Global Multi-Asset Market Portfolio

Note: This is part of a series of posts on portfolio construction that I will be publishing in the coming days. The objective of the series is to help readers understand various concepts of portfolio-allocation so that they can construct portfolios to reach their investment objectives. This is still a work-in-progress hence the posts are in no particular order.

This post draws from the paper, The Global Multi-Asset Market Portfolio, published in January 2014 by Ronald Q. Doeswijk, Chief Strategist at Robeco; Trevin W. Lam, Senior Quantitative Analyst at Rabobank,; and Laurentius (Laurens) Adrianus Petrus Swinkels of Erasmus University, Rotterdam and a Senior Researcher at Norges Bank Investment Management.

For the paper, Messrs. Doeswijk, Lam and Swinkels looked at the relative value of asset classes according to the global financial investment community. Their objective was to provide information for investors using strategic asset-allocation and adaptive-asset policies. The underlying frameworks for those policies and models are described in papers, “Global Portfolio Optimization” by Fischer Black and Robert Litterman in 1992; and “Adaptive Asset Allocation Policies” by William F. Sharpe in 2009. In subsequent posts I will analyze those and other papers.

The authors focused on the invested market portfolio of eight asset-classes in which global investors have actually invested. The data used for the analysis was derived from the leading index providers, whose indexes are often used as a benchmark for mutual funds or exchange-traded funds.

The attached pie-chart shows the weighted allocation of asset-classes in 2012.

Over the years this asset-class weight distribution varied. The general picture is that, the portfolio weight of equities have declined from 51.6% in 1990 to 36.3% in 2012. On the other hand the weight for the investment-grade credits has risen from 11.4% to 18.5%.

If we consider only the four asset classes then the change on weight over the years is as follows:

Here is how some of the national pension funds have strategically allocated assets.

And, here is the strategic allocation of some sovereign wealth funds:

In later posts I will build upon this and use this information in developing guidelines for constructing well-balanced portfolio for consistent medium-to-long-term returns.