Measuring Everything

May 10, 2006

The new Capital Markets Index takes the idea of complete indexing to the extreme; the ultimate asset allocation.

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 the total market.  And I mean the total market.

No, I'm not talking about a competitor to the Dow Jones Wilshire 5000, measuring the total stock market.

And I'm not talking about a competitor to the MSCI Global Capital Markets Index, which measures the performance of global stocks and bonds.

I'm talking bigger - an index that measures everything from stocks to bonds to commercial paper, asset-backed securities and adjustable-rate mortgages.  In other words, a single index covering just about anything you can put money into (there are exceptions, which I'll cover later.)

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

It's been quite a project for Schmalenberger and his crew.

"To create the index and then generate the historical performance, we downloaded 4 terabytes of compressed data," said Schmalenberger.  "We have been downloading data for three years at a constant rate.  And we get 200 million pieces of additional data every day."

Schmalenberger said that the idea for the index first occurred to him when he was studying to get his MBA at the University of Chicago, back in the 1970s.

"I went through my professional life thinking that someone else would do it," said Schmalenberger.  "I kept waiting for someone to do it. And then, I came to a point in my professional career where I saw that no one had done it. I had the curiosity and the desire, and that's where I started."

And now he has.

According to Schmalenberger, a number of things have changed that have made creating the index possible, including market structure.  But by far the biggest change was computing and storage power, which made creating -and computing-- this index a real possibility.

The index is calculated every fifteen seconds, using a sample of 2,500 securities.  The full value of the index is updated overnight, looking at … well, looking at everything. Schmalenberger says that the 2,500 securities is a very close proxy for the total index, and that it represents a manageable proxy for an asset manager.  He expects to see investment products tied to this index soon.  In fact, he thinks that they could quickly become the holding place for univested assets in instituitional portfolios - as the true, beta-neutral allocation to the investable universe.

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