Albert Brenner is the executive managing editor of Asset Allocation Parametrics, a firm that provides asset allocation advice to small institutions. Over the past few years, he's come to recommend significant commodities exposure to most of his clients ... if he can convince them to follow his advice.

HardAssetsInvestor.com (HAI): What is Asset Allocation Parametrics and how do you work with clients?

Albert Brenner, executive managing editor, Asset Allocation Parametrics (Brenner): This company grew out of my experience in the banking and nonprofit world; in particular, with regard to endowment management. It was hard to come by professional asset allocation guidance that was independent and not linked with a commitment to place money with a particular firm or organization.

It's either hard to come by or very expensive. There are shops like Cambridge Associates that do a wonderful job for clients, but if you are an organization with a $10 million or $20 million endowment, Cambridge Associates is completely out of your budget.

I was working for a prep school with an endowment of less than $20 million. At the time, we had the endowment split among three different firms. As we looked at the combined portfolio, we saw that managers were duplicating positions in certain stocks, so we weren't getting the diversification we needed.

As we started looking for guidance on how to better manage things, I was disappointed with the suggestions we received. I hold a CFA charter and I know what sort of technical guidance they should have been bringing to the table. They weren't bringing it.

HAI: So today, if a client approaches Asset Allocation Parametrics, what do you provide?

Brenner: We started initially publishing a newsletter on a quarterly basis to try to give people an idea on how they should be optimizing their portfolio. We're making a change to publish on a Web site, as that's more efficient and fits the audience.

When we started doing the modeling for portfolios, we initially had 16 asset classes. Actually, commodities were not one of them, because we did not have the data available at that time. We subsequently got that information and now we incorporate commodities as a standard asset class in our portfolios. Our portfolio optimization runs consistently show that commodities are a very useful asset class, providing great diversification benefits.

HAI: What is the range of commodities exposure you recommend to clients?

Brenner: That depends upon their particular risk position. But, to give you an example, one of the clients we advise is an arts organization in New York City. When we ran our portfolio optimization based on their risk tolerance, our recommendation to them was that they make a 20% allocation to commodities.

That was actually a little bit more than they had a stomach for. They initially agreed to a 12% allocation, and with the strong performance of commodities, that's grown to approximately 15%. That particular position has helped that portfolio weather the market over the course of the past 10 months, and I think it'd be fair to say that the trustees of that organization are quite happy with how they've done.

HAI: Is that typical? Do institutions shy away from making large allocations to commodities?

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