Many investors focus on the BRIC countries within the emerging markets (Brazil, Russia, India and China). Brazil for many years was considered the attractive opportunity because of its broad statements and sweeping intentions. But its subsequent scandals have shown that intentions were not enough.

By contrast, Hungary has received far less press and is noticeably smaller. Yet for the past decade, it has undertaken a variety of actions to strengthen its governance. Sometimes the implementation of those improvements was challenging. But between 2012 and 2014, the country became more effective, particularly in protecting shareholders and ensuring that financial statements were more accurate. In subsequent years, the country’s equity markets returned more than 30% annually through the period ending December 31, 2016. Once again, a portfolio based on market cap would have relatively small exposure to a country with improved governance behaviors.

Governance Is A Critical Driver Of Performance

In 2015, Gabriel Research & Management conducted a survey of trustees, finance directors, pension managers and consultants on the role of country governance in investing. The results reaffirmed its importance:

• 89% of respondents agreed that effective governance is a critical driver of investment performance;

• 57% believed that country governance regimes/competencies constitute a better measure of opportunity/risk than the traditional emerging/developed market definitions.

Erik Carleton, the director of pension investments at aerospace and defense conglomerate Textron Inc., said in the survey, “I expect my asset managers to take account of governance regimes in country-based investment analysis because it is going to affect a cumulative return of capital to shareholders.

“Things like rule of law in a country, portability of capital, restrictions on investing, money coming in or out and frictions that may be associated with that in either time or tax, are important,” he said.

Country Governance Indexes

Earlier this year, our firm created the first country-level governance indexes. Our database relies on 16 years of research, and it measures and scores all the investable countries in the world based on their governance. From this research, there are 12 standards and 280 factors that are analyzed to determine a country score, which ultimately determines the weighting in the index.