, to diversify with. Back to the question: I would then substract from ACWI mostly and from real estate.

By the way, I am not just guessing these numbers, I retrieve them from statistical portfolio optimization. I can for sure tell you, that >30% stocks is way too much. 10-15% is healthy.

best regards
rudi

El-Erian's Recommended Allocation vs. Harvard, Yale

I'd find it interesting to know, how these portfolios are being created. As I am involved into asset allocation a lot, I wonder why there is so little allocation into bonds. I think the difficulty is, what expected returns to assume, when optimizing the portfolio by the best sharpe ratio (or some other ratio). As you can see, all portfolios assume >10% commodities to be appropriate. I find results like that, when I imply the empirical returns of commodities for the last years. Minding the efficient market hypothesis, there is no reason to assume more than the inflation rate plus some increased demand due to worlds economic growth, as an expected return. This would be 3-4% in my opinion. This leads me to a portfolio with maximum 5% commodities.

I conclude the harvard portfolio to be defenitely the best, since they are best diversivied, i.e. they have the most asset classes. High yield bonds and inflation-linked bonds should be included in every good portfolio.
In spite of that, the harvard portfolio could be easily outperformed (risk adjusted) by a portfolio like that:

-International Stocks (weighted by marketcap) 20% (ACWI)
-International inflation-linked-bonds 30% (TIP)
-High yield bonds 3% (HYG)
-Bonds with short avg. maturity 18% (SHY)
-International Bonds 12% (BWX)
-Commodities 5% (DBC)
-Real Estate 7% (VNQ)
-Private Equity 5% (PPE?)

Keep in mind, that private equity is correlated with stocks. So there is a lot of emphasis on stocks market in all mentioned portfolios.

The idea of having hedge funds is in my opinion misleading as well, since they are either doing some similar allocation, or they apply some strategy, which includes short selling (not sticking to efficient market hypothesis), what means, you are long and short in the same assets at the same time, just wasting fees.

By the way, there are even more asset classes, that should be added to the portfolio, but I wanted to show a portfolio, which doesnt't include more than the harvard one and is already more developed.

best regards
rudi