Emerging Markets Allocation

[Deleted User]

https://forums.moneysavingexpert.com/discussion/comment/82033445#Comment_82033445

As the opening post states, the report is 6 years old. Despite its age I think it's useful because it does as you have said, attempted to retrofit the optimal proportions of EM share, based on past performance…..it's worth repeating that, based on actual historic performance. If you take those performance figures, you end up with an allocation level on the higher end of the scale. But then you say that the MSCI Index is the only one that can sensibly be used because it avoids rebalancing, which ignores the past performance results and points towards an allocation on the lower end!

I don't have a horse in this race, except to understand the better way to decide allocations. It seems to me the EM aalocation issues discussed here are an extention of the earlier US allocation debate, which I hope not to revisit. As long as any index is based on cap weighted market size, along with the wealth within that market, the numbers are always going to favour the larger wealthier countries. But if you turn the equation around and try to do what the authors of this report have done and retrofit past performance to an allocation size, the numbers increase substantially. So yes, the weightings haven't increased, because the index has continually rebalanced.

[Deleted User]

https://forums.moneysavingexpert.com/discussion/comment/82033748#Comment_82033748

There is indeed some inconsistency across the market analysts and commentators as to what's in and what's not, Developed Asia is in a similar boat with some companies regarding Japan as a part whilst others regard Japan as a standalone. And then there's Taiwan which in my book is Developed Asia but in others is a part of China, hence it is EM! Fortunately Morningstar is quite consistent, whether or not they are completely accurate is another story.

[Deleted User]

https://forums.moneysavingexpert.com/discussion/comment/82033755#Comment_82033755

Bostonerinus, you don't go down into the engine room and inspect components for the correct tolerances and wear so you don't need to query such things. You, by your own admission, hold a couple or three index trackers that do all the heavy lifting and make all the adjustments for you, you've told us many times that you don't need to waste time thinking about the things discussed here. Great, if that's your prefered approach. Mine however is not the same, I like to understand these things, I want to see what makes it tick and possibly tweak the design and construction for better performance. Interesting? Absolutely it is.

dunstonh

You also need to consider which benchmark you are following as part of your portfolio. FTSE Russell and MSCI have different countries in their emerging markets allocation. The most relevant of which is South Korea, and you just have to look at how the KOSPI has done this year. For FTSE, South Korea is a developed nation, but for MSCI it's an emerging market.

InvesterJones

https://forums.moneysavingexpert.com/discussion/comment/82033760#Comment_82033760

As long as any index is based on cap weighted market size, along with
the wealth within that market, the numbers are always going to favour
the larger wealthier countries. But if you turn the equation around and
try to do what the authors of this report have done and retrofit past
performance to an allocation size, the numbers increase substantially.
So yes, the weightings haven't increased, because the index has
continually rebalanced.

No, the index hasn't continually rebalanced. It's a free-float market cap weighted index, so it just needs to buy as and when new members appear/disappear, or if free-float is adjusted by the company, apart from that it's self-balancing. I also don't agree that such an index favours larger wealthier countries - GDP is not related to market size, as the paper shows when their allocations by GDP are so different. Proponents of free-float market cap argue that's an important thing to realise - China is huge, but proportion of shares that are freely traded is tiny by comparison, hence argument for an index weighting rather than allocation by GDP.

EthicsGradient

The Morgan Stanley paper doesn't seem to explain where it got its (2020) "global market cap" share for EMs of 26%, compared to the then 13% in the MSCI All Country World Index. That seems pretty important, since it doubles the allocation for apparently the same measure.

I reckon that, using the MSCI "emerging" definition (including Korea) that the paper says it uses, the MSCI ACWI is currently 12.6% emerging, and the FTSE Global All Cap index 13.4%.

GeoffTF

https://forums.moneysavingexpert.com/discussion/comment/82033423#Comment_82033423

Your question seems to accept that the FTSE's EM market weight is correct, i.e. that it accurately represents the capitalisation of the EM market stocks available to trade by global investors, divided by the capitalisation of the global market stocks available to trade by global investors. I take that on trust, and hold the appropriate weights of Vanguard Developed World ex UK and VFEM. If you deviate from the market weight, someone else has to deviate in the opposite direction. One of you will win and the other will lose. I am happy to take the average performance with low costs.

[Deleted User]

https://forums.moneysavingexpert.com/discussion/comment/82033941#Comment_82033941

Yes, that information is at the heart of the subject. The figures come from the two graphs, Displays 6 & 7 on Page 4. But they don't explain their methodology for determining the optimal ratio's, other than it involves a historic look at volatility and monthly returns. Presumably this is the product of the actual historic retrofit exercise but they don't explain the detail. Those numbers appear to say that with the benefit of hindsight, past markets performance warranted a higher allocation than the index suggested at the outset.

Using monthly data since 1988, the year
MSCI introduced the EM index, and
starting from a portfolio which is 100%
allocated to DM equities (MSCI World
Index), we examined the monthly returns
and volatility of the MSCI World and
MSCI EM Indexes and found that the
optimal equity portfolio would have
allocated 27% to EM and 73% to DM, as
shown in Display 6.

[Deleted User]

https://forums.moneysavingexpert.com/discussion/comment/82034037#Comment_82034037

As @EthicsGradient points out in his post, the missing detail is an explanation of how they conducted their historic review and arrived at the optimal percentage allocation, which is considerably higher than the MCSI allocation. If you accept their review was robust and accurate, the higher figure is more likely to appeal. It seems unlikely they simply pulled numbers out of a hat, only that they haven't explained their process fully, which is why most members are running for the certainty of the MCSI allocation.

GeoffTF

https://forums.moneysavingexpert.com/discussion/comment/82034188#Comment_82034188

In my case it does not matter. I bought Vanguard Developed World ex UK (which tracks the FTSE index) shortly after it launched in 2009. Vanguard launched its Emerging Markets OEIC at the same time, but it tracks the MSCI index. I did not particularly want to hold Emerging Markets at that time, and I would have wanted a compatible fund anyway. I bought VFEM (which tracks the FTSE index) shortly after it launched in 2012. My developed world fund now has a massive capital gain, so selling it is out of the question.