We looked previously at the importance of international competitiveness of countries when it comes to building investment indices (U.S. Falls to Bottom of Top Ten Most Competitive Nations). We've seen that the level of competitiveness as reflected in, for example, the IMD Digital Competitiveness Ranking, historically tended to be associated with better performance when selecting countries to invest in. We've also seen that the U.S. has been dropping in overall IMD Competitiveness Ranking in recent years and that the Vident Core International Equity Index™ has somewhat better competitiveness characteristics in both level and especially in trends in changing of ranks when compared against the Morningstar Global Markets ex-U.S. Index.
But since we adhere to the principle of Human Productivity as the driver of investment returns, then it makes sense to zoom in on those elements of the competitiveness index which pertain directly to development, attraction and retention of talented people. If human productivity is the key to economic and profit growth and by extension long-term investment returns, then selecting countries which attract productive people is a promising proposition.
The IMD Ranking has a section devoted specifically to how nations compare when it comes to productivity of participants in the economy called the IMD World Talent Ranking, with three major categories: Investment & Development, Appeal, and Readiness. These are comprised of 31 individual factors.
The data shows that this Talent ranking has been additive. Looking at the Talent index ranking, we see that the top quintile (meaning the nations in the best 1/5th of the Talent rank) averaged 5.71% 6-month return, whereas the bottom quintile (meaning the nations in the worst 1/5th of Talent rank) averaged only 1.52% 6-month return. Furthermore, the correlation between the Talent Ranking and subsequent returns is positive 65% of the time. However, these results should be taken with a grain of salt as this factor is only available back to 2013.
(Source: Bowyer Research, analysis ranges from 6-30-2013 through 12-31-2021, most recently available. Past performance is not indicative of future results.)
Despite the fact that IMD’s Talent ranking has only been available beginning in 2013, more often than not the factor has been additive to returns. Furthermore, it's a broad enough aggregate metric (with 31 ingredients) that it is less likely to be driven by a small set of outliers in 1 or 2 factors. And finally, it just makes sense. Countries with highly economic productive people are more likely to be highly economically productive themselves and countries in which this trend is moving in the right direction are more likely to be trending the right way in terms of growth.
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Investors cannot invest directly in an index. Indexes are not managed and do not reflect management fees and transaction costs that are associated with some investments. Past performance does not guarantee future results.