Tools to Construct Global Equity Portfolios

It is a global market with many investors seeking global diversification. In the following I offer guidance on global equity market asset allocation. Asset allocation explains more than 100% of total portfolio performance because timing and selection tend to subtract value.  Optimal diversification is achieved by allocating to each equity market proportionately to its outstanding capitalization as shown in the pie chart below. Anything other than a market weight is a bet, either for or against a particular economies

The total world market comprises 25,000 companies worth $70 trillion. The U.S. is the largest market at $27 trillion, which is 39% of the total. Most U.S. investors hold more than 39% U.S. in their global equity portfolios, and this bet has paid off in the last 5 years because the U.S. stock market has far outperformed most other stock markets. You can decide whether you expect this to continue.


With this pie chart, you can decide which countries you want to over- or under-weight. You might want to fundamentally weight, which means using something other than capitalization to guide your allocations. For example, the following performance report for the year-to-date through April, 2015 shows that equal weighting countries would have added 220 basis points (9.17% versus 6.96%).


global economies return

An alternative perspectivesector diversification

Some have argued that sector diversification is more important than country diversification, so I provide the Global sector pie chart on the right. You can use this as a second order diversification tool: (1) decide on your country bets, (2) allocate to sectors according to their market weights.


As with country allocations, you can decide to fundamentally weight within sectors. For example, the following Y-T-D performance report shows that equal-weighting sectors would have added 71 basis points (7.67% minus 6.96%).

sector diversification return


There’s more to global diversification than simply holding some non-U.S. stocks. Asset allocation is king, so the allocations to foreign countries and foreign economic sectors matter a lot. The charts above provide a road map for optimal allocation. You can decide when and where you want to go off-road.

To learn more about Ron Surz, visit PPCA, Inc.

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