The Global Multi-Asset Market Portfolio

...

- For Private equity: they were based on other authors results to value the private equity before and after 2000 knowing that the date was not exact.

- For Real estate: they distinguished commercial and residential real estate which would be much bigger than the commercial market. They focused on commercial real estate only in their study.

- For High-yield bonds: They used a market capitalization of an index available from 2000 onwards

- For Emerging –market debt: here, they sum the JP Morgan Government Bond Index Emerging Global Composite for local and external (hard) currency debt, the JP Morgan Corporate for USD-denominated emerging market corporate bonds and an inflation linked index for inflation linked bonds.

After conducting many studies, they found out that for most of their estimation of the market capitalization of the asset classes were in line with the findings of other authors when it comes to data which was not available.

They had a static estimation of the global multi-asset market portfolio for 2012. Therefore, they had an insight into the dynamics of the market portfolio showing the volatility of historical asset-class weights. This could be helpful in determining the investor strategic asset weights.

- The global market portfolio 1990- 2012

In this section, the authors documented the market portfolio for the 8 asset classes during the period from 1990 to 2012.

Here, they collected the data for all 8 asset classes. They discovered that they should go back further in time to have less difficulties constructing market capitalizations from standard data sources. However, they faced a challenge when it comes to index providers that did not cover as many assets historically as they do today, because of the lower investability of some asset classes. The historical market portfolio weights might be biased or not if there was an assumption that the coverage by data sources grows at the same rate.

However, since index providers tended to put more effort into covering the market as benchmarks gained importance during the sample period, it seems reasonable to suppose that all asset classes are subject to an increased coverage.

- The global market portfolio 1959 – 2012

The authors determined the global market portfolio for the 54-year period 1959-2012 for the four main asset categories - equities, real estate, non-government bonds and government bonds.

[pic 6]

Here, they included high-yield bonds and investment-grade credits in the category non-government bonds. Private equity is not included in this analysis. They used capitalizations data to show how the international financial markets developed from 1959 to 1984. They used US estimates for business real estate from other publications to derive their global estimate of the market capitalization of invested commercial real estate as there were no data available back then.

On balance, the other three main asset categories are subject to a smaller change in portfolio weight during the sample period than equities. Also, their current weightings are closer to the period average than equities.

At an aggregated level, all financial investors hold the market portfolio. The authors showed that pension funds have an allocation to equities that is a little above the market portfolio. The sovereign wealth funds in their sample tend to allocate more to equities while endowments allocate more to alternative assets than is warranted by their weights in the market portfolio. Their allocation to bonds falls short of the market portfolio’s weight of bonds.

To sum up:

- The invested market portfolio represents the views of the market crowd with respect to the pricing and value of all asset classes ➔ it represents a suitable benchmark for the strategic asset allocation of investors.

- They were based on the Black Litterman Framework. While this model is well-suited to portfolio construction in the context of active asset allocation decisions, it suffers from an important limitation, namely that it is based on the Markowitz model, where volatility is used as the definition of risk.

---------------------------------------------------------------