The Global Market Portfolio

Two years after the global capital stock report of Gadzinski, Schuller, and Vacchino (2018) and 36 years after the world market wealth portfolio of Ibbotson, Siegel, and Love (1985), investors still lack a global composite portfolio benchmark that includes a broad spectrum of assets with weights in line with a fair representation of the stock of capital for each asset class. Despite ample evidence of the substantial use of alternatives and real assets in institutional portfolios, the authors argue that existing academic and practitioner attempts are still unable to provide a satisfactory approximation of the “true” global market portfolio. The authors fill this gap and provide two benchmarks: one for retail investors constrained by liquidity needs and one for institutional investors with access to illiquid assets. TOPICS:Portfolio construction, real assets/alternative investments/private equity, global markets, performance measurement Key Findings ▪ The authors provide two global market portfolio benchmarks, for retail and institutional investors, based on a measurable global capital stock, which includes 87 existing indices within 11 asset classes. ▪ Their investable global market portfolio is built with ETFs only and is therefore transparent and systematic. The total return index realizes a compounded annual average return of 4.7%, with a standard deviation of 10.1% during the period 2005 Q1–2020 Q2. ▪ Their noninvestable global market portfolio realizes a compounded average return of 5.9%, with a standard deviation of 6.3% and a maximum cumulative drawdown of 20%. Thanks to a better allocation of resources toward real assets, diversification is then achieved and makes their total return index an efficient long-term portfolio benchmark.