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The current financial meltdown may not be the best time to talk about asset allocation since most people don’t want to open their monthly statements to see how bad the carnage is.  But, at some point you have to open them up and figure out where the damage is and potentially re-allocate. So how should you allocate your assets? The one report that sheds some light on this is the annual World Wealth Report from Merrill and CapGemini.  It decribes how Merrill advices their clients and how they have allocated their billions. Page 15 of the PDF is the money page, below is the summary: (click on the image to download the full report)

33% – Equities
27% – Fixed Income
18% – Cash (preferably NOT dollars!)
11% – Real Estate
11% – Alternative Investments (such as hedge funds, commodities, pe/vc or even lame art work)

Another good resource is David Swensen, who runs the highly successful Yale endowment fund which has about USD 22.5 billion and author of Unconventional Success. He recommends using ETF’s and index funds in the following allocation:

30% – US Equities
15% – Foreign Equities
5% – Emerging Equities
20% – Real Estate
15% – Treasury Bonds
15% – TIPS

Which is right? I believe it’s up to you, but it gives you an ideas of what others are doing. Which may not always wise since some of these clients invested in hedge funds that invested heavily in toxic CDO’s. As they say your mileage may vary.

Someone emailed me yesterday and asked “why does your blog have such a negative angle on India?”  Part of me wanted to just tell the person to read the headlines and tell me what they see.  Americans always get blamed for not knowing anything about anything outside of the United States. Many Indian’s suffer the same fate, they don’t care what’s happening in the world financial markets – wrong attitude if you invest in Indian stocks you better give a damn about global macro events.

Let me run through some headlines over the last 48 hours:

- IndyMac 2nd largest bank failure in history
- Lehman down 75% for the year
- Fannie Mae and Freddic Mac down 80% for the year 
- Oil hits $147, highest recorded price EVER 
- Dow drops below 11,000 – first time since Aug 2006 

And some Indian headlines:
- Infosys down 7% after announcing flat revenues (this is India’s tech bellwether stock similar to Cisco) 
- S&P might cut India’s investment grade rating
- June air traffic down 15% (GoAir down the most at -33%)
- Industrial growth dipped to 3.84% lowest in six years (it was 10.59% last May)
- Inflation at 11.89%
- Sensex dives 456 points on Friday
- HCL Technologies suffer forex losses of $65-75 million (the dreaded yen carry trade?)

Ridham Desai, MD of Morgan Stanley India, has been appearing on the financial networks lately talking about the Sensex correcting by 50% form their peak levels of 21000.  If that is true we still have another 30% to go…ouch.  Over the past 4 months he is one of the few guys setting realistic expectations for the equity markets and his candor is surprising since he’s from a bulge bracket investment bank.

However in the past two weeks more and more people are saying the same thing – “sell into the rally.”  Not good to hear but the reality is the financial markets are going through a painful re-rating and re-pricing exercise.

The bright side is Indian stocks are still doing well when compared to the US which is experiencing multi year lows for many stocks: GE, Countrywide, Fannie Mae, GM, etc…or complete destruction like Bear Sterns.

It’s official we are heading back to the mainframe model, with a dumb terminal (now called a web browser) and the mainframe machine (now called cloud computing). It’s hard to believe the computer wonks at IBM had it right the first time around. It seems as my laptop gets more powerful, I’m pushing more of my applications to the cloud.  The biggest one so far has been Gmail, I was a die-hard fan of Outlook/Entourage but gave into the Googleplex.  

Recently, I was looking for an online content collaboration tool. I looked at a couple open source apps but stumbled upon a company offering an online tool that was surprisingly based out of Bombay. 

It’s similar to BaseCamp but way better, if you have remote teams working on different projects or need a way to track your work within the office this works way better then trying to share an Excel sheet. And of course since it’s online the data is always backed up.

I’m convinced in another year I won’t have any use for my laptop and will use my iPhone since everything will be in the cloud.

Reliance Mutual Fund (part of Anil Ambani’s empire) had recently converted a couple index funds (Sensex and Nifty trackers) into a single “quant fund.”  Since I’m a hugh believer in Index funds, it’s a disappoint to see Reliance shutdown that investment strategy…but its business.

The new strategy has been running since mid April and to make any judgements on it’s performance is a bit pre mature. Their basic model as taken from the offer document is: “will invest at least 90 per cent of the assets in an actively managed portfolio of 15 to 20 stocks from S&P CNX Nifty index on the basis of a mathematical model. The model will shortlist stocks on the basis of stock price movement and a variety of financial valuation aspects. The fund is managed by Krishna Daga who has been in the Indian equity markets for over 10 years with companies such as: HSBC, JP Morgan, Brics, B&K and Deutsche.

Since the product is a mutual fund the options it can deploy are limited to long only equities.  As the Agile Fund from Lotus it cannot go short, go to cash, hedge, leverage, etc…techniques that most international quant funds use.