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1.4.3 Selecting companies & reallocation of weights

Finally, with the number of companies to be included in each country and PECCS activity, obtained, selecting the constituents is the final step. To achieve this, we rank the companies in each country-activity combination by their latest valuation as estimated by the privateMetrics factor model approach and include the largest companies till the required number for that combination of country-activity is reached.

Reallocation of index selection 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 a majority 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).

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