The Global Market Portfolio

By: S.G. Lacey

One of the simplest investment approaches is to purchase a single offering that mimics the entire global marketplace.  While debates can be had about country weights, asset classes, and market size, if one anticipates that in the future economies around the world will continue to grow and develop, then having an investment holding that has the full breadth of global exposure makes sense.

The “Global Market Portfolio” (GMP) represents a collection of all investable assets throughout the world, proportionally weighted by total market capitalization.

While this description seems wordy, it essentially means owing a piece of every segment of the global economy, and ideally capturing changing trends in asset class values as the world’s financial markets shift.  Below is a pie chart of the GMP compiled in a research paper by Doeswijk, Lam, and Swinkels titled “Historical Returns of the Market Portfolio” from 2012 which, surprisingly, still represents the most current data set in this area.

Nov1

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2978509

As shown, the GMP covers a wide breadth of investable, and typically uncorrelated, asset classes: equities (public and private), fixed income (government, corporate, emerging, high-yield, TIPs), and real estate (listed and unlisted).  A few other categories which are notably missing from this breakdown are commodities, currencies, and cash; these can also be considered part of the total investable landscape.

Each of these components represents a discrete piece of the overall total global marketplace and has the ability to change in value on both a relative and absolute basis depending on a variety of economic factors.  The graph below from the same Doeswijk et al. paper shows the wide fluctuation in returns of the four largest global asset classes dating back to 1959, along with the corresponding GMP composite return.

Nov2

In addition to broadening asset class holdings, country diversification is another benefit of the GMP approach.  Regardless of the exact asset percentage breakdown, including holdings from around the world is important for achieving uncorrelated returns as regional economies can diverge over time.

The chart below from “Triumph of the Optimists” by Dimson, Marsh, and Staunton highlights the cyclical boom and bust of certain countries’ markets; this is a great read for those with further interested in historical investing trends.

Nov3

https://www.credit-suisse.com/media/assets/corporate/docs/about-us/media/media-release/2018/02/giry-summary-2018.pdf

Assuming the GMP is accepted as a reasonable investing thesis, the next question is how to construct a portfolio to simulate its returns.

The GMP can be closely replicated with 4 ETFs (US & Foreign / Bonds & Stocks) of roughly 25% each; these offerings are readily available from any of the major online brokerage firms.  This portfolio holds 50% bonds, but has a large high yield component (low-grade corporate and emerging debt) which can make such an approach riskier than it seems at first glance.

Branching out from this simplified, 4 holding, equal weight tactic, the makeup of a diversified ETF portfolio can be fine tuned as desired.  Matt Hogan puts out an annual summary which is a slightly US-bias version of the GMP: 6 holdings of varying weights which currently comes out to a staggeringly low expense ratio of 0.05%.  Feel free to visit the link below for more details on this ETF strategy.

http://www.etf.com/sections/blog/worlds-lowest-cost-portfolio-hits-005-fee?nopaging=1

While these multiple ETF approaches are effective at closely replicating the GMP, they require multiple transactions to get going.  Also, such an approach may necessitate at least annual rebalancing as the relative percentage of each holding grows or shrinks, though this methodology goes counterintuitive to the GMP strategy of providing direct investment in the world’s entire, fluid, financial landscape.

As a result, there’s a real benefit to examining a single investment which replicates the GMP closely.  These one-stop-shop ETF offerings can be of particular interest to investors looking to dollar cost average their money over time, likely contributing a set amount from each paycheck.

One of the main benefits of using a single holding is that it helps avoid knee jerk reactions.  At any given point, some asset classes around the world are thriving while others languish; the US vs. Emerging Market stock indices are a good example of this phenomenon currently.  In such turbulent times, having a balanced and diversified position makes a lot of sense for the skittish investor.

The table below shows a comparison of some of the top GMP ETFs (plus a Vanguard mutual fund baseline), with the ticker symbol listed first, then several other parameters that are of particular interest to this investment style.

Nov4

The following are a few key findings from this Global Market Portfolio ETF screen.

  • Considering this simplified investment approach is likely most prudent for a passive, long term investor, the expense ratio and other associated fees with taking such a position should be a significant consideration.
  • The amount of US-bias and the overall relationship between stocks, bonds, and real assets are two dials which can be adjusted based on each investor’s location, time horizon, and economic outlook.
  • All 4 of these ETFs have very small net assets currently; look for expanded offerings in this space in coming years as the larger brokerage players realize the benefit of a simple GMP approach.
  • The beta, a measure of relative volatility, tracks generally with the total amount of stocks plus the percentage of “Other” holdings as expected. One outlier is RAAX which uses a trend following component that limits aggressive holdings in this current, turbulent market climate, but has heavy past exposure to a variety of volatile real assets.

In general, the GMP represents a great starting point for basic investing that can be added to, or deviated from, based on other market factors and performance goals.  There are definitely other ETF allocation strategies that will outperform the GMP over the short, and potentially longer term, but this strategy offers a disciplined and logical baseline for building a solid, durable investment strategy.

As always, the goal of this column is to simplify investing, using fundamental terms and concepts, while still being accurate and comprehensive; don’t hesitate to reach out (sglacey@gmail.com) if you have any additional questions or thoughts.

Invest wisely and don’t forget the power of low fee, automatic investment combined with compounding growth over time.

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