Part IV: Countries Matter in International Equity Portfolio Modeling

October 2014

This is Part IV in a four-part series outlining the Magni Global Asset Management approach to international investment analysis.

In Parts I, II and III of this series we discussed how the traditional domestic company equity analysis may fall short when investing internationally. We also discussed how a country’s adherence to economic principles may impact a company’s performance. We continue the conversation here, stating that if adherence to well-accepted economic principles leads to more vital economies and to higher equity valuations, investors should be able to construct and acquire portfolios incorporating these principles. Magni Global Asset Management has a proprietary research process for determining country-level adherence to these principles. It is called the Country Selection Technique.

The technique utilizes a hierarchical set of analytical measures with twelve Economic Standards that in turn are further subdivided into almost 300 Qualitative Sovereign Factors. Analysts measure each Qualitative Sovereign Factor by determining a country’s level of intent to abide by each factor plus its actual level of adherence. To enhance objectivity, the analysts rely, when feasible, on neutral third-party research analytics.

Magni research factorsThe analysts then convert each Qualitative Sovereign Factor into quantitative scores using a uniform scale. The quantitative scores from each Qualitative Sovereign Factor are aggregated for each Economic Standard and the scores for each Economic Standard are in turn aggregated into overall Magni Country Scores. The higher the overall score, the greater is the adherence to the Sustainable Wealth Creation principles.

Magni Country Scores are converted into target weightings with adjustments to constrain exposure to less liquid countries and to maximize the prospective ratio of reward to risk as measured by the Sharpe Ratio. Portfolios are constructed through purchasing securities, such as country-level ETFs, based on the weightings from the Country Selection Technique.

The Magni Model run since 2003 using the Country Selection Technique has consistently demonstrated significant outperformance across portfolios when compared to their MSCI benchmarks on both an absolute and risk-adjusted basis. You can read more about our investment process here.

Read Part I: Is International Equity Investing Analysis the Same as Domestic Analysis?

Read Part II: How Economic Principles Sustain Economic Vitality in Countries

Read Part III: Country Adherence to Economic Principles Impacts International Equity Value

Looking for more perspective on international investing? Download our whitepaper:  “Country Selection – A Powerful Technique of International Equity Investing.” Follow Magni Global Asset Management on LinkedIn and Twitter @MagniGlobal, #CountriesMatter.