Heckman Global

A Disciplined Approach

Heckman Global, a division of DCM Advisors, LLC, is a research firm which provides investors with global equity allocation advice and consulting. HGA's focus is on a disciplined, model-based approach to allocation at the country, region, sector, and industry levels.

Our model is built on a scoring mechanism. Each month it compares the markets under coverage on the basis of quantitative investment factors that have been shown to convey information about future equity returns in research by academics and practitioners, including ourselves. These include indicators of **valuation**, **growth**, **risk**, **interest rate trends**, and **sentiment/momentum**. The factors and the weights we put on them are shown in the table below. Each month, scores are computed for each factor, and a total score is computed for each country (equal to the weighted average of the individual factor scores). Each country then gets an overweight or underweight allocation relative to the benchmark that is roughly in proportion to the difference between the country’s total score and the cross-market average total score (with restrictions on the maximum allocation possible to each market to avoid unrealistically large exposures to small markets). The model is updated each month and the performance of the hypothetical portfolio is compared to the benchmark.

The *International Equity Allocator* provides country allocation recommendations with the goal of enhancing the dollar returns of unhedged global equity portfolios. Our allocation model, based on quantitative indicators, evaluates the attractiveness of each equity market relative to a benchmark based on the Morgan Stanley Capital International (MSCI) All-Country World Index (ACWI).

The *Emerging Market Equity Allocator* summarizes the country allocation recommendations of our interactive model for emerging market countries. The goal is to enhance the dollar returns of un-hedged, long-only emerging market equity portfolios benchmarked against the MSCI emerging markets universe.

For the *International Equity Allocator*, our model covers 23 developed and 15 emerging markets — the ones we have found to be of most interest to global fund managers.

Unless otherwise noted, all return data for the *Emerging Markets Equity Allocator* are from the MSCI indices. Our passive benchmark is composed of the same 23 markets under coverage, and approximates the performance of the MSCI Emerging Market Index.

Forecasted Price-to-Earnings

The forecasted price-to-earnings ratio is calculated by dividing the aggregate market capitalization of a country’s MSCI constituents by the aggregate of their forecast earnings, aggregated from Estimates company-level data by Heckman Global Advisors. Source: Heckman Global Advisors

Price-to-Earnings Minus its 10-Year Average

The Price-to-earnings ratio is calculated by dividing the aggregate market capitalization of a country’s MSCI constituents by the aggregate of their recently reported 12 months of earnings. This ratio is compared with its average over the last 10 years. Source: MSCI, Heckman Global Advisors

Forecasted Price-to-Earnings

The ratio of the total dividend payout to the marketcap of a country index. Source: MSCI

6-Month Change in GDP Forecasts

The 6-month change of GDP forecasts measures the difference between the forecasted GDP growth rate and the forecasted GDP growth rate as of 6-months ago.

One Month Upward Estimate Revision Ratio

The one-month upward estimate revision ratio is computed as the number of analyst estimates with upward revisions to earnings forecasts divided by the total number of analyst estimates with revisions over the last month

Terms-of-Trade Trend

A country’s terms of trade is a measure of its aggregate export price index relative to its aggregate import price index. The model’s proprietary measure of the terms-of-trade change over the past 18 months is based on the interaction of (a) global fuel, mineral, agricultural, and manufacturing price movements, and (b) the varying import and export structures of the markets in the model’s universe. Source: International Monetary Fund (IMF), World Trade Organization, U.S. Bureau of Economic Analysis, Heckman Global Advisors

Beta

Beta measures the combination of volatility and correlation for each market relative to world returns based on the last 18 months of returns. *Source: MSCI, Heckman Global Advisors*

Real Exchange Rate Overvaluation

The real effective exchange rate is a measure of the local-currency cost of the local consumption basket relative to the local-currency cost of a trade weighted basket of foreign consumption baskets. The model’s measure of overvaluation is the percent deviation between the current real effective exchange rate and it 6-year moving average. *Source: IMF, Heckman Global Advisors*

Forecasted Current Account/GDP

The forecasted Current Account Balance is measured relative to GDP. *Source: Heckman Global Advisors*

Excess Domestic Credit Growth

Excess domestic credit growth is defined as the change in the ratio of domestic credit to GDP (DC/GDP) over the last five years. *Source: World Bank and Heckman Global Advisors*

Change in Sovereign Spreads

Sovereign spreads are barometers for measuring investor risk aversion. A declining spread implies a decline in risk aversion. The indicator included in the model is based on the decline of the spread over the previous 24 months. *Source: JP Morgan*

Nominal Interest Rate Trend

Nominal interest rate changes are measured as differences between short-term rates and their 24-month averages. Source: Heckman Global Advisors

Price Momentum

The price momentum factor is defined as the one-year percentage change in each market’s local currency price index. *Source: MSCI*

Value Trap Markets

Value-trap markets are those that score in the first quartile according to valuation indicators but in the bottom quartile according to the non-valuation indicators. For these markets, we neutralize valuation scores by setting them equal to the global average country valuation score. This has the effect of lowering the overall scores of value-trap markets.