The Global Multi-Asset Market Portfolio, 1959-2012

Global Multi-Asset Market Portfolio 1

The Global Multi-Asset Market Portfolio, 1959-2012 by Ronald Doeswijk, Trevin Lam, CFA, and Laurens Swinkels, CFA Institute.


The market portfolio contains important information for purposes of strategic asset allocation. One could consider it a natural benchmark for investors. The authors composed the invested global multi-asset market portfolio for 1990–2012 by estimating the market capitalization for equities, private equity, real estate, high-yield bonds, emerging-market debt, investment-grade credits, government bonds, and inflation-linked bonds. They also used an expanded period (1959–2012) for the main asset categories: equities, real estate, nongovernment bonds, and government bonds.

The Global Multi-Asset Market Portfolio, 1959-2012 – Introduction

Our study contributes to the literature by documenting the invested global multi-asset market portfolio. This portfolio is the aggregate portfolio of all investors, in which portfolio weights indicate the constitution of the average portfolio. It contains important information because it represents the views of the global financial investment community with respect to the pricing of each asset class. Hence, it can serve as a benchmark for investors’ strategic asset allocations. As Sharpe (2010) advocated, the market portfolio can also be used as a starting point for portfolio construction.

The asset allocation framework of Black and Litterman (1992) affords an important application of the global multi-asset market portfolio. Practitioners who use this framework need the market portfolio to derive the expected returns-implicitly priced in by all market participants-by reverse-engineering the mean–variance optimization problem. In the next step, investors can express their own views and corresponding uncertainty in determining their optimal asset allocations. In addition, investors who follow tactical asset allocation strategies might use large deviations from long-term average market portfolio weights as a valuation indicator. But aside from these practical considerations, the market portfolio is also interesting from a theoretical perspective.

The capital asset pricing model (CAPM) states that each investor should invest in exactly the same portfolio of risky assets—the market portfolio. How much is invested in the market portfolio depends on the amount of risk an investor is prepared to take. The CAPM is frequently used in modern-day finance to advocate passive index investing (see Goltz and Le Sourd 2011). An important application of our study is to determine the strategic asset allocation weights of a CAPM investor who targets investing according to market capitalizations. As Rudd and Rosenberg (1980) showed, constructing an invested market index is useful in an asset management environment; indeed, that was the aim
of our study, in which we documented the global invested multi-asset market portfolio.1 None of this is to imply that the market portfolio has been  the optimal portfolio in practice. Asness, Frazzini, and Pedersen (2012) demonstrated that, assuming leverage aversion, the tangency portfolio formed on the basis of risk parity between asset classes leads to a higher risk-adjusted return than does the market portfolio.

In our study, we used eight established asset classes: equities, private equity, listed and unlisted real estate, high-yield bonds, emerging-market debt, investment-grade credits, government bonds, and inflation-linked bonds.2 Investors have easy access to these asset classes through mutual funds or index funds. In addition to estimating the world market portfolio for the end of 2012, we tracked the market portfolio for the eight asset classes over 1990–2012. For the four main asset classes-equities, real estate, nongovernment bonds, and government bonds—we expanded the period to 1959. To our knowledge, we are the first to have documented the global market portfolio at these levels of detail over such a long period.

We focused on the invested market portfolio, which contains all assets in which financial investors have actually invested. So, for example, we excluded durable consumption goods, human capital, private housing, and family businesses. The presence of an asset in the benchmark of leading index providers is generally an important criterion. We focused on the invested portfolio because we tried to assess the aggregate portfolio of all financial investors, which can serve as a reference for purposes of strategic asset allocation. Our study differs from others (e.g., Ibbotson and Siegel 1983; Ibbotson, Siegel, and Love 1985; Roxburgh, Lund, and Piotrowski 2011) in that we included publicly available financial assets only.

See full article by CFA Institute.

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