6 Asset Classes You Should Consider

01/20/2012 6:30 am EST


Investors should consider several different asset classes when allocating for their portfolios, says John De Goey, who shares six he focuses on.

John, tell us how many asset classes or various asset classes you believe investors should be using?

When you are writing an investment policy statement, most people would generally agree that you should have perhaps high single digits, anywhere from let’s say five to nine or ten asset classes. You can become more granular if you want, but I generally think that that is not advisable. So I tend to use six, for instance.

Exactly where are you putting your clients with regard to these asset classes? 

Okay, well let’s talk about the six first. So the one that should be easy is income—that can be anything. It can be domestic bonds, foreign bonds, nominal, corporate, whatever.

Then five different kinds of equity asset classes: Tangibles, which are traditional inflation hedges, oil, commodities...that sort of thing, and then Canadian stocks, US stocks, international stocks, and emerging market stocks. So you have six asset classes in total.

The big driver of risk and return is how much money you have in income. So if you are a traditional balanced investor, you are going to have let’s say 40% in income, and then the other 60% will be divided for me usually evenly, so its maybe 12% in each of the other five.

Okay, how about global regions? Any diversification there that you recommend?

Well, it’s funny, because this is actually very much a matter of debate. Some people say you should be diversifying by sector, because the US will have more money in health care and Canada will be very resource heavy and so forth.

I tend to do it by geography with the four: Canada, US, international and emerging. I cover the entire world geographically, then I tend to have them in equal weights and then different parts of the world have different sector strengths and weaknesses. So I believe I am getting diversification that way. Some people do it by region, I don’t.

So you prefer to look at it by sector rather than region?

Well, I would say by parts of the world. So I guess you could call that reason, as well. I guess what I am saying is I don’t want to target Latin America. I am just going to lump it in with all emerging markets, and I don’t want to separate Japan from Western Europe—it is just going to be the rest of the world.

Within all of this, are there any specific investment vehicles that you believe are worth a look right now?

Yeah. My preferred investment vehicles for my clients are offered by a company called Dimensional Fund Advisors. Dimensional just moved their head office from Santa Monica to Austin about three years ago.

These guys are really crazy smart. They are very intelligent. They have a number of different Nobel Laureates on their investment committee, and they use what is called the Fama-French three-factor model. They look at risk and return, and they try to get exposure to a broad asset class and tilt toward small companies and value companies, because they have a better risk-return.

So what are the tickers on these funds, John, for Canadian investors?

The DFA Canadian Core is DFA256 and DFA Canadian Vector is DFA600.

Any other funds that you putting clients into these days?

Well, again, I also use some exchange traded funds, so I will use...for instance, in emerging markets there is a Claymore BRIC ETF (CBQ) from Claymore...just the four BRIC countries, Brazil, Russia, India, and China. So for clients who want a more targeted approach, I will use a product like that.

OK, any other ideas that might be worth some research?

Well, let’s say that you instead don't want to have a targeted emerging market approach. You might want to have, let’s say, a broad emerging market. Well there is one called ZEM which is from the Bank of Montreal. So it is the same sort of thing.

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