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Topic of the month Septemeber 2018: Benchmarking Multi-Asset Portfolios

Multi-asset investing is nothing new.
William Sharpe first postulated that the market portfolio was the natural starting point in portfolio construction back in 1964. The balanced portfolio, which held fixed proportions of bonds and equities, was another antecedent to today’s multi-asset portfolio.

The Relevance
With increased global access to various asset classes, multi-asset investing has entered the mainstream for certain second generation asset allocation methods — for multi-factor/multi-period models. Constructing optimally diversified multi-asset portfolios is all the more critical for investors who follow the principles of such third generation asset allocation methods as adaptive asset allocation or adaptive risk management techniques.
Multi-asset investing’s growing popularity reflects these preferences: About 16,000 multi-asset funds are offered in Europe alone (Q2-18).

The Challenge
Many institutions have policy guidelines based on their investment managers’ preferences and expectations about the risks and returns associated with each asset class. Other institutional investors run peer-group comparisons with similar multi-asset managers or measure their portfolios against broadly defined total return indices.
But these are only non-representative work-arounds. No policy portfolio benchmark did exist against which investors can measure their multi-asset investment strategy. Until now.

A Solution
A hypothetical global index purist could simply buy all of the outstanding assets in the world. The resulting global market portfolio would include all risky assets in proportion to their market capitalization. The purist could then use this as a benchmark to compare strategies.

The Solution - The Global Capital Stock
For the first time, together with OECD and BIS economists, we developed a measure of the capital stock that consists of quantifiable financial and non-financial assets. We calculated the global market value of 11 asset classes from 2005 to 2015 as our proxy for the global market portfolio. The world’s global capital stock reached $512 trillion in 2015, down from $517 trillion in 2014. The largest component? Debt, at $194 trillion, which grew without interruption until 2014. Non-financial corporate bonds showed the largest increase in 10 years. The following charts depicts the global capital stock per asset class during the decade in question in trillions of US dollars and as a percentage.




General Applications

#Asset Owner
•Monitor multi-asset managers by benchmarking their holdings against the global capital stock components, and then discovering appreciated or unrecognized drifts.
• Achieve a comprehensive understanding of the performance attribution of multi-asset strategies.
• Construct portfolios with the global capital stock as the initial point of reference.

#Asset Manager
• Investment decision making (factor allocation)
• Risk management (style drift, concentration risk)
• Marketing and branding

Concrete Application - The Cube
Think causal, act empowered.
The cube enables asset owners and manager to compare their multi-asset portfolios against three dimensions of the global capital stock: asset classes, geographies and strategies
You liked the Morningstar matrix, you will love the cube.




About Markus Schuller

Markus is the founder and managing partner of Panthera Solutions.
As Investment Decision Architects ™, Panthera optimizes the choice architecture of professional investors through applied behavioral
finance methods. Empowering the decision makers towards comparative advantages in capital markets remains the ultimate
goal. The Panthera intervention toolbox has proven to be equally effective and innovative.

As adjunct professor, Markus teaches courses like „Adaptive Risk Management“, „Investment Banking“ and „Asset Allocation for
Practitioners“ at renowned Master in Finance programs of the EDHEC Business School and the International University of Monaco.
Markus publishes in academic top journals (i.e. Journal of Portfolio Management, 2018), writes articles for professional journals (i.e.
CFA Institute, OECD Insights, etc.) and holds keynotes at international investment conferences.

In short, as investment banker, adjunct professor and author, Markus looks back at 18 rewarding years of trading, structuring, and
managing standard and alternative investment products. Prior to founding Panthera Solutions, he worked in executive roles for a
long/short equity hedge fund for which he developed the trading algorithm. Markus started his career working as equity trader,
derivatives trader and macro analyst for different banks.

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