Seeking the Perfect Asset Allocation

04/17/2008 12:00 am EST


Tom Lydon

Editor and Publisher, ETF Trends

Go global if you want to maximize your portfolio growth, was the message that attendees heard from Tom Lydon, president, Global Trends Investments,and his panel of experts.

Lydon opened the session by asking panel members to comment on their firm's strategy for asset allocation, as well as the current market's challenges. Michael Cuggino, president and portfolio manager, Permanent Portfolio Family of Funds, focuses on the non-correlation of assets and builds investment models to encompass various assets, using several scenarios, not necessarily divided between global and domestic. In addition to the typical Wall Street model of stocks, bonds, and cash, his company also believes that investors should have exposure to precious metals, commodities, currencies, real estate, and natural resources. And he added, a long-term, disciplined approach is crucial to success.

Bryce James, founder, CEO, and president, Smart Portfolios, advocated a new approach to the old bearish, bullish markets based on history. Instead, he suggested a focus on qualifying the data and looking at new ways to measure risk/return in different sectors, not just domestic vs. global.

Komal Sri-Kumar, managing director & chief global strategist, TCW Investment Management, noted that the US stock market is becoming a smaller and smaller part of the world and that investors need to analyze the parts of the world in which they want to participate. He suggested that a better use of asset allocation may be to look at percentages of investments in infrastructure, water, food, better, and real estate, instead of by market caps.

Lydon asked how the increasing pressure from clients to go global is affecting them and whether that strategy requires a change in discipline.

James commented that global or domestic, it doesn't matter. What is important is buying at the right price.

Cuggino said a lot of people make investing more complicated than it needs to be. The point is to make money. So the approach should be a long-term, strategic focus, not a strategy based on momentum. Investors should be in all areas to some extent at all times.

Kumar noted that it is important to find out what your clients want to achieve. If they are long-term investors, they may want to underweight the US. If short-term, they may not want to hold US dollars. Advisors need to realize that the world is changing, the US is becoming a smaller part of the global markets, and the world is shifting from commodity-based to more knowledge-based, as technology advances. All of these developments will necessarily drive a change in portfolio allocation.

Commenting on their firm's strategy, James backed market timing, from a scientific approach, looking at the risk/return model and stable distributions, compared to using old historical data and classic asset allocation models. His message was get rid of the old notion of doing things, and look at investments from strictly a price point-of-view. If it's cheap and the risk/return matrix is acceptable, then it's worth taking a look at.

Targeted allocation, periodic rebalancing, on a tax-efficient basis is the key for Cuggino's funds. His managers want long-term exposure in all markets and realize there will be short-term anomalies from which to profit, but overall, they look at the big picture, over a period of years. He sees the US as cheap right now, relative to the rest of the world and advocates commodities as a good way to increase global exposure, without taking on the risk of foreign currencies or emerging markets.

Although the panel's views on global asset allocation differed widely, the message was clear that the key to portfolio success is very dependent upon your clients' needs and goals, analyzed from a long-term perspective and not from a Wall Street fad-of-the-moment.

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