I’m Suspicious of New Asset Classes

Posted at Advisors4Advisors.com on October 8, 2009

Celestial objects have the International Astronomical Union. Important buildings have the National Register of Historic Places. Daylilies have the American Hemerocallis Society.

Who designates asset classes?

Consider these events:

In 2007 Risk Publications published “Volatility as an Asset Class: A guide to buying, selling and trading third-generation volatility products,” edited by Israel Nelken.

In 2008 Richard M. Weber and Christopher Hause published “Life Insurance as an Asset Class: A Value-added Component of an Asset Allocation.”

In 2009 the Wharton Financial Institutions Center published “Life Settlements: Signposts to a Principal Asset Class” by Sam Rosenfeld, who will speak on this topic next month at a three-day conference hosted by the Life Insurance Settlement Association.

Here’s what bothers suspicious me. If something is an asset class, then an asset allocator needs to pay attention to it. And if he decides to allocate money to that class, he’s probably not going to allocate less than 5% of the portfolio to it; otherwise, why bother?

So what should I think of someone’s declaration that something is an asset class? Is it investment science? An expert’s attempt to raise the visibility of his area of expertise? A marketing strategy to get more money flowing into a favored type of asset?

I’m certainly not the only person who wonders about this. Take a look at “What defines an asset class?” at www.abnormalreturns.com.