Rising Sector and Style Influences on Global Equity Portfolios
38 Pages Posted: 27 Jun 2003
Date Written: November 26, 2002
This paper investigates how recent market and manager developments - including rising sector risk, reduction in managers' country bets, and greater influence of investment style on managers' stock/sector views - change the hierarchy of global equity's active risk drivers and multi-manager portfolio construction. Using cross-sectional regressions and multi-manager portfolio simulations, we find a shift from the dominance of country risk to style and sector risk. We also find style-balanced portfolios substantially reduce active risk after 1999, mostly in stock/sector selection. Given changing influences of risk factors, this study suggests constructing a portfolio with multi-factor (style, sector, and country) risk-controlled strategies.
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