AFG Asset Allocation Model

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AFG Asset Allocation Model:

For fifteen years the Applied Finance Group has provided investment professionals with a suite of tools dedicated to helping select attractively priced stocks.  Over the last five years, our focus has expanded to include international stock markets, creating an opportunity to leverage our research across an asset allocation model that can help investment professionals decide which countries around the world are most attractive.  This platform also details which sectors are attractive within each country, and ultimately which stocks are attractive in each sector.  This article outlines our asset allocation process, as well as provides insight into currently attractive countries, sectors, and stocks.  The data for this project is as of July 31, 2010.

AFG Country Model

Our first task is to determine which countries are currently attractive.  Our research process in the asset allocation platform starts by first calculating a market-cap weighted snapshot of several variables to help quantify the characteristics of each country.  These variables include AFG’s Percent to Target, EM Momentum, EM+1 Change, and Price Momentum.  Once we have calculated country values for each variable, we then build a factor model based on these variables to help determine the attractiveness of each country.  The graph below highlights the performance of this model over time: 

Chart 1: AFG Country Allocation Model

From the chart above, we can see that this model has done an admirable job selecting "Buy" countries that are set to outperform the overall global stock market.  Alternatively, we can see that "Sell" countries we recommend avoiding have underperformed the global stock market.  Using this framework going forward, we believe that overweighting countries that we label a “Buy”, as well as underweighting countries that we label a “Sell”, should help boost overall performance from an allocation perspective.  Currently, using our twelve-country model, we rank each country in the following order:

Chart 2: AFG Country Allocation Model Results – 7/31/2010

According to our results above, our current "Buy" countries (as of 7/31/2010) are France, the United States, and Germany.  France is the top-ranked country based on Percent to Target, and is ranked in the top half on EM Momentum, EM Change, and Price Momentum.  The United States lands at number 2, boosted by its top ranking with EM Momentum, although Percent to Target and EM Change are ranked in the bottom half.  Germany rounds out the Buy list with a #2 rating for Percent to Target and falls in the top half for EM Momentum and EM Change.

AFG Sector Model

After determining the countries we find most attractive, our second step becomes finding the most attractive sectors within each country.  We can recreate our country model, but instead shift our focus to the individual sectors within one country.  We repeat the steps of building market-cap weighted snapshots of several variables to help quantify the characteristics of each sector.  Once we have calculated sector values for each variable, we then build a factor model based on these variables to help determine the attractiveness of each sector.  The graphs below highlight the performance of this model over time, using the three countries from our “Buy” model above:

Chart 3: AFG Sector Allocation Model – France

Chart 4: AFG Sector Allocation Model – United States

Chart 5: AFG Sector Allocation Model – Germany

Currently, in each of these “Buy” countries, the sector ranks are the following:

Chart 6: AFG Sector Allocation Model Results – 7/31/2010

AFG Stock Model

After determining which countries and sectors attractive, our last step is to determine the final list of holdings that we want to include in our portfolio.  We have built an entire research platform around finding attractive stocks, and we have a library of training materials to help our clients become confident in applying these principles to their research process.  But for the sake of brevity, we will first limit our focus to simply our “Buy” stocks in our “Buy” sectors and our “Sell” stocks in our “Sell” sectors.  The charts below contain the same data as our sector research charts from above, but now add the performance if we were to only include individual stocks with a “Buy” or “Sell” rating.

Chart 7: AFG Sector Allocation Model – France (AFG Buys/Sells included)

Chart 8: AFG Sector Allocation Model – United States (AFG Buys/Sells included)

Chart 9: AFG Sector Allocation Model – Germany (AFG Buys/Sells included)

The charts above highlight the ability that our platform has to improve our outperformance at the sector level by limiting our focus to a smaller basket of quantitatively defined “Buy” or “Sell” countries.  Our analyst team has helped identify some currently attractive long and short ideas based on their quantitative characteristics in each of the “Buy” and “Sell” sectors within our “Buy” and “Sell” countries.  The table below contains an overview of these stocks, but you can research each of these further from AFGViewGlobal.com.

Chart 10: AFG Allocation Model Stock Picks