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Implementation Vehicles

Once the target allocations are decided the next step is to decide on the appropriate investments to use.

For the typical investor, direct access to hedge funds, private equity, commodities, etc. is either impossible or very expensive. Alternatives with similar investment behaviors must be identified.

El-Erian identifies 11 investment categories. If multiple investments were used for each category a portfolio might wind up with 30-50 different moving parts. For the typical investor that is way too many items to keep track of. Think of tax time!

What we have done is use a few guiding principles to craft a manageable, cost-effective portfolio. Some of these are:

  • use mutual funds and ETF's (exchange traded funds)
  • minimize the number of investments per category by using aggregate investments
  • minimize the number of investment suppliers (fewer statements)

In this way a portfolio was developed with the following characteristics:

  • 7 funds from 4 fund families
  • 10 ETF's

This could be reduced even further. However, investing is fun so having some flexibility makes things more interesting.

Below are the investment details for one example portfolio:

  investment (% in each category)1 % of total portfolio
Equities 46%  
             US              TEDIX(47) ,WAMVX(70),WAGOX(44) 5,5,6
             Developed countries              TEIDX(53),WAMVX(30),WAGOX(56) 4,4,4
             Emerging countries              VWO,WAEMX 6,6
             Private              PSP 6
Bonds 11%  
             US       HABDX 5
             International (developed,emerging)              LSGLX,PEMDX 2,4
Real Assets 30%  
             Real Estate (domestic/international)              VNQI,TRREX 3,3
             Commodities              DBA,DBB,DBE,GLD,HAP 2.4,1.6,3.4,0.6,7
             Inflation Protected Bonds              VAIPX 4
             Infrastructure              FLM,PXR 3,2
Cash VANGUARD MONEY MARKET 13
1mutual funds can be split by geographical region, ie. TEDIX is 47% domestic, 53% foreign stocks

 

The above table is used as follows.
Assuming an investor has a $100K portfolio, they would make the following investments:

  • $9K TEDIX ($5K+$4K)
  • $9K WAMVX ($5K+$4K)
  • $10K WAGOX ($6K+$4K)
  • $6K VWO
  • etc.

See this page for a complete example

A few comments:

  • the US, developed and emerging equity selections could be replaced by only one of each
  • the 3 bond funds could be replaced by one world bond fund
  • HAP could be used for the entire commodity allocation

Some of our preferences are evident here. Vanguard is a great place for low cost funds. They are in the process of offering many of their mutual funds as ETF's with even lower costs. Wasatch is a great small equity fund house. They close their funds often to the benefit of existing share holders. PIMCO, home of El-Erian and Bill Gross, has some of the best talent in the industry and an inside track on information. El-Erian is co-manager of a global allocation fund there that we will discuss later.

Now it is time to put this to work.