Reaping the fruits of globalisation

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: El-Erian, the co-chief executive of Pimco, the money management firm, wants to explain the current turmoil in the global markets, outline what investors should do to take advantage of the changing landscape, and offer advice to policy makers about how to handle the rapidly changing, and increasingly interrelated, global economy. The results are mixed. The book works best in explaining what investment strategies to follow. El-Erian, the former president and chief executive of the Harvard Management Company, which invests the university’s endowment, offers extremely detailed advice. Understanding the danger of a one-size-fits-all-approach, he couches his suggestions in the form of ranges, saying that investors should have between X and Y percent of their holdings in a particular asset class.

Even so, his recommendations are surprising. If you are a long-term investor, El-Erian suggests placing as little as 36% of your money in equities, less than most professionals recommend. And he advocates having no more than 62% there, even for aggressive investors, a figure that is also lower than traditional advice.

To simplify the discussion, let’s just deal with the midpoint of his recommended range for various asset classes. The midpoint for stocks, for example, would be 49%, or halfway from 36 to 62.

That 49% should break down this way, he writes: 15% in domestic stocks, another 15% in equities of companies that are part of “advanced economies,” 12% in stocks of companies in “emerging economies” and 7% in private equity invested through vehicles like hedge funds.

The goal is to ensure that you have a “globally diversified set of stocks,” he writes. “While international investing does involve a different set of risks,” he says, “the cumulative impact of risk has been declining in recent years when compared in relative terms to domestic investing.” He adds that increased international exposure is justified because, when it comes to stock appreciation, “a faltering U.S. engine of global growth will be replaced by several emerging-market engines.” For example, he points out that “when measured using purchasing power parity, China and India each contributed more to global growth in 2007 than did the United States, the European Union and Japan.”