Expected Returns: An Investor's Guide to Harvesting Market Rewards

Appendix A

World wealth

This appendix reviews evidence on the relative sizes of various parts of world wealth. A market’s size may indirectly influence its expected return; smaller markets can be less liquid and create capacity concerns for large investors, thus implying higher required returns. Any assessment of global wealth is plagued by problems of definitions (which wealth categories to include) and measurement (how to quantify values, how to treat leverage). Let’s start with a simple story from major indices. At the end of 2009, the size of global equity markets was $45 trillion and the size of global bond markets was $40 trillion. But what about non-public equity and debt, cash and money market instruments, real estate and infrastructure, durable goods and other personal holdings, commodities and other resources, art and other collectibles, convertibles and other hybrids, derivatives and structured products? Most importantly, what about human capital? The challenges are immense, as already highlighted in Ibbotson–Siegel–Love (1985), though more manageable than when assessing the amount of capital allocated to strategy styles:

• Investability is an important qualification. (i) Many important parts of wealth are not included in this analysis because they are not investable (or are illiquid and poorly measured). Some estimates suggest that natural resources (e.g., oil underground), privately held firms, and owner-occupied housing can each be worth tens of trillions of dollars, ...