Country allocation is determined by relative Prospective Real Yields (PRY).
The top-level allocation is then determined by an optimization procedure that seeks to maximize portfolio PRY subject to tracking error. High PRY markets are overweighted, subject to constraints on the degree of dispersion from the benchmark index.
Inflation forecasting is a key feature of our approach. We forecast inflation using econometric models for each local currency market. These capture the statistical relationships between demand-pull and cost-push price pressures. These models are supplemented by a quantitative analysis of factors that past statistical relationships might not capture but will affect future inflation, such as changes in government tax policy.
In order to assess sovereign credit risk, we take a quantitative approach that rates a country on four fundamental sets of factors (i) its domestic economy (ii) its institutional strength (iii) the country’s external sector and (iv) its fiscal outlook. If necessary, this rating leads to an adjustment to a country’s Prospective Real Yield (PRY) measure.