Bridge over ocean
1 November 2002 Financial Analysts Journal Volume 58, Issue 6

Cross-Industry, Cross-Country Allocation

  1. Stefano M.F.G. Cavaglia
  2. Vadim Moroz

Recent empirical evidence has demonstrated that both global industry factors and country factors are important determinants of equity prices. In light of this evidence, we describe a cross-industry, cross-country allocation framework for making active global equity investment decisions. We present a forecasting approach to predicting the relative performance of industries in each of 22 developed country equity markets and demonstrate that a blend of style signals provides an effective way to predict the return performance of these assets. The out-of-sample portfolio performance of investment strategies based on these forecasts for the 1991–2001 period would have provided annual gross returns in excess of the world benchmark return of 400 bps a year with one-way turnover of 50 percent. Conventional global risk models cannot explain this outperformance. Thus, explaining this “anomaly” is a challenge for the investment and academic communities.

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