El-Erian Holds 30% in Cash as Central Banks Distort Markets

Mohamed El-Erian said he’s favoring cash as well as the riskiest investments, such as venture capital, in his own portfolio.

El-Erian is less bullish on publicly traded securities such as stocks and bonds because global central banks have pushed their prices to “distorted” levels, he said in an interview in Singapore. Cash comprises about 30 percent of his portfolio, which is more than most people have, according to El-Erian.

“There’s enormous risk in public markets because that’s the one that central banks have distorted to the greatest extent,” said El-Erian, chief economic adviser at Allianz SE and a Bloomberg View columnist. “It’s very hard to say I’m going to buy a basket of public equities and go to sleep for the next five to 10 years and feel good about the returns. Similarly with bonds.”

Central banks in the U.S., Japan and Europe have used unprecedented asset purchases to try and support their economies. Now the Federal Reserve is contemplating raising interest rates for the second time in a year. The Bank of Japan abandoned plans to push down benchmark 10-year yields, fueling speculation policy makers are pondering limits to their stimulus measures.

‘Barbell’ Strategy

El-Erian described his investment approach as a “barbell” strategy, favoring assets at both ends of the risk spectrum while holding fewer in the middle such as government and corporate bonds, stocks and emerging-market assets. Benchmark 10-year Treasury note  yields dropped to an all-time low in July, and the S&P 500 Index rallied to a record high in August.

A “moderate” investor may have 5 percent in cash, while a “conservative” portfolio would allocate 30 percent, based on asset allocation models compiled by Charles Schwab Corp.