The global market portfolio

The global market portfolio represents the aggregate of the holdings of all investors.

Not a fixed mix

For those of us in the institutional investment world, we tend to look at the global market portfolio from the perspective of the investor: we think of it as the global investment opportunity set. But it's not only the aggregate of the holdings of investors, it's also the aggregate of the debt, equity and other securities that have been issued by governments, corporations and others.

In a 2014 paper, Ronald Doeswijk, Trevin Lam and Laurens Swinkels document the development of this global market portfolio over a period of more than 50 years, which is shown in the chart below:

Global market portfolio over the period 1959-2012 (%)

The portfolio has been far from a fixed mix: in 1999 equities constituted more than 60% of the market portfolio, but this had fallen below 40% by 2012. Real estate, although a small part of the total, has increased materially over the period. Government bonds have varied between 20% and 40% of the total.

The largest single–year changes tend to be a result of market movements: there are, for example, sharp single–year drops in the equity allocation in 1974, 2002 and 2008, reflecting market declines in those years.

Other changes in the mix are due in large part to the relative preferences of issuers for debt or equity (which may depend, for example, on tax considerations) and on the relative demand for capital between governments and the private sector. In recent years, for example, the data show a shift away from listed equity toward private equity and corporate debt¹.

Balancing supply and demand

Just as the supply of available investment assets evolves over time, so the demand for each type of security also changes. Recent decades have seen a shift away from direct ownership by individuals toward institutional ownership and, more recently, the growth of sovereign wealth funds. Pension provision is increasingly based on defined contribution arrangements. These changes have created a different set of investor needs.

Sovereign wealth funds, for example, may be more willing to tolerate reduced liquidity than other investors, and will generally have less appetite for government debt than, say, insurance companies or pension funds. As defined benefit pension plans mature, their focus shifts to liability hedging. Evolving demand for various types of security will impact pricing which, in turn, can be expected to influence supply in the long run.

So while it is the issuer perspective that is most helpful in explaining how the portfolio has changed over time, the investor perspective is also relevant. It was, for example, explicit demand from inflation–sensitive investors that led to the emergence of inflation–linked securities in the UK in the 1980s and the U.S. in the 1990s.

These long–term considerations of supply and demand, and the resulting evolution of the global market portfolio, seem unlikely to influence market behavior over the short term. They are of interest, however, to those who take a longer view.