Country Factors vs. Industry Factors

1
Country Factors vs. Industry Factors

• Stellar Asset Management
• Austin Kairnes
• Emre Kati
• Jae Hyun Jacky Lee
• David Russ
• Marika Schwartzman

2
Increasing Country Correlation

• Declining trade barriers
• GATT/ WTO
• Trading Blocks (NAFTA)
• Falling transportation costs
• Increasing Economic Coordination
• EMU
• IMF

3
Our Analysis

• Compare Mean-Variance Efficient Frontiers for
• Country Portfolio (G7)
• Industry Portfolio
• Country-Industry Portfolio
• 5 countries (US, UK, Germany, Japan, France)
• 6 industries (banking, beverage/tobacco,
  construction, electronics, health, merchandising)
• Test Trading Strategies for
• Country Portfolio
• Industry Portfolio

4
The Efficient Frontiers
5
High Industry Correlations
6
Potential Explanation

• The US is heavily weighted in all industries
  increasing industry correlation.

7
Fixed Weight Strategy
Country Portfolio

• Industry Portfolio

8
Dynamic Weight Strategy
Country Portfolio Oil mthly price diff GTS
global term struct LPB local P/B ratio
LTS local term struct
9
Dynamic Weight Strategy
Industry Portfolio USTBill mthly change in 90
day GPB P/B for MSCI
10
Final Results
11
Conclusions

• Country effects are dominant but industry tilts
  can add value.
• A portfolio diversified on both country and
  industry factors will outperform a one factor
  portfolio.
• An active allocation strategy to take advantage
  of the diversification benefits will be the best.