A white paper on constructing global equity portfolios using single-country ETFs published by Borealis Global Advisory can be accessed below. The paper has three broad sections and is summarized below.
The paper explores the challenges and opportunities of constructing a global equity portfolio, which Borealis Global Advisory approaches with a novel multi-pillar paradigm using single-country ETFs. The paper discusses in detail this multi-pillar approach, called the Global Country Allocation Framework (G-CAF), which has the delivery of country allocation recommendations for a global equity portfolio, called the Global Country Allocation Model (G-CAM), at its crux. It also highlights the mainstays of G-CAF by running the construction of an international equity portfolio centered on the MSCI’s All Country World Index ex USA universe through the same. The framework encompasses a series of measures that range from selecting factors, which explain country returns, to formulating portfolio country weights using the selected factors and to shaping fine-tuning mechanisms that align the model’s short-term forecasts with the medium-term forecasts on an ongoing and incremental basis, and they are:
- Carving of the investment universe into three tranches, namely: Upper Tranche (UT) consisting of large developed countries with market-cap weights at least 1% (of the universe), Middle Tranche (MT) consisting of large emerging countries with market-cap weights at least 1%, and the Lower Tranche (LT) consisting of developed and emerging countries with market-cap weights at most 1%.
- Exercising the data driven scientific approach enunciated by the multi-period Fama-Macbeth OLS regression method to identify a separate set of factors that drive equity returns for each set of countries residing in the tranches.
- Ranking each of the identified factors and an added volatility factor across countries in each tranche using a standardized scoring mechanism to arrive at a unified country score for each country, and then applying the mechanism again to standardize the unified country scores within each tranche to attain the portfolio country allocation weights, altogether called the double “Z”™ methodology.
- Adopting a modified version of the Shiller’s CAPE framework for all the countries in the universe called the Country Yield Forecasting Mechanism (CY-FOREM) to derive a measure of country equity yield on real basis, the Medium-term Country Yield Forecast (CY-M), also called the Radha’s Country Yield (RCY)™, for each country and tranche in the universe. The RCY is used to fine-tune the country weight recommendations to their corresponding medium-term country yield forecasts on an ongoing and incremental basis.
- Employing the Radha’s Country Yield for each tranche and their corresponding set of countries underlying them in order to derive diffusion index called the Diffusion Index (DI) for each tranche.
- Analyzing the time-series of RCY as well as diffusion index for each tranche at the end of a given timeperiod on a relative basis to establish the weights of the tranches in the portfolio.
Section I of the paper explores the challenges and opportunities of constructing a global equity portfolio, and how Borealis Global Advisory countered them by developing a multi-pillar paradigm for constructing the portfolio using single-country ETFs. In section II, the paper discusses in detail this multi-pillar approach, called the Global Country Allocation Framework (G-CAF), which has the delivery of country allocation recommendations for a global equity portfolio, named the Global Country Allocation Model (G-CAM), at its crux. This section highlights the mainstays of G-CAF by running the construction of an international equity portfolio centered on the MSCI’s All Country World Index ex USA universe. In section III, the paper covers a discussion on Country Yield Forecasting Mechanism (CY-FOREM), which derives a measure of country equity yield on real basis, called the Medium-term Country Yield Forecast (CY-M). The section also details the fine-tuning of the model portfolio’s country weight recommendations to the corresponding medium-term country yield forecasts on an ongoing and incremental basis. Finally, in section IV, the paper introduces additional applications of the BGA’s fundamental framework – Global Allocation Framework (G-AF) – in global investing. While G-CAF happens to a specific implementation the fundamental framework, G-AF offers various other means for investors to exploit opportunities globally.