Knowledge of the country weights in the emerging and developed markets indices can be helpful in specifying allocations within the equity portion of a portfolio.

For those clients who wish to allocate primarily on a country basis (as opposed to a sector basis, for example), our general philosophy is to begin the design process from the starting point of world market capitalization, then deviate from there as appropriate per client.

More specifically, we recommend placing at least 50% of equity assets in broad index funds in proportion to world market capitalization.  Then, depending on your degree of aggressiveness and your confidence in your assessment of markets, placing up to 50% of equity assets in regional or country funds with anywhere from minor to massive overweights or underweights.

In order to make a conscious overweight or underweight decision, you need to know the neutral weights.

The major weight categories, US (VTI), non-US developed ((EFA) and (EWC)) [see prior article], and emerging (VWO) are: 41.08%, 48.35% and 10.57% respectively, according to S&P/Citgroup Global Broad Market Indices, as of June 24, 2008.

The individual country weights (and proxy investment funds) for the developed markets and the emerging markets are provided in the following two graphic tables:

World funds would tend to contain stocks from all the listed countries, but you don’t lose much by constructing your own “world fund” with the available investment proxies, since they cover about 97% of the developed world market-cap.

Note: The major indexers tend to use the term “world” to refer to the developed world only, and the term “global” or “world all countries” to refer to the combined developed and emerging countries.

A smaller portion of the emerging market countries have their own proxy investment funds, but they comprise about 90% of the emerging markets capitalization in total.

There is much more to consider than simply market weights, however knowledge of market weights in your allocation program is important to understanding how your risks and opportunities differ from a world neutral allocation.

Finally, you need a benchmark.  You might consider using the world index performance as the benchmark against which you measure whether or not your “tilted” investments are adding value.

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Richard Shaw

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