Assessing Alternative Global Equity Investment Frameworks

Abstract

In establishing the foundation of their investment process, global equity investors typically adopt a framework along geographic and/or industry dimensions. The chosen framework is then applied to the whole investment process including alpha generation, portfolio construction, and risk management, thus having fundamental implications for investment results. Our paper provides the first comprehensive study of the feasibility and optimality of alternative frameworks. We draw on the intuitions and methodology from the prior debate on whether country-specific or industry-specific sources of return variations dominate in the diversification benefits of global equity investing. We find that region-sector and region-industry frameworks are the optimal frameworks among the feasible ones. Our results are of importance to both stock selection and asset allocation investors in global equities.

Keywords: global equity, investment framework, geographic, region, country, sector, industry, portfolio constructure, alpha generation, risk management, stock selection, asset allocation

JEL Classification: C10, C21, C22, C12, C50, C51, G11, G12, G14, G15, G31