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Target Allocation

Below is the target allocation as presented in "When Markets Collide", p.198.

  Midpoint (%) Range(%)
Equities    
             US 15 12-18
             Other advanced countries 15 12-18
             Emerging countries 12 6-18
             Private 7 6-8
Bonds    
             US 5 4-6
             International 9 6-12
Real Assets    
             Real Estate 6 3-9
             Commodities 11 7-15
             Inflation Protected Bonds 5 4-6
             Infrastructure 5 3-7
Special Opportunities 8 2-14

 

Please refer to the original text for a detailed discussion of the various asset classes.

The first step is to develop a target allocation based on the above. The allocation we use is the following:

  Allocation (%) El-Erian Range(%)
Equities 46%  
             US              16 12-18
             Developed countries              12 12-18
             Emerging countries              12 6-18
             Private              6 6-8
Bonds 11%  
             US              5 4-6
             International (developed/emerging)              6 (2/4) 6-12
Real Assets 30%  
             Real Estate (domestic/international)              6 (3/3) 3-9
             Commodities              15 7-15
             Inflation Protected Bonds              4 4-6
             Infrastructure              5 3-7
Special Opportunities 0 2-14
Cash 13 n/a

 

 

Notice that cash was added as a category.We essentially replaced the special opportunity category with cash. This is not intended to reflect that allocation category. It was just a simple way to reflect cash in the overall allocation as most investors do. The impact of this substitution is to make the allocation more CONSERVATIVE as cash will typically have smaller fluctuations than the special opportunities category.

More aggressive investors can reduce the cash allocation and blend the allocation over other categories.

The overall guidelines I used to develop the target allocation plan were as follows:

  • de emphasize bonds
  • favor emerging markets
  • favor US equities over developed markets
  • emphasize real assets

This allocation is still working for me. If I made any adjustments it might be to reduce emerging markets slightly in favor of US markets and private equity.

Once the allocation details are established it is time to identify implementation vehicles for each asset class. That discussion follows.