Global Investment Opportunities: A Low-cost Passive Strategy (PDF)

The much-heralded decoupling of the financial markets in the developed economies from those of the emerging and frontier markets found its nemesis in the 2008/9 global financial crisis- The Great Recession. For the believer in a diversified global basket of stocks or indices that reduces his unsystematic or idiosyncratic risk (that is the risk associated with investing in individual countries, regions or currencies leaving him solely to worry about his world beta) to almost nil the events of 2008/9 came as a big blow to his world of comfort.

The above notwithstanding, investing in a world index like the MSCI index series, specifically the MSCI All Country World Index (MSCI ACWI) comprising as much exposure as possible to stocks across region, sector and currency may well provide the most cost-effective way of maximising net iinvestment return.

Ideally, the global fund manager and/or investor will passively invest in an index fund that tracks the MSCI ACWI. He will invest in this at the market trough, buy and hold it and only liquidate his holding when the index peaks in a subsequent period. He will have augmented this broader passive strategy with periodic tactical shifts across region, size and style to bolster his returns. These tactical shifts are informed by a number of heuristics that are the subject of study here. We believe this to be a low-cost winning strategy.