MSCI's methodology for creating and maintaining the index follows a "market representation" approach. It takes into account the aggregate value of all listed securities in particular industries/countries as a proportion to the world.
Do note it is adjusted with a liquidity factor amongst other factors. For example, China's equity markets are still highly-controlled where foreign investors are subject to quotas for trading in Chinese shares. Therefore, China's weightage in the MSCI All Country World index is much smaller (after MSCI adjustment) than what it ought to be with the many large Chinese companies like Tencent, Alibaba, Baidu, ICBC etc.
It is probably more logical to allocate based on a country/industry's representation to the world. The alternative of equal weighted will likely result in a high-risk portfolio with over-concentrated allocation to small countries like Malaysia, Mexico, South Africa etc. Similarly, in the context of industries, the alternative of equal weighted will likely result in an outsized investment position in certain small industries like utilities.
MSCI's methodology for creating and maintaining the index follows a "market representation" approach. It takes into account the aggregate value of all listed securities in particular industries/countries as a proportion to the world.
Do note it is adjusted with a liquidity factor amongst other factors. For example, China's equity markets are still highly-controlled where foreign investors are subject to quotas for trading in Chinese shares. Therefore, China's weightage in the MSCI All Country World index is much smaller (after MSCI adjustment) than what it ought to be with the many large Chinese companies like Tencent, Alibaba, Baidu, ICBC etc.
It is probably more logical to allocate based on a country/industry's representation to the world. The alternative of equal weighted will likely result in a high-risk portfolio with over-concentrated allocation to small countries like Malaysia, Mexico, South Africa etc. Similarly, in the context of industries, the alternative of equal weighted will likely result in an outsized investment position in certain small industries like utilities.