Byron Wien, vice chairman of
the other day talking about his idea for a "radical" asset allocation strategy for 2011. Wien has a very long-term and well-respected track record on Wall Street and anyone wanting to implement his radical strategy could do so with exchange-traded products.
Wien advocates 20% into emerging-market equities. This space has, of course, been very popular over the last few years as returns going into the financial crisis were superior to domestic benchmarks and many emerging-market countries have seen faster recoveries than developed markets. I would avoid broad-based funds like
iShares MSCI Emerging Market Index Fund
Vanguard Emerging Market Index Fund
because they take in the good and the bad while at the same time blending away various positive attributes that many of these markets have.
Investors have countless narrower funds to build a very customized exposure. Among the types of choices available with easily understood longer-term catalysts for growth are the
EG Shares INDXX India Infrastructure Fund
the Global X Brazil Consumer Sector ETF
iShares MSCI Turkey Index Fund
. A combination of specialized funds would be better than one of the broad-based funds.
Wien also believes that high-yield bonds, targeted at 20%, are attractive. There are two very popular ETFs with the
SPDR Barclays Capital High Yield Bond Fund
iShares iBoxx High Yield Corp Bond Fund
. Recently there has been a new actively managed fund in the space with the
Advisor Shares Peritus High Yield ETF
JNK has a trailing yield of 8.48%, HYG has a trailing yield 8.39% and the Peritus fund is too new to have any yield information. One other possibility is the
SPDR Barclays Capital Convertible Securities ETF
. While the 3.11% trailing yield is less than the others, it does capture price appreciation when this group is in favor. One important note is that with bond ETFs the trailing yield doesn't necessarily give any reliable indication of what to expect. Changes in the bond market will be quickly reflected in these ETFs.
Hedge funds also feature prominently Wien's allocation. While there are plenty of exchange-traded-products that replicate hedge fund strategies, investors need to realize that the emphasis here is on the word "hedge" and none of these funds will be up 300% one year because they shorted subprime mortgages or some other equally heroic trade in the future.
IndexIQ has launched several funds in this space including the
IQ Hedge Multi Strategy Tracker ETF
IQ Hedge Macro Tracker ETF
IQ Merger Arbitrage ETF
. All three funds have done a good job in terms of a low correlation to domestic equities but this also sets some reasonable expectations too. Year to date, all three funds have been close to flat either way while the
is up 11%. If the market had been down a lot then these results would look very good but in this environment where markets are up a little the hedge replicators have been laggards. Had markets been up a lot this year they would have lagged too.
Private equity is targeted at 10% of the allocation. There are a couple of ways into this space including the
PowerShares Global Listed Private Equity Portfolio
, a mix of companies that operate funds and actual investment companies. The fund has a decent global footprint with exposures to many countries including Sweden, Canada and South Korea. Buying this fund is buying volatility that correlates very closely to the financial sector. At its worst, PSP was down 80% from its 2007 peak in a very similar fashion to the
Financial Sector SPDR
Another 10% goes to real estate. Just about every large ETF provider has a domestic large-cap REIT fund and not surprisingly they cover the same ground. iShares does offer some other funds that while not as popular might offer some differentiation including the
iShares FTSE EPRA/NAREIT Developed Real Estate ex-US Fund
which provides exposure to Hong Kong, Japan and Australia among other destinations, and the
iShares FTSE NAREIT Residential Plus Capped Index Fund
which offers exposure to apartments and storage which might make sense if homebuying trends continue to flag.
Wien is partial to U.S. multinationals including companies like
Procter & Gamble
Johnson & Johnson
which are all featured prominently in the
iShares Morningstar Large Core Index Fund
. Wien suggests 10% for this segment of the market.
The final 10% is split between gold at 5% and a more generic "commodities." There are several gold ETFs with the most recent being the
ETF Securities Gold Trust
. For the other commodities portion investors could consider something broad like the
PowerShares DB Commodities Index Tracking Fund
, a slightly narrower product like the
iPath DJ UBS Agriculture Total Return ETN
or a single commodity tracker like the
iPath DJ UBS Coffee Subindex Total Return ETN
While I don't necessarily think following someone else's exact idea is the best way to construct a portfolio, because we may not have access to Wien when he changes this allocation, this does give insight into what someone who knows more than we do about the market thinks for the next year or two.
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At the time of publication, Nusbaum had JNJ as a client holding, although positions may change at any time.
Roger Nusbaum is a portfolio manager with Your Source Financial of Phoenix, and the author of Random Roger's Big Picture Blog. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Nusbaum appreciates your feedback;
to send him an email.