Multi-asset strategies are the supreme discipline in investment management. Managers of those strategies consider all asset classes worldwide as a part of their investment universe. For greater than 20 years, the increasing popularity of multi-asset has been one among our industry’s success stories. In this post, we discuss a key challenge for multi-asset managers – accurately and plausibly benchmarking their performance – and share the newest trends in essentially the most representative multi-asset benchmark, the Global Capital Stock (GCS).
Multi-asset assets under management (AUM) increased from lower than $2 trillion in 2003 to roughly $16 trillion in 2023 (FTSE Russell, 2024). These assets now account for about 13% of the $120 trillion global asset management industry (BCG, 2024). However, momentum towards multi-asset has cooled because the COVID-19 pandemic. It seems that these strategies are usually not only difficult to administer, but additionally difficult for investors to observe.
Unlike single-asset strategies, the dearth of well-curated, representative multi-asset indices makes it difficult for advisors and investors to evaluate how their funds compare to the broader market (Avant-Garde, 2023). Secondary approaches reminiscent of peer group evaluation are neither attractive nor accurate resulting from self-selection incentives.
Measuring the worldwide capital stock
Benchmarking multi-asset strategies was under-researched until 2014 once we began exploring the potential of measuring capital stock, including all financial and non-financial assets (Vacchino, Gadzinski, Schuller, 2016 And 2018).
Our goal was to supply investors a world market portfolio based on a measurable benchmark of the worldwide capital stock (Vacchino, Gadzinski, Schuller, 2021), including physical and financial capital that could possibly be traded available in the market, whether or not these assets are used. While the scale of monetary assets is publicly available, determining the weights of non-financial assets is less trivial.
We used data from essentially the most reliable public international sources starting in 2005 to attenuate the gaps in data accuracy between traditional and alternative assets, thereby providing a more accurate picture of the relative weights of every asset class at a given cut-off date (Vacchino, Gadzinski, Schuller, 2018).
relevance
A reliably representative benchmark for multi-asset strategies addresses investors’ key concerns. Timing difficulties, higher fees and related issues could be attributed to the dearth of such a representative benchmark prior to the provision of the Global Capital Stock measure.
These issues should be addressed to further strengthen the momentum of the multi-asset segment, which is growing right into a larger nominal and relative share of the worldwide asset management industry. Due to the character of their portfolios, multi-asset managers utilize a sophisticated suite of valuation techniques required for efficient capital deployment in today’s markets.
Why is that? Since the worldwide financial crisis, capital markets have grow to be harder to navigate, although quite a few regulatory measures have resulted in standardized and low-risk processes. In fact, markets today are less efficient and more complex.
For example, passive strategies, momentum trading and short-term trading on the intersection of algorithmic trading have disrupted and delayed the worth adjustment mechanism. This is especially evident in fundamental approaches where the investment horizon has lengthened significantly before the elemental undervaluation begins to correct. Investment management has counterintuitively grow to be a defensive exercise in box-ticking, while exploratory behavior could be required to take advantage of increasing market inefficiencies.
In parallel with this financial oxymoron, markets have seen an increase in passive investing, factor investing and multi-asset investing over the past 20 years. The latter two aim to generate alpha by exploiting opportunities, with multi-asset investing being most flexible when using passive replication and factor investing in portfolio construction. This makes it the Swiss knife amongst investment management strategies and at the identical time a supreme discipline.
The global capital stock in diagrams
Our recent Global Capital Stock Index update concluded that by the top of 2023 the next nominal aggregates and relative weights can be in place:
Global capital stock per asset class in trillions of US dollars
Global capital stock per asset class in percent
The global capital stock in trends
The total nominal U.S. dollar value of the GCS was $795.7 trillion by the top of 2023, and the compound annual growth rate was 4.94% from 2005 to 2023. The GCS greater than doubled between 2005 and 2023. The Natural Diversification Effect – Derived from Real Value When economic growth and risk aspects are causally heterogeneous on the idiosyncratic level, this leads to nominal appreciation with minimal overall volatility over time. Depending on the asset class, volatility could be significant. In 2008, for instance, the worldwide stock market value halved from $60.46 trillion in 2007 to $32.42 trillion.
Some current trends could be observed:
- Stocks: A Roller Coaster Ride: Global stock market capitalization has experienced significant fluctuations over time. After reaching a peak of $111.16 trillion in 2021, it fell to $93.69 trillion in 2022, reflecting the impact of economic uncertainties and market corrections.
- Debt securities: Steady growth: Public debt has increased steadily, from $20.34 trillion in 2005 to $68.02 trillion in 2022, indicating growing demand for fixed income investments. Bonds issued by financial institutions and non-financial corporations also recorded regular growth, reaching $46.55 trillion and $18.65 trillion, respectively, in 2022. The growth of public debt is characterised by significant regional differences. Public debt in developing countries is increasing twice as high as in industrialized countries.
- Cash and Liquidity: Increase in Uncertainty: The data shows a major increase in money holdings, from $13.14 trillion in 2005 to $56.78 trillion in 2022. Changing the definition of M1 in May 2020 to incorporate savings accounts given their increased liquidity , may have contributed to the observed increase in money holdings. This suggests that the rise in money holdings will not be only resulting from investor uncertainty, but additionally reflects a change in the best way money and liquid assets are measured.
- Tangible assets: gaining in importance: The private equity and real estate sector experienced significant growth, with private equity assets reaching $194.31 trillion and real estate assets reaching $130.27 trillion in 2022. This trend highlights the increasing popularity of different investments as investors look to diversify their portfolios and potentially achieve higher returns. However, private markets declined 22% YoY to $1.0 trillion in 2023, representing the sector’s lowest AUM since 2017.
Impact on multiple assets
The observed trends in global asset allocation have several implications for investors:
- Diversification is vital: Volatility in equity markets and regular growth in debt and alternative investments highlight the importance of maintaining a well-diversified portfolio to mitigate risks and capitalize on potential opportunities.
- Liquidity management: The increase in money holdings suggests investors are prioritizing liquidity and capital preservation, which could possibly be a prudent strategy given market uncertainties.
- Alternative investments: The increasing importance of different investments reminiscent of private equity and real estate highlights the necessity for investors to contemplate expanding their investment horizons beyond traditional asset classes. Private markets proceed to supply diversification opportunities, with institutional investors making allocations 27% of their portfolio on private assets as of early 2023, up from 17% a decade ago.
- Continuous monitoring: Due to the dynamic nature of the worldwide financial landscape, investors must continually monitor and adjust their investment strategies to reap the benefits of emerging trends and mitigate potential risks.
Key to remove
Incorporating the GCS as a benchmark provides multi-asset managers with a reliable, data-driven foundation for constructing portfolios that are usually not only diversified but additionally aligned with global economic trends. It enables multi-asset managers to comprehensively assess asset classes and allocate strategically across sectors and regions.
