We can construct many pie charts of national thingies that will differ from global market cap, but the question is: under what theory are they relevant to the allocation of our own portfolio?
There is a theory, it makes a metric boatload of assumptions, but there is a theory, under which the market portfolio (the actual total assets held by a market) has special properties and is mean-variance optimal, and these properties are shared by cap-weighted portfolios that mirror the market portfolio. It's in textbooks. I don't think I understand it, but it's in textbooks.
Those textbooks don't say boo about revenue exposure portfolios or GDP portfolios or economy portfolios or portfolios that measure what the cap weight would be if companies that don't issue stocks did issue stocks.
I've seen numerous articles that say something like "Do you realize that your total international index doesn't reflect relative proportions of X?" and I say "When is the article going to explain why I should care," and it never does. It just assumes that everyone in the know agrees that it should.
Why should I care how my portfolio compares with regional revenue exposure? Any more than GDP, literacy, or wine production? (Measuring by regional wine production, I'm seriously underweight in European stocks).
In this global context, it is crucial to understand the geographic distribution of company revenues as it may enhance the investment decision processes for constructing and managing global portfolios. To that end, the MSCI Economic Exposure Indexes aim to reflect the performance of companies with high economic exposure to specific regions. Managers can use these in a number of different ways:
Tilting their portfolios towards domestic stocks with higher international exposure.
Creating a more “pure” domestic bias in their portfolio.
Dynamically allocating to (or away from) securities in countries or regions that display momentum.
Increasing or decreasing allocations via passive exposures.
Developing an alternative way to diversify globally through a portfolio of companies with diversified regional exposure.
But why should I want to do any
of these things?
(By the way what does "creating a more 'pure' domestic bias in their portfolio" mean?)
P.S. I love this one: "Dynamically allocating to (or away from) securities in countries or regions that display momentum." Which
is it, MSCI?
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.