Multi-asset strategies are the supreme discipline in investment management. Managers of these strategies consider all asset classes worldwide as part of their investment universe. For more than 20 years, multi-asset’s rise in popularity has been one of the success stories in our industry. In this post, we discuss a key challenge for multi-asset managers — accurately and plausibly benchmarking their performances — and share the latest trends on the most representative multi-asset-benchmark, the Global Capital Stock (GCS).
Multi-asset assets under management (AUM) rose from less than $2 trillion in 2003 to about $16 trillion in 2023 (FTSE Russell, 2024). These assets now represent approximately 13% of the $120 trillion global asset management industry (BCG, 2024). Momentum toward multi-asset has cooled since the COVID 19 pandemic, however. It turns out that these strategies are not only challenging to manage, but also challenging for investors to monitor.
Unlike single-asset strategies, the lack of well-curated, representative multi-asset indices makes it difficult for advisers and investors to assess how their funds compare the broader market (Vanguard, 2023). Second-tier approaches like peer group analyses lack appeal and accuracy due to incentivized self-selection biases.
Measuring the Global Capital Stock
Benchmarking multi-asset strategies was under-researched until we started in 2014 to investigate the potential of measuring the capital stock, including all financial and nonfinancial assets (Vacchino, Gadzinski, Schuller, 2016 and 2018).
Our aim was to offer a Global Market Portfolio for investors based on a measurable benchmark of the Global Capital Stock (Vacchino, Gadzinski, Schuller, 2021), including both physical and financial capital that could be traded in the market regardless of whether these assets are used or not. While the size of financial assets are publicly available, it is less trivial to determine the weights of non-financial assets.
We used data from the most reliable public international sources from 2005 onward to minimize the data precision gaps between traditional and alternative assets, thus giving a more accurate picture of the relative weights of each asset class at one point in time (Vacchino, Gadzinski, Schuller,2018).
Relevance
A reliably representative benchmark for multi-asset strategies addresses the main issue investors expressed. Timing difficulties, higher fees and related issues pose to be a derivative of having lacked such representative benchmark, prior to the availability of the Global Capital Stock measure.
Those issues need to be addressed to further strengthen the momentum of the multi-asset segment growing into a larger nominal and relative share of the global asset management industry. Due to the nature of their portfolios, multi-asset managers adhere to an advanced toolbox of assessment techniques that is needed in today’s markets to deploy capital efficiently.
Why is that so? Capital markets have become more challenging to navigate since the global financial crisis, despite numerous regulatory measures having standardized and derisked processes. Markets are, in fact, less efficient and more complex today.
Exemplarily, passive strategies, momentum trading, and short-term trading in the intersect of algorithmic trading have disrupted and delayed the price adjustment mechanism. This is particularly evident in fundamental approaches, where investment horizons have significantly lengthened before fundamental undervaluation begins to correct. Investment management has counterintuitively turned into a defensive box-ticking exercise, while explorative behavior would be required to exploit increased market inefficiency.
In parallel to this financial oxymoron, markets have seen the rise of passive investing, factor investing, and multi-asset investing over the last 20 years. The latter two aim to extract alpha from exploiting opportunity sets, with multi-asset being most flexible in utilizing passive replication and factor investing in its portfolio construction. This makes it the Swiss knife among investment management strategies, and a supreme discipline at the same time.
The Global Capital Stock in Charts
Our most recent update of the Global Capital Stock index concluded on the following nominal aggregates and relative weights by the end of 2023:
Global Capital Stock per Asset Class in Trillions of US Dollars
Global Capital Stock per Asset Class by Percentage
The Global Capital Stock in Trends
The aggregate nominal US dollar value of the GCS by the end of 2023 was $795.7 trillion, and the average annual growth rate was 4.94% from 2005 to 2023. The GCS more than doubled between 2005 and 2023. The natural diversification effect — derived from real economic growth and risk factors being causally heterogeneous on an idiosyncratic level — leads to a nominal appreciation with minimal overall volatility over time. Per asset class, the volatility can be significant. In 2008, for instance, the global stock market value halved to $32.42 trillion from $60.46 trillion in 2007.
Some recent trends can be observed:
- Equities: A Rollercoaster Ride: The global stock market capitalization has experienced significant volatility over the years. After reaching a peak of $111.16 trillion in 2021, it declined to $93.69 trillion in 2022, reflecting the impact of economic uncertainties and market corrections.
- Debt Securities: Steady Growth: Public debt securities have steadily increased from $20.34 trillion in 2005 to $68.02 trillion in 2022, indicating a growing appetite for fixed-income investments. Similarly, financial institutions bonds and non-financial corporate bonds have also experienced consistent growth, reaching $46.55 trillion and $18.65 trillion, respectively, in 2022. The growth in public debt is marked by significant regional disparities. Public debt in developing countries is rising at twice the rate of that in developed countries.
- Cash and Liquidity: Surge in Uncertainty: The data show a significant increase in cash holdings, from $13.14 trillion in 2005 to $56.78 trillion in 2022. The change in the definition of M1 in May 2020 to include savings accounts, given their increased liquidity, may have also contributed to the observed increase in cash holdings. This suggests that the surge in cash holdings is not solely due to investor uncertainty, but also reflects a change in the way cash and liquid assets are measured.
- Real Assets: Gaining Prominence: The private equity and real estate sectors have experienced substantial 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 alternative investments as investors seek to diversify their portfolios and potentially achieve higher returns. However, private markets declined 22% year-over-year to $1.0 trillion in 2023, marking the sector’s lowest AUM since 2017.
Multi-Asset Implications
The observed trends in global financial asset allocation have several implications for investors:
- Diversification is Key: The volatility in the equity markets and the steady growth in debt securities and alternative investments underscore the importance of maintaining a well-diversified portfolio to mitigate risk and capture potential opportunities.
- Liquidity Management: The surge in cash holdings suggests that investors are prioritizing liquidity and capital preservation, which may be a prudent strategy in the face of market uncertainties.
- Alternative Investments: The increasing prominence of alternative investments like private equity and real estate highlights the need for investors to consider expanding their investment horizons beyond traditional asset classes. Private markets continue to offer diversification opportunities, with institutional investors allocating 27% of their portfolios to private assets as of early 2023, up from 17% a decade ago.
- Continuous Monitoring: The dynamic nature of the global financial landscape requires investors to continuously monitor and adapt their investment strategies to capitalize on emerging trends and mitigate potential risks.
Key Takeaway
Incorporating the GCS as a benchmark provides multi-asset managers a reliable, data-driven foundation for constructing portfolios that are not only diversified but also aligned with global economic trends. It enables multi-asset managers to evaluate asset classes comprehensively and allocate strategically across sectors and regions.
Multi-asset strategies are the supreme discipline in investment management. Managers of these strategies consider all asset classes worldwide as part of their investment universe. For more than 20 years, multi-asset’s rise in popularity has been one of the success stories in our industry. In this post, we discuss a key challenge for multi-asset managers — accurately and plausibly benchmarking their performances — and share the latest trends on the most representative multi-asset-benchmark, the Global Capital Stock (GCS).
Multi-asset assets under management (AUM) rose from less than $2 trillion in 2003 to about $16 trillion in 2023 (FTSE Russell, 2024). These assets now represent approximately 13% of the $120 trillion global asset management industry (BCG, 2024). Momentum toward multi-asset has cooled since the COVID 19 pandemic, however. It turns out that these strategies are not only challenging to manage, but also challenging for investors to monitor.
Unlike single-asset strategies, the lack of well-curated, representative multi-asset indices makes it difficult for advisers and investors to assess how their funds compare the broader market (Vanguard, 2023). Second-tier approaches like peer group analyses lack appeal and accuracy due to incentivized self-selection biases.
Measuring the Global Capital Stock
Benchmarking multi-asset strategies was under-researched until we started in 2014 to investigate the potential of measuring the capital stock, including all financial and nonfinancial assets (Vacchino, Gadzinski, Schuller, 2016 and 2018).
Our aim was to offer a Global Market Portfolio for investors based on a measurable benchmark of the Global Capital Stock (Vacchino, Gadzinski, Schuller, 2021), including both physical and financial capital that could be traded in the market regardless of whether these assets are used or not. While the size of financial assets are publicly available, it is less trivial to determine the weights of non-financial assets.
We used data from the most reliable public international sources from 2005 onward to minimize the data precision gaps between traditional and alternative assets, thus giving a more accurate picture of the relative weights of each asset class at one point in time (Vacchino, Gadzinski, Schuller,2018).
Relevance
A reliably representative benchmark for multi-asset strategies addresses the main issue investors expressed. Timing difficulties, higher fees and related issues pose to be a derivative of having lacked such representative benchmark, prior to the availability of the Global Capital Stock measure.
Those issues need to be addressed to further strengthen the momentum of the multi-asset segment growing into a larger nominal and relative share of the global asset management industry. Due to the nature of their portfolios, multi-asset managers adhere to an advanced toolbox of assessment techniques that is needed in today’s markets to deploy capital efficiently.
Why is that so? Capital markets have become more challenging to navigate since the global financial crisis, despite numerous regulatory measures having standardized and derisked processes. Markets are, in fact, less efficient and more complex today.
Exemplarily, passive strategies, momentum trading, and short-term trading in the intersect of algorithmic trading have disrupted and delayed the price adjustment mechanism. This is particularly evident in fundamental approaches, where investment horizons have significantly lengthened before fundamental undervaluation begins to correct. Investment management has counterintuitively turned into a defensive box-ticking exercise, while explorative behavior would be required to exploit increased market inefficiency.
In parallel to this financial oxymoron, markets have seen the rise of passive investing, factor investing, and multi-asset investing over the last 20 years. The latter two aim to extract alpha from exploiting opportunity sets, with multi-asset being most flexible in utilizing passive replication and factor investing in its portfolio construction. This makes it the Swiss knife among investment management strategies, and a supreme discipline at the same time.
The Global Capital Stock in Charts
Our most recent update of the Global Capital Stock index concluded on the following nominal aggregates and relative weights by the end of 2023:
Global Capital Stock per Asset Class in Trillions of US Dollars
Global Capital Stock per Asset Class by Percentage
The Global Capital Stock in Trends
The aggregate nominal US dollar value of the GCS by the end of 2023 was $795.7 trillion, and the average annual growth rate was 4.94% from 2005 to 2023. The GCS more than doubled between 2005 and 2023. The natural diversification effect — derived from real economic growth and risk factors being causally heterogeneous on an idiosyncratic level — leads to a nominal appreciation with minimal overall volatility over time. Per asset class, the volatility can be significant. In 2008, for instance, the global stock market value halved to $32.42 trillion from $60.46 trillion in 2007.
Some recent trends can be observed:
- Equities: A Rollercoaster Ride: The global stock market capitalization has experienced significant volatility over the years. After reaching a peak of $111.16 trillion in 2021, it declined to $93.69 trillion in 2022, reflecting the impact of economic uncertainties and market corrections.
- Debt Securities: Steady Growth: Public debt securities have steadily increased from $20.34 trillion in 2005 to $68.02 trillion in 2022, indicating a growing appetite for fixed-income investments. Similarly, financial institutions bonds and non-financial corporate bonds have also experienced consistent growth, reaching $46.55 trillion and $18.65 trillion, respectively, in 2022. The growth in public debt is marked by significant regional disparities. Public debt in developing countries is rising at twice the rate of that in developed countries.
- Cash and Liquidity: Surge in Uncertainty: The data show a significant increase in cash holdings, from $13.14 trillion in 2005 to $56.78 trillion in 2022. The change in the definition of M1 in May 2020 to include savings accounts, given their increased liquidity, may have also contributed to the observed increase in cash holdings. This suggests that the surge in cash holdings is not solely due to investor uncertainty, but also reflects a change in the way cash and liquid assets are measured.
- Real Assets: Gaining Prominence: The private equity and real estate sectors have experienced substantial 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 alternative investments as investors seek to diversify their portfolios and potentially achieve higher returns. However, private markets declined 22% year-over-year to $1.0 trillion in 2023, marking the sector’s lowest AUM since 2017.
Multi-Asset Implications
The observed trends in global financial asset allocation have several implications for investors:
- Diversification is Key: The volatility in the equity markets and the steady growth in debt securities and alternative investments underscore the importance of maintaining a well-diversified portfolio to mitigate risk and capture potential opportunities.
- Liquidity Management: The surge in cash holdings suggests that investors are prioritizing liquidity and capital preservation, which may be a prudent strategy in the face of market uncertainties.
- Alternative Investments: The increasing prominence of alternative investments like private equity and real estate highlights the need for investors to consider expanding their investment horizons beyond traditional asset classes. Private markets continue to offer diversification opportunities, with institutional investors allocating 27% of their portfolios to private assets as of early 2023, up from 17% a decade ago.
- Continuous Monitoring: The dynamic nature of the global financial landscape requires investors to continuously monitor and adapt their investment strategies to capitalize on emerging trends and mitigate potential risks.
Key Takeaway
Incorporating the GCS as a benchmark provides multi-asset managers a reliable, data-driven foundation for constructing portfolios that are not only diversified but also aligned with global economic trends. It enables multi-asset managers to evaluate asset classes comprehensively and allocate strategically across sectors and regions.
