Combining Asset Classes

December 21, 2012

Paul Amery

In this issue of the Journal of Indexes Europe we present a broader perspective on indexing by looking at markets from a cross-asset-class perspective.

Although index-based investing continues to gain in popularity, it’s rare to find an index approach that isn’t based on a single asset class.

As a result, while investors are quite happy to use a bond or equity index for parts of their portfolio, they rarely compare the portfolio as a whole against an all-of-market index.

Instead, as Pierre Héreil, Julien Laplante and Thierry Roncalli of Lyxor point out in our lead article, most investors use a fixed-weight benchmark for a mixed portfolio of shares and bonds, causing inevitable distortions as market valuations move around over time.

Héreil, Laplante and Roncalli look at how to construct a joint equity-bond index from first principles, throwing up some interesting results.

In their article on efficient income investing, Morningstar’s David Blanchett and Hal Ratner introduce a new framework to build portfolios focused on generating yield, using traditional portfolio theory as a starting point. As long-term savers in developed markets face a funding crisis due to near-zero interest rates, yield is the topic of the decade, and this contribution generates some thought-provoking ideas.

Commerzbank’s head of asset allocation strategy, Bernd Meyer, looks at investor sentiment surveys in a systematic and revealing way.

As Keynes said, the stock market is a beauty contest, and we need to “anticipate what average opinion expects the average opinion to be.” Surveys of investor sentiment are therefore amongst the most important tools for professional investors. But there are systematic biases in the results, Meyer shows.

Perhaps unsurprisingly, equity investors tend to be overoptimistic, bond investors the reverse. But this doesn’t mean we can’t make use of survey results, argues Meyer, who presents his fascinating findings in our third contribution of this issue.

And Jim O’Neill of Goldman Sachs, who coined the term “BRIC” countries a decade ago and caught the mood of the latest emerging markets boom, offers Journal of Indexes Europe readers some intriguing thoughts on economic growth, market prospects and country classifications in an exclusive interview.

I hope you will enjoy this big picture view of asset classes and market indices.


Sign Paul Amery

Paul Amery


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