The Performance of International Portfolios

2006

This paper evaluates the ability of U.S. investors to allocate their foreign equity portfolios across 44 countries over a 25-year period. We find that U.S. portfolios achieved a significantly higher Sharpe ratio than foreign benchmarks, especially since 1990. We test whether this strong performance owed to trading expertise or longer-term allocation expertise. The evidence is overwhelmingly against trading expertise. While U.S. investors did abstain from momentum trading and instead sold past winners, we find no evidence that these past winners subsequently underperformed. In addition, conditional performance measures, which directly test reallocating into (out of) markets that subsequently outperformed (underperformed), suggest no significant trading expertise. In contrast, we offer strong evidence of longer-term allocation expertise: If we fix portfolio weights at the end of 1989 and do not allow reallocations, we still find superior performance in the recent period.

2011

This paper investigates the trading of U.S. investors across 44 foreign equity markets over a 25-year period. We find that U.S. investors abstained from momentum trading and instead sold past winners. We then ascertain whether this trading strategy led to strong portfolio performance. We find that while U.S. portfolios did indeed achieve a significantly higher Sharpe ratio than foreign benchmarks, especially since 1990, we cannot attribute this performance to trading expertise for two reasons. First, we find no evidence that these past winners subsequently underperformed. Second, conditional performance measures, which directly test reallocating into (out of) markets that subsequently outperformed (underperformed), suggest no significant trading expertise. Rather, the evidence suggests that the strong performance of U.S. investors' foreign portfolios owes to longer-term allocation expertise: If we fix portfolio weights at the end of 1989 and do not allow reallocations, we still find superior performance. Our results indicate that U.S. investors, in aggregate, cannot be labeled momentum traders and that the international portfolio performance of U.S. investors owes more to long-standing allocations rather than month-to-month trading expertise.

SSRN Electronic Journal, 2009

We compare the performance of local versus foreign institutional investors using a comprehensive data set of equity holdings in 32 countries during the 2000-2010 period. We find that foreign institutions perform as well as local institutions on average, but only domestic institutions show a trading pattern consistent with an information advantage. Our results suggest a smart-money effect of local institutions in countries subject to higher information asymmetry, non-English speaking countries, countries with less efficient stock markets, with poor investor protection, or high levels of corruption. The local advantage is more pronounced in periods of market turmoil and in illiquid stocks.

SSRN Electronic Journal, 2003

This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate. Despite the liberalization of foreign portfolio investment around the globe since the early 1980s, the home-bias phenomenon is still found to exist. Using a relatively new IMF survey dataset of cross-border equity holdings, this paper tests new structural equations from a consumption-based asset-pricing model on international portfolio holdings. Using of stock data allows us to provide new and clear-cut evidence on the determinants of international portfolio holdings. The empirical results show that an augmented gravity model performs remarkably well. The results indicate that market size, transaction cost, and information asymmetry are major determinants of cross-border portfolio choice. These findings shed light on alternative theories of international portfolio holdings, especially on the transaction and information cost-based explanations of home bias.

SSRN Electronic Journal, 2004

This study evaluates the impact of information on international portfolio investments. We decompose information into two categories: information that is observable by investors from all countries that we call homogeneous, and information that differs between countries that we call heterogeneous.

1998

This paper explores daily, international portfolio flows into and out of 44 countries from 1994 through 1998.

Review of Financial Studies, 2010

We examine how residents of the United States allocate their stock portfolios internationally. We find that a large U.S. Foreign Direct Investment (FDI) position in a destination country in 1990 is associated with a relatively large stock portfolio position in that country in the 2001-2006 period. Moreover, a change in the U.S. FDI position from 1980 to 1990 helps predict the change in the U.S. Foreign Portfolio Investment position from 1994 to 2006. These results are rationalized by Van Nieuwerburgh and Veldkamp's (2009) equilibrium model of learning and portfolio choice under an information processing constraint. FDI establishes marginal differences in the endowments of information about different countries, which later translate into differences in stock portfolio holdings. We control for crosscountry differences in capital controls, proximity along different dimensions, corporate governance, and economic and capital market development. Our results also hold for the G6 countries collectively. (JEL F21, F36, G11) How do investors allocate their stock portfolio internationally? The capital asset pricing model (CAPM) under purchasing power parity predicts that all investors hold the World Market Portfolio regardless of their nationality (Grauer, Litzenberger, and Stehle 1976). This prediction, however, is clearly at odds with the data (Karolyi and Stulz 2003), indicating that investors take into account factors other than the benefits of international diversification. Economists need alternative theories to describe how investors allocate their portfolios internationally. An important family of models asserts that crosscountry differences in stock portfolio allocations arise because investors in different countries are endowed with different information sets (Gherig 1993; Brennan and Cao 1997; Kang and Stulz 1997). A long-standing conceptual difficulty with this argument is that information asymmetry would not be sustainable for long peri-We are grateful to Geert Bekaert (the Editor) and two anonymous reviewers for excellent suggestions. For helpful discussions, we thank

SSRN Electronic Journal, 2000

Do market comovements affect international portfolio investment? We examine whether there are systematic changes made to the holdings of equities listed on U.S stock exchanges by foreign fund managers when their home markets become more correlated with the U.S. We concentrate on international equity mutual fund managers based in 41 countries. We find that foreign fund managers increase their holdings of U.S. stocks post structural breaks in the return comovements between their home markets and the U.S. equity market. Our results are robust to various controls for the determinants of cross-border asset flows associated with information asymmetry. JEL classification: F36, G11, G15, G23 Abstract Do market comovements affect international portfolio investment? We examine whether there are systematic changes made to the holdings of equities listed on U.S stock exchanges by foreign fund managers when their home markets become more correlated with the U.S. We concentrate on international equity mutual fund managers based in 41 countries. We find that foreign fund managers increase their holdings of U.S. stocks post structural breaks in the return comovements between their home markets and the U.S. equity market. Our results are robust to various controls for the determinants of cross-border asset flows associated with information asymmetry. JEL classification: F36, G11, G15, G23

International Journal of Finance & Economics, 2018

The benefits of international diversification for equity investors have been highlighted for decades. Despite the reduction of many previous barriers to foreign investment, investors are found to persistently overweight domestic equities. This paper examines whether the benefits of international diversification are available via U.S.-traded equity products over a 15-year period between 1996 and 2011. The equity products investigated are multinational corporations (MNCs), American depository receipts (ADRs), single-country exchange-traded funds, iShares, and closed-end country funds. Mean-variance spanning tests and Sharpe ratio analysis reveal that portfolios of ADRs and MNCs offer the greatest international diversification benefits to U.S. investors in a domestic setting. Whereas the benefits of international diversification vary during periods of differing market conditions, the findings for ADRs and MNCs remain robust. We conclude that it is possible to reap the benefits of international diversification via U.S.-traded equity products but that the benefits of different equity types vary significantly.