GDP-BASED GLOBAL DIVERSIFICATION
We believe that Investor spending within each country, or Gross Domestic Product (GDP), should be the primary determinant of the geographic diversification of a global portfolio. Consumption Based Fundamental Asset Allocation (CFAA) uses spending data for asset allocation and diversification purposes. For example, if China’s spending is nine percent of the world’s GDP, then a global portfolio will start with a target of nine percent allocation in China (Asset Managers have the discretion to make exceptions when they feel certain risks such as currency risk or political risk outweigh the benefits). This methodology dynamically allocates the portfolio to the geographic regions with the greatest economic activity.
When we diversify our portfolios across the globe, we start with regional GDP and work our way down to country specific GDP. From a geographic standpoint, GDP tells us the relevance of that region to our portfolios. This bottom line approach filters out the noise and focuses on the regions and countries that are performing.
