In our previous post, we announced our intention to produce a multi-asset index that tracks the performance of the five major asset categories: stocks, bonds, commodities, real estate, and currencies.

Naturally, there are or have been indices that measure the performance of various sets or subsets of these categories. MSCI once offered a “Global Capital Markets Index,” for example — though it tracked only equity and fixed-income securities, and was discontinued in July.

We believe our product, the Stracia™ Globally Optimized™ Capital Markets Index™ (GOCMX), will be the world’s first truly global,  multi-asset tracking index, and the first optimized index of any kind. In this post, we expand on the rationale for creating such a product and provide additional product details.

All Portfolios Are Global

Broadly, the reasons for pursuing a global intermarket strategy are threefold: It affords opportunities (i) to pursue the highest expected alpha regardless of market or geographic constraints; (ii) to manage beta through diversification — even with a minimum number of asset holdings, due to the potential to realize low or negative correlation among the universe of investments available to the global intermarket manager; and (iii) to blend a host of macro- and micro-economic analytical techniques and portfolio strategies in support of these goals.

While global-macro funds represent only a fraction of fund strategies pursued by the world’s hedge-fund managers, we would argue that all portfolios (as distinct from strategies) are, at least implicitly, global. That is, cross-border securities investment is so broadly available to even the smallest retail investors and 401(k) participants (thanks to Internet-based investment platforms, multinational securities exchanges, cross-border ETFs, international mutual funds, etc.), that the decision to invest beyond one’s country of origin is neither difficult to make nor to execute. Even single-country (or, indeed, single-security) portfolios, then, are implicitly global — if only for what they have left out. There is an opportunity cost to not allocating assets globally that is both tangible and easy to avoid.

So How Come No One’s Done This?

For all of that, there is no truly global, multi-asset benchmark.

MSCI¹ announced its Global Capital Markets Index on 25 April 2005, to some fanfare; it discontinued it — along with its entire fixed-income index family! — last summer (to somewhat less fanfare). But even before it was discontinued, the total inadequacy of the MSCI Global Capital Markets Index as a benchmark for, well, the global capital markets, was a function of the inability of MSCI or any other index vendor to offer a global proxy covering multiple asset classes. We submit that both institutional and individual investors, and their advisers, want and need to benchmark against a true world Index — one that captures not just the performance of stocks and bonds, but commodities, currencies, and real estate.

None of the index providers have gotten around to this. Not MSCI, not Barclays, not Dow Jones. The demand is there but by definition (when a product or service does not exist) latent.

Warren Schmalenberger of Dorchester Capital has come the closest on the multi-asset axis. So frustrated was he by index providers’ failure, year-in and year-out, to offer a true capital-markets benchmark, that he created one himself, The Capital Markets Index (CPMTKS)²; but it covers only U.S. securities. (The genesis of the CPMTKS makes for an interesting read: article.)

International investors needed a true GCM index fifteen years again; that one was not available ten years ago speaks not so much to the inability of MSCI and Dow Jones to recognize that need, but to serve it — despite the technological advances that make it possible for smaller players to do just that. Even before its discontinuation, MSCI’s Global Capital Markets Index was nothing of the sort — it was a global stocks-and-bonds index. Dow Jones World Index is nothing of the sort — no bonds, no currencies, no natural resources, no real estate. It is a world stock index. Orbis index non sufficit (or, if you prefer, index mundanus).

Market participants like Schmalenberger (or Stracia) shouldn’t have to create our own proxies or investable indices to fill the holes in the product portfolios of players like MSCI or Dow Jones. But the truth is that now, we can.

Globalization: Phenomenon, and Buzzword

The index providers recognize the need for a GCM, as evidenced by their product-branding decisions (“global” this, “world” that), but they leave the real work of creating such a product undone. Or they leave it to a frustrated, creative entrepreneurs — who are then forced to duplicate much of the work done by the mainstream index providers at great cost, and with little benefit (to index users, to the market) from the duplication.

Finally, if there is insufficient demand for this kind of product, then please, let us hear no more about the globalization of financial markets, their inter-connectedness, that the world is flat, etc. Because globalization, like allocation by asset class, is real — the financial markets just lack a benchmark that captures the phenomenon across asset categories.

Let’s get to measuring the world index already. That’s what Stracia intends to do.

I Want My GCM

While most indices simply measure changes in (past) price, the Stracia^TM Globally Optimized^TM Capital Markets Index^TM (GOCMX) will measure the performance of a global, multi-category portfolio offering the most attractive risk-adjusted reward on a dynamic basis. Future posts will explain more about the optimization aspect of the GOCMX, its intended use, pricing, etc. Meanwhile, we have collected and are processing the primary data that we will use to construct the index. We expect to begin offering the GOCMX later this quarter.