New Capital Markets Index Will Allow Individuals to Invest Like Institutions

by: Richard Kang

I saw this piece over at Indexuniverse.com:

In an era where indexers are slicing the market into finer and finer segments, here’s a breath of fresh air: A new index that measures everything.

The new Capital Markets Index is the brainchild of Warren Schmalenberger, president and CEO of Dorchester Capital. It is the first index to combine the performance of U.S. stocks, bonds and money-market instruments.

The index is calculated every 15 seconds, using a sample of 2,500 securities, and is published on the American Stock Exchange [Amex]. The full value of the index is updated overnight, looking at … well, looking at everything. Schmalenberger says that he downloaded four terabytes of information to compile the index, and that he receives 200 million additional pieces of information each day.

Schmalenberger expects to see investment products tied to his index soon, and also expects his index to become the ultimate asset allocation benchmark against which U.S. investors will be measured. As of mid-May, the index was composed of 51 percent equities, 31 percent bonds and 16 percent “liquidity,” or money-market instruments. Historically, the size of the equity market has swayed from 37 percent of the total market to 66 percent of the market; the size of the bond market has varied between 21.5 percent and 42 percent; and the money-market portion has ranged from 12 percent to 31 percent.

The Amex will publish the index under the ticker CPMKTS, along with three sub-indexes: CMPKTE (stocks), CPMKTB (bonds) and CPMKTL (liquidity). The liquidity index itself may be especially useful, as there’s no comparable index on the market (money-market managers, welcome to the harsh world of active versus index comparisons).

Schmalenberger said that a global index is in the works, but that it might take a few years.

The importance of this is that, if investment products do become tied to this “index”, then the ETF space will truly overlap the active management/mutual fund space. Any product linked to the index mentioned above could be classified as a balanced fund or asset allocation fund, I suppose depending on the maximum/minimum constraints on the three asset classes within.

I’m not suggesting that this is a worthwhile investment … I’ll need a bit more on the portfolio construction process/methodology beyond “four terabytes of information to compile the index, and that he receives 200 million additional pieces of information each day.” But again, we are seeing some interesting innovation in the ETF marketplace. Not revolutionary, but also not another dividend fund or sector (oil again!) oriented fund. To me this is a continued spin-off of the fundamental indexation story, or basically quasi-active management moving in on the traditional, index oriented, ETF industry. We have portfolio weights based on specific portfolio composition “receipes” derived by Research Affiliates and WisdomTree and their ETFs like PRF and DLN. The question is: what exactly is the secret sauce from Dorchester Capital and other future, similar ETF products?

On a separate note, I know that institutional investors are demanding greater transparency from their external hedge fund managers. As hedge funds fight for this business, and keep it, and thus in some cases allow greater degrees of transparency, is there a convergence story here with the quasi-active (I don’t feel that’s the right term here, but not sure what is) ETFs? I can see the Dorchester strategy being of interest to someone like CalPERS and other large sophisticated institutional investors. I understand from an industry contact that Rob Arnott’s Research Affiliates manages roughly $1 billion for CalPERS in a RAFI mandate.

For those of you interested in managing your money like the institutions (I’d start by reading Swensen’s “Pioneering Portfolio Management”), then you might be interested into watching how quasi-active management moves into the ETF space in addition to new (although not to institutions), alternative asset classes like timber and infrastructure.

The importance of this is that, if investment products do become tied to this “index”, then the ETF space will truly overlap the active management/mutual fund space. Any product linked to the index mentioned above could be classified as a balanced fund or asset allocation fund, I suppose depending on the maximum/minimum constraints on the three asset classes within. I’m not suggesting that this is a worthwhile investment … I’ll need a bit more on the portfolio construction process/methodology beyond “four terabytes of information to compile the index, and that he receives 200 million additional pieces of information each day”. But again, we are seeing some interesting innovation in the ETF marketplace. Not revolutionary, but also not another dividend fund or sector (oil again!) oriented fund. To me this is a continued spin-off of the fundamental indexation story, or basically quasi-active management moving in on the traditional, index oriented, ETF industry. We have portfolio weights based on specific portfolio composition “receipes” derived by Research Affiliates and WisdomTree and their ETFs like PRF and DLN. The question is: what exactly is the secret sauce from Dorchester Capital and other future similar ETF products?

On a separate thought, I know that institutional investors are demanding greater transparency from their external hedge fund managers. As hedge funds fight for this business, and keep it, and thus in some cases allow greater degrees of transparency, is there a convergence story here with the quasi-active (I don’t feel that’s the right term here, but not sure what is) ETFs? I can see the Dorchester strategy being of interest to someone like CalPERS and other large sophisticated institutional investors. I understand from an industry contact that Rob Arnott’s Research Affiliates manages roughly $1 billion for CalPERS in a RAFI mandate.

For those of you interested in managing your money like the institutions (I’d start by reading Swensen’s “Pioneering Portfolio Management”), then you might be interested into watching how quasi-active management moves into the ETF space in addition to new, although not to institutions, alternative asset classes like timber and infrastructure.

CPMKTS 1-yr chart:

CPMKTS 1-yr

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