Simple Mohamed El-Erian Portfolio ~ market folly

Wednesday, February 25, 2009

Simple Mohamed El-Erian Portfolio

Great post by Roger Nusbaum 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 his book When Markets Collide by Mohamed El-Erian. 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).

Great overall write-up from him 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 GSN) 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.

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