Pimco's El-Erian: Hold Cash, Keep Options Open

Monday, 15 Mar 2010 11:41 AM

Investors should be holding healthy levels of cash in order to take advantage of "known unknowns" that become clearer as the economy evolves, Pimco's Mohamed El-Erian told CNBC.

"The mindset is critical," he said, for investors who need to understand that the environment has changed in terms of government policy adjustments and cyclical events that influence markets.

Those cyclical moves are important to note for how they perform within the larger structural environment of financial markets, said El-Erian, co-CEO of the world's largest bond fund.

"There are cyclical tailwinds for now that are going to overcome the structural headwinds," he said.

"You construct a portfolio and more importantly you retain optionality," which said should entail "cash for very high-quality holdings that allow you to reposition as the future gets clearer."

The ability to react to events could be critical for investors who are used to things happening in a more predictable fashion.

"This is a wonderful time to be an active manager, with all these things moving," El-Erian said. "We are in the midst of a paradigm shift where things happen but they don't happen in the linear fashion that everyone wants them to happen."

In contrast, he said the Federal Reserve is likely to stay in a holding pattern when it meets this week to put together its own strategy to manage monetary policy.

"They're not going to do anything dramatic because they want to see how the tug of war between the cyclical tailwinds and structural headwinds plays out," he said.

El-Erian said he expects to see "a multi-speed world" where "part of the world is going to grow and grow robustly. There's going to be another part, the US and UK, that is going to have difficulty once all the stimulus and inventory cycle goes through."

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