In the world of investment management, multi-asset strategies stand out as a gold standard. These strategies consider every asset class around the globe within their investment framework. Over the past two decades, they’ve become incredibly popular, marking a significant triumph in the investment industry. Today, we’re diving into a major challenge facing multi-asset managers—how to benchmark their successes accurately and reasonably. We’ll also take a look at the latest developments regarding the widely recognized multi-asset benchmark, the Global Capital Stock (GCS).
The amount managed under multi-asset strategies has seen a meteoric rise, going from under $2 trillion back in 2003 to a staggering $16 trillion by 2023, according to FTSE Russell’s 2024 report. This now makes up about 13% of the $120 trillion global asset management industry, per BCG’s 2024 data. However, since the COVID-19 pandemic, the momentum behind these strategies has slowed. It’s not just because managing them is tough—the challenge extends to investors, who find it difficult to keep track of their investments.
Unlike single-asset strategies, where clear, reliable indices exist, multi-asset strategies lack such benchmarks. This makes it tricky for advisors and investors to really see how their funds stack up against the broader market. Peer group analyses, while an alternative, often fall short due to biases that skew the assessment.
Understanding the Global Capital Stock
Research into properly benchmarking multi-asset strategies didn’t really get off the ground until 2014. That’s when we began exploring the potential of assessing capital stock, which includes both financial and non-financial assets (Vacchino, Gadzinski, Schuller, 2016 and 2018).
The goal was to create a Global Market Portfolio that investors could rely on, benchmarked against the Global Capital Stock (Vacchino, Gadzinski, Schuller, 2021). This portfolio would include all types of capital, both physical and financial, that could be traded. While data on financial assets is readily available, figuring out the weights of non-financial assets is less straightforward.
From 2005 onward, we gathered data from the most reputable public international sources to minimize gaps in data precision between traditional and alternative assets. This effort aims to provide a clearer snapshot of the relative weights of each asset class at any given time (Vacchino, Gadzinski, Schuller, 2018).
Importance of Reliable Benchmarks
The introduction of a credible benchmark for multi-asset strategies is addressing one of the main concerns investors have had. Timing issues, higher fees, and related challenges often stemmed from not having a representative benchmark like the Global Capital Stock before its availability.
To build upon the multi-asset segment’s success and expand its influence within the global asset management industry, these issues must be tackled. Given the complexity of their portfolios, multi-asset managers utilize a sophisticated set of assessment tools required for today’s efficient capital deployment.
Why is this complexity crucial? Since the global financial crisis, despite standardizing and reducing risks through numerous regulatory measures, capital markets have become harder to navigate. They are less efficient and more intricate.
The influx of passive strategies, momentum trading, and short-term algorithmic trading have disrupted the price adjustment process. This is particularly noticeable in fundamental approaches, where the investment horizon must now extend further before seeing corrections in fundamental undervaluation. Paradoxically, investment management has veered towards a defensive checklist, whereas exploiting increased inefficiencies in the market would require a more exploratory approach.
Alongside this financial contradiction, we’ve witnessed the rise of passive investing, factor investing, and multi-asset investing over the last 20 years. The latter two, namely, are aimed at extracting alpha from various opportunities, with multi-asset strategies being exceptionally versatile—an investment manager’s Swiss knife if you will.
The Global Capital Stock: Breaking it Down
Our recent updates on the Global Capital Stock index reveal notable figures and trends by the end of 2023.
Global Capital Stock by Asset Class – A Broad Overview
The GCS valued in nominal US dollars surpassed $795.7 trillion by late 2023, reflecting an average annual growth rate of 4.94% from 2005 to 2023. From 2005 to 2023, the GCS more than doubled. This growth is largely driven by natural diversification, resulting from real economic expansion and diverse risk factors. While the overall volatility remains low over time, individual asset classes can experience significant fluctuations. Case in point: the global stock market value halved in 2008, dropping to $32.42 trillion from $60.46 trillion in 2007.
Here’s what recent trends show:
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Equities: Tops and Turns: The stock market faces significant ups and downs. It hit a high of $111.16 trillion in 2021, only to drop to $93.69 trillion in 2022 under the weight of economic uncertainties and market corrections.
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Debt Securities: Stability Prevails: Public debt securities have climbed steadily from $20.34 trillion in 2005 to $68.02 trillion in 2022, showcasing an increasing preference for fixed-income investments. Bonds from financial institutions and non-financial corporate bodies have also grown steadily, reaching $46.55 trillion and $18.65 trillion, respectively, in 2022, with notable regional growth disparities.
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Cash and Liquidity: Riding the Wave of Uncertainty: Cash holdings soared from $13.14 trillion in 2005 to $56.78 trillion in 2022. The redefinition of M1 in May 2020 to include savings accounts could also explain this increase. It implies that this spike isn’t just about investor uncertainties, but also about how cash and liquid assets are now defined.
- Real Assets: Gaining Traction: The sectors of private equity and real estate have shown remarkable growth, with private equity assets hitting $194.31 trillion and real estate reaching $130.27 trillion by 2022. This rise underscores the growing appeal of alternative investments as investors look to diversify and seek potentially higher returns. Yet, private markets saw a 22% decline, down to $1.0 trillion in 2023, the sector’s lowest since 2017.
Implications for Multi-Asset Strategies
The shifts in global financial asset allocations reveal several insights for investors:
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Diversification is Essential: With equity markets being volatile and steady growth seen in debt securities and alternative investments, it’s crucial to maintain a diversified portfolio to manage risk and seize opportunities.
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Liquidity Matters: The hike in cash holdings indicates a focus on liquidity and safeguarding capital—wise moves amid market uncertainties.
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Broaden Your Investment Scope: The rise of alternative investments like private equity and real estate signals a vital need for investors to consider expanding beyond traditional assets. The appeal of private markets continues, with institutional investors allocating 27% of their portfolios to private assets by early 2023, up from 17% a decade prior.
- Keep a Vigilant Eye: With the ever-changing global financial landscape, investors must constantly review and tweak their strategies to harness new opportunities and sidestep risks.
Takeaway Message
Utilizing the GCS as a benchmark equips multi-asset managers with a dependable, data-centric foundation to build diversified portfolios in sync with worldwide economic trends. This enables them to thoroughly assess various asset classes and make strategic allocations across different sectors and regions.
