October 08, 2021

All investors face capital-market risk. Managing that risk, evaluating opportunities in the context of their goals, and assessing specific investments efficiently requires broad, objective, close-to-the-capital-market thinking. A global allocation framework does not need to be a black box that processes many statistical variables and then spits out an investment plan. It should be a logical framework that lays out choices for investors. The LJE process strives to accomplish these objectives. It summarizes in a logical and consistent way the investment choices recommended by our assessment of the coming economic environment. Our process estimates the probabilities of the individual countries outperforming the world benchmark. Taking advantage of the additive properties of our strategy, we aggregate the individual countries stock markets and build up broader regional and/or stage-of-development indices to which we apply our strategy. Given the countries’ stock market capitalizations, aggregating the individual country indices we replicate many of the regional indices for the developed, emerging and frontier markets. The aggregation also leads to the construction of the broadest index, the world, and the world ex-US. The US accounts for a large fraction of the capitalization weighted global index. It has the largest impact on the global index performance. This means that the US allocation is the most important decision one can make in a global portfolio. When our model expects the U.S. to outperform the world index, we also expect the global strategy to outperform the international strategy (i.e., the world ex-US) and vice versa. For example, during the Third quarter the US appreciated 0.073% and the global portfolio posted a 1.66% loss. The US outperformance means that the international index underperformed the world. The data show that is the case. During the third quarter the international portfolio declined 3.96%. The second being the differential performance between the global benchmark and the international benchmark, 8.20% versus 2.96%, is simply attributable to the to the US 12.22% return and outsized US weight in the global index. These numbers show why we argue that the US allocation is the most important decision one can make in global investing. The Year-to-Date Performance of the capitalization weighted global strategy is working on all cylinders. The global tilt strategy with a 8.39% appreciation and the global buy portfolio with a 11.26% gain outperformed the 8.20% increase posted by the global benchmark. In turn, the global sell portfolio with a 2.56% gain, underperformed the benchmark as expected.

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