Global asset allocations

bowlhead99

Tom99 wrote: »

Ifyou went to the supermarket for some apples and pears and there were 10x the number of apples on display as pears would you automatically buy 10 apples but only 1 pear just because that was the ratio in which they are offered to you?

I don't think this is an entirely irrelevant comparison as 'buying something because it's available to you in the proportions in which it's available to you' is not a route you need to take when you don't have trillions to deploy into the markets.

We can say that if the market is an efficient valuer of companies and allocator of capital, and the global public markets capital ends up allocated $x in Apple and $y in Samsung, and by extension a% in USA and b% in Korea, then that would be a good guide to getting ourselves an allocation which the market, by consensus, has decided is ok.

The market is made up of lots of people with different objectives and collectively they have averaged out the price of the various companies to something which those market participants consider to be ok. You probably know no better than the voice of the market when deciding what to pay for a stock. They allocate a bigger piece of the pie to Tesco than Sainsbury because Tesco has more stores, revenue, employees and profits. If the market has 'worked', Tesco and Sainsbury share prices will each be 'fair', and you won't gain an advantage by diverging from the 'market ratio' and holding, say, equal amounts of each instead of £5 of Tesco for every £1 of Sainsbury or whatever.

However, you might assume that if you are going to hold two or three big UK supermarkets there is some concentration risk in having 80+% in just one of them. If the valuations have priced the risk for you (by letting you buy at a fair price even though one might have more risk and more potential reward), do you want lots more in one than the other, and lots more again in Walmart over on the US markets with a different set of political and economic risks (albeit those risks are 'fairly priced' by the people who participate in the markets from their homes and offices worldwide, but you may not personally comprehend what they are). Some will be very happy with that approach and buy the index while others might not.

Buying something just because it exists and already had someone in the world put their capital to compete in a market to establish a valuation point for that asset, is what you accept with a standard cap weighted index.

Most of the fans of such index funds don't all cap weight their allocation between equities and bonds (and end up with a lot more bonds than equities), because they say that their personal objectives aren't aligned with the average of large institutional insurance companies, governments, DB pension funds, endowments and other special interest groups which make up all the potential market for bonds. So they don't want to allocate a lot of their wealth to a US municipal bond just because it exists and is large. But they will perhaps tell you that you need more Apple than Samsung, because the former exists, and is large. When you look for them, you'll find contradictions within pretty much everyone's personal strategy.

MarkCarnage wrote: »

First question - how do you define 'correct'? Most people above have done so as market cap weighted with no bias to country of origin, which is fair enough, and might be the default answer.

However, as mentioned above, what does this tell you? Country of listing may bear little or no relation to the economic sources of a company's revenue, profits and risks.

That's before we get into the impacts of free float, B share classes etc etc.

You may wish to consider these points - and also whether it is worth delegating that decision making either passively ( a global index tracker, but again be careful what index to choose!) or actively via a global equity fund.

Yes, there are all manner of ways of how to allocate how much to each country (population, GDP, stock market size, etc) before you even start to consider how to build a portfolio with asset and income exposure to those weights - rather than just shortcutting by generalising that UK listed companies have assets and income in the UK (which we know may not be a valid generalisation in any case).

The free float and accessible share class stuff is considered by index makers when coming up with their stats, to get around practical problems of measuring stuff and building investible products. The are imperfections around the place and some are much easier to live with than others. An index fund isn't perfect, but it's cheap. Though I'd contend that I don't need 10 apples in my fruitbowl to every one pear, and nor do I need to pretend that my investment needs are best served by buying the average of what the general institutional investor buys, though I can certainly see why it could be a good place to start, because one has to start somewhere.