Gerd Kommer's World Portfolio
How can I build a globally diversified portfolio with all possible asset classes in the stock markets? In this article we present the Gerd Kommer Worldportfolio, an optimal portfolio for passive investing.
1.-Author
Gerd Kommer was for many years a manager at various investment banks in London and since 2017 he began his solo career as a financial advisor and 2 years ago in 2020 he created a Robo-Advisor, in which he uses his own portfolio._cc781905- 5cde-3194-bb3b-136bad5cf58d_
In 2012 Gerd Kommer published this book “Souverän Investieren mit Indexfonds und ETFs” which is based on his doctoral thesis. The book is considered the bible of passive investing and has sold more than 100,000 copies. Unfortunately this book is only published in German. But don't worry because in this article we tell you in Spanish all the secrets of his portfolio.
Gerd Kommer's Worldportfolio is based on scientific concepts, including Eugene Fama's market efficiency theory and Harry Markovitz's modern portfolio theory, both with a Nobel Prize behind them.
We are now going to see the Asset Allocation of the WorldPortfolio.
Source: Gerd-Kommer-Capital
2.- Asset Allocation Level 1
First of all, you must estimate your risk tolerance to determine the percentage of your assets allocated to Savings (bonds, savings accounts, etc...) and the percentage allocated to Investment (stocks, raw materials, real estate, etc...). There are practically infinite possibilities. Taking the percentage in Investment as a reference and choosing steps of 10%, Gerd Kommer's book“Souverän Investieren mit Index funds and ETFs” breaks down 11 different weightings of level 1 of Asset Allocation. The breakdown goes from a very risky portfolio (number 1) with 100% exposure to real assets to a very low risk portfolio (number 11) with 0% exposure to real assets and 100% exposure to monetary assets.
The weight you put on both sides of the scale depends to a large extent on your propensity for risk, the return you expect and the horizon of your investment. The more Investment there is in your portfolio, the greater the fluctuation and the greater the potential loss, which would have to be assumed. However, as Investment exposure decreases, the long-term expected return also falls.
Gerd Kommer advises for the Savings part to deposit the money in short-term government bonds with a high credit rating or in savings accounts. For the bonuses, you can always buy them individually or through an index such as the one that appears on the screen.
The distribution between Savings and Investment is very personal and depends on each one of you, so from now on we are going to focus only on the Investment part. In other words, we will not consider the part of Savings in this article.
For the Investment part, Gerd Kommer proposes 4 variants, depending on the simplicity you want, as well as your investment volume.
3.1.variant 1
The first variant is the simplest and involves investing all of the investment portion in the MSCI All Country World Investable Market Index (MSCI ACWI IMI Index) or the FTSE All-World Index. These indices cover 98% of the world market capitalization, contain approximately 9,000 stocks from 45 countries including Small Caps and stocks from emerging countries.
This variant is suitable for all those who start to invest passively and do not have a large investment volume, as well as all those people who want to keep their Worldportfolio as simple as possible. With this variant you would only have to buy an ETF, which is very simple if you do it manually on a frequent basis, for example, monthly, and even more so if you set up an automatic investment plan.
3.2.Variant 2
In the second variant, more asset classes are introduced, such as gold, raw materials and shares of real estate funds. The assets would be distributed as follows: 55% in shares of industrialized countries, 25% in shares of emerging countries, 10% in shares of real estate funds, 5% in gold and 5% in raw materials._cc781905 -5cde-3194-bb3b-136bad5cf58d_
For 55% of stocks from industrialized countries Gerd Kommer proposes using the MSCI World Investable Market Index. For now, there is no ETF in Europe that covers this index, so the MSCI World and MSCI World Small Cap indices could be used. The first covers Large and Mid Caps and the second covers small caps from industrialized countries. Another possibility would be to use the variant 1 MSCI All Country World Investable Market Index.
For 25% of shares from emerging countries, Gerd Kommer proposes the MSCI Emerging Markets IMI index, which includes both Large Caps and Mid and Small Caps. Real estate fund shares are hedged with globally diversified REITs (Real Estate Investment Trust). For raw materials you can use ETC (Exchange Traded Commodities) or international ETFs that are diversified in all types of raw materials (industrial metals, precious metals, agricultural products, fossil raw materials, etc...). Lastly, gold can be bought either physically, although if it is invested frequently it can cause high acquisition costs and time, so it can also be bought through an ETF.
3.3.Variant 3
The third variant of Gerd Kommer's Wordportfolio includes Factoring. One factor is oversimplifying an extra condition that stocks have to meet to enter the index. It has been scientifically proven that some factors have in the past given a higher return than the normal index. These factors are the Small Cap factor, the Value factor, the Momentum factor and the Quality factor. The factors have somewhat higher return expectations, since the risk is also somewhat higher. In turn, the ETFs with a factor are usually slightly more expensive than the ETFs of the simple indices and, in turn, more popular.
The Asset Allocation of this variant would have the following distribution of assets: 10% in shares of real estate funds, 5% in gold and 5% in raw materials, but the rest is distributed in 16% MSCI World Small Cap-Index , a 16% MSCI World Value-Index, a 16% MSCI World Quality-Index, a 16% MSCI World Momentum-Index and a 16% MSCI Emerging Markets IMI-Index.
Francisco García Paramés, who is known as the Spanish Warren Buffet, also highlights the use of Factoring in passive investment over simple indices in his book "Investing long term".
In this variant we would be buying 8 ETFs, and if we do it with some frequency using Dollar Cost Averaging we would definitely be causing more transaction costs than in the two previous variants. This variant is therefore not advisable for beginners in passive investing or for those whose investment volume is not high, since the transaction costs would represent a high percentage of our investment volume. This last argument is logically invalid if we find a broker that offers these ETFs without commissions.
In any case, if you are interested in Factoring and this variant seems very complex to you, there is a fourth variant.
3.4.Variant 4
The fourth and last variant is the one with the multi-factor integrated into a single index. That is, the indices only contain shares that simultaneously meet the conditions of the Small-Cap, Value, Quality and Momentum factors. In the Asset Allocation of this variant we continue to have 10% in real estate fund shares, 5% in gold and 5% in raw materials. In addition, we have 55% in shares of industrialized countries with integrated multi-factor and 25% in shares of emerging countries with integrated multi-factor. For the multi-factor of industrialized countries, the MSCI World Multi-Factor Index can be used. For the multi-factor of emerging countries there is still no ETF, so in this case the MSCI Emerging Markets IMI can be used again. Surely in the coming years Multi-Factor ETFs will appear on emerging countries, but for now the offer is non-existent.
You may be wondering: If Gerd Kommer has created his own Robo-Advisor, which variant does he use? Well, according to your Robo-Advisor White Paper, this is based on Variant 3 of the Worldportfolio.
Well, this has been all about Gerd Kommer's Worldportfolio with its various variants or simplifications to help you build this portfolio more easily. Once you have decided on one of the variants, you simply have to use the indices that we have mentioned and find the most suitable ETFs for you, which replicate those indices.