In this book subtitled “Investment strategies for the age of global economic change”, Mohamed El-Erian, a head honcho at bond giant PIMCO, convincingly argues that the global economy is undergoing a fundamental secular change driven by:
- The gradual ascendancy of a set of countries that previously had little if any economic power and influence.
- The accumulation of significant amounts of capital by a set of countries that were debtors and borrowers only a few short years back.
- The proliferation of new financial instruments such as derivatives that Buffett likes to call “weapons of mass destruction”.
These changes will result in a world markedly different from the past but the transformation will be a bumpy affair.
Interesting stuff but what does it mean for investors? Mr. El-Erian says that the secular shifts will result in higher inflation and strong commodity prices and outlines an action plan for investors. He suggests that US investors consider the following asset allocation that he expects to deliver a nominal return of 8 to 10 percent, a real return of 5 to 7 percent and a standard deviation of 8 to 12 percent:
US equities: 15%
Other advanced economies: 15%
Emerging economies: 12%
Private equity: 7%
US bonds: 5%
International bonds: 9%
Real Estate: 6%
Inflation protected bonds: 5%
Special opportunities: 8%
There is some criticism in other book reviews (such as this by My Money Blog and this by Million Dollar Journey) that Mr. El-Erian has written a somewhat obtuse book. In fact, the author himself acknowledges that he took the risk of the book ending up in the “muddled middle” between average investors and policy wonks with economics PhDs. I’m not a trained economist and though I found parts of the book tough sledding, I didn’t have much trouble following the points the author was making. After all, not every book is meant to be read like an airport novel in under a few hours. I think this book is worth the time and effort spent to read it.
The book is published by McGraw-Hill and has a cover price of $27.95 (US). More details, including an excerpt can be found on the publisher’s website here.