Academic Research Insight: When Does International Investing Make Sense?

/Academic Research Insight: When Does International Investing Make Sense?

Academic Research Insight: When Does International Investing Make Sense?

By | 2017-08-18T17:10:57+00:00 July 24th, 2017|Basilico, Academic Research Insight|0 Comments
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(Last Updated On: August 18, 2017)
  • Publication: FINANCIAL ANALYST JOURNAL, II Q 2017  (version here)

What are the research questions?

Market globalization is said to be the culprit of decreased benefits of international diversification. In 1995, a US investor investing in Vodafone had exposure to 99% of UK based sales. The same investor in 2012 is exposed to UK sales only for 8% while at the same time he is exposed to 30% of US sales, his home country. Vodafone is an example of a multinational corporation (MNCs).

  1. What are the diversification benefits of domestic and multinational corporations with varying degrees of internationalization, including foreign companies with sales only in their domestic market, companies with sales concentrated in their home region, companies with sales concentrated in other regions and global companies?

What are the Academic Insights?

By using a modified version of Bragman and Brain’s (2003) multinational classification system to categorize 1,276 stocks from 10 countries (domestic, home region, host region, bi-region and global), they find that:

  1. Adding international stocks to a local portfolio offers statistically significant diversification benefits to investors in Canada, Europe and Japan, but not the US or the UK.
  2. When looking at varying degrees of internationalization, global stocks offer diversification benefits only to Belgian investors. Differently, for the remaining eurozone countries, Canada and Japan all but global stocks classification add diversification benefits. Finally, for the UK and the US only foreign domestic stocks offer statistically significant diversification.
  3. Generally, the greatest improvement in Sharpe ratios comes from adding foreign domestic stocks.

Why does it matter?

International diversification is not dead yet! It is a matter of finding the right stocks. The suggestion for both investors and fund managers is to perform an “end-market” sales analysis to increase the potential diversification benefits of an international stock portfolio.

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About the Author:

Dr. Elisabetta Basilico is a seasoned investment professional with an expertise in "turning academic insights into investment strategies." Research is her life's work and by combing her scientific grounding in quantitative investment management with a pragmatic approach to business challenges, she’s helped several institutional investor achieve stable returns from their global wealth portfolios. Her experise spans from asset allocation to active quantitative investment strategies. Holder of the Charter Financial Analyst since 2007 and a PhD from the University of St. Gallen in Switzerland, she has experience in teaching and research at various international universities and co-author of articles published in peer-reviewed journals. She and co-author Tommi Johnsen are currently writing a book on research backed investment ideas. You can find additional information at Academic Insights on Investing.