As a finance student at the University of Chicago exploring modern portfolio theory, Warren Schmalenberger wondered why current indexes didn't cover the entire efficient frontier.

As years went by, he built some "baby models" seeking to track all U.S. stocks and fixed-income in a single benchmark. "In order to do this, I quickly realized that we'd have to download an immense amount of data from multiple sources," said Schmalenberger, now chief executive of Houston-based Dorchester Capital Management Co.

But creating the mother of all indexes was just a part-time dream. For 21 years, Schmalenberger worked as an analyst and money manager at well-known firms such as Bank of America, Transamerica and John Hancock. 

That would be an impressive career in itself. But in 1995, Schmalenberger struck out on his own to work full time on building an all-encompassing benchmark. "For the next 3.5 years, I devoted myself to building a construct for a true capital markets index," he said.

Turning Dreams Into Reality

It took him that long just to figure out how to make such an enormous task viable from an operations standpoint. Then in 1999, a business associate introduced him to Paul Stockton. That meeting marked a turning point for the project.

Stockton had experience as an IBM marketing executive and served as a consultant to many of America's biggest high-tech companies. He quickly steered Schmalenberger to a product development head at the American Stock Exchange.

"They were very intrigued with the idea," Stockton said. "Through their interest, we were able to connect with a wide range of index providers and ETF money managers."

But the magnitude of what they proposed was so daunting that nobody else wanted to tackle it. Refusing to be deterred, the indexing duo continued to work on their own. It took more than a year just to design a structure for their database. Then, it took nearly three years to download all of the necessary data.

Dorchester and its growing staff, now eight strong, say they've got it figured out. They're able to download roughly 530 million different pieces of market data a day. Those figures are dispersed to four separate computer systems in Chicago and Houston.

A total of about 3.5 billion different pieces of market information is crunched a day. And that's just the historical data. Dorchester's crew also designed real-time calculators.

Building A Better Mousetrap

The granddaddy became known as the Capital Markets Index. It covers the 2,000 largest U.S. stocks and roughly 2,131 short-term fixed-income instruments as well as 5,600 investment-grade bonds.

Two weeks ago, a new exchange-traded fund based on the Dorchester index launched. That was the Claymore U.S.-1 Capital Markets Index ETF (AMEX: UEM). At the same time, two ETFs based on subindexes created by the firm also came to market. One is focusing on micro-term fixed-income markets and the other is just the master index's bond side.

"The market for micro-term issues is a $7 trillion market," Schmalenberger said. "And there was no index to cover it."

The Capital Markets Index has a $31 trillion market cap and covers 80% of U.S. capital markets, he adds. Not included are asset-backed securities, municipal bonds, junk bonds, convertibles, preferreds and floating-rate securities.

"We've built an index for the traditional investment-grade portfolio for stocks, bonds and money markets," Schmalenberger said.

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