1.4.3 MIU construction

The last step in company selection is to arrive at the Market Index Universe or MIU, which involves identifying the actual constituents and considerations for reallocation of weights when a sufficient number of companies do not exist in a country-sector combination in the Private Equity-backed Universe (PEU). To achieve this, we rank the companies in the PEU in each country-activity combination by their latest valuation as estimated by the factor model approach and include the largest companies till the required number for that combination of country-activity is reached.

Reallocation of index constituents becomes necessary when enough companies cannot be found within our database for country-activity combinations to be included in the index. To achieve this, we follow a two-tier approach.

1. If a certain activity does not have enough companies to choose from in a given country, then unallocated companies from remaining activities are selected, provided their market capitalisation is higher among the leftover companies.

2. If step 1 leads to a situation where some activity is overrepresented in the index, then an activity weight cap is applied for each activity so that no activity in any country receives too much weight in the index in that country.
   Note that any cap applied is only for the reallocation-induced changes to activity weights in a country and not if naturally an activity is overrepresented in a country due to fractional weights (e.g., 1 company from a specific activity in a country with a 0.01% weight in the index) or naturally because of an activity having a large economic importance (e.g., manufacturing-intensive countries can have a large weight for this activity).

If we do not have enough companies in a country to be selected, then we follow the same procedure for activity as above, but reallocate the country weights to unallocated companies in countries that are geographically/economically closer to the country that does not have enough companies in the PEU.