Free Float Adjustments in Global Equity Portfolios

Abstract

Free float represents the portion of a company’s shares that is publicly traded as opposed to locked-in shares held by strategic investors. In this note, we compare the rationale and various implications of using full market weights or free float adjusted weights in a global equity portfolio. Market capitalisation weights can be justified on a theoretical basis and better represent the relative economic importance of the companies in the portfolio. Free float weights take into account the trading opportunities but change the geographic and industry composition of the global portfolio. The market weighted portfolio has higher exposures to small cap, value and less liquid stocks in the global universe which have been documented to command premia over the long run.