Changing Risks in Global Equity Portfolios

Posted: 13 Feb 2004

See all articles by Wenling Lin

Wenling Lin

Office of Comptroller of Currency

Lisa Kopp

Frank Russell Company

Phillip Hoffman

Frank Russell Company

Mark Thurston

Frank Russell Company

Abstract

Given recent changes in sector and style risk and in manager betting behavior in the global equity markets, we analyzed the relative importance of the major active-risk drivers and the implications of their relative importance for global multimanager portfolio construction. Using cross-sectional regressions and multimanager portfolio simulations, we found that the effect of style and sector bets on active manager risk increased after 1998 and that using style-balanced portfolios could have substantially reduced active risk during the 1998-2002 period. Most of the risk reduction, however, would have come from the diversification of stock/sector selection risk, because growth and value managers make different bets on certain sectors. Common bets on major countries, such as Japan or the United States, persisted during this period, but their importance decreased because of smaller benchmark-relative bets and country risk. In light of the changes, using multiple risk-control strategies to construct multimanager portfolios may be an effective way to thrive in different market environments.

Keywords: Portfolio Management, asset allocation, equity strategies

Suggested Citation

Lin, Wenling and Kopp, Lisa and Hoffman, Phillip and Thurston, Mark, Changing Risks in Global Equity Portfolios. Financial Analysts Journal, Vol. 60, No. 1, pp. 87-99, January/February 2004, Available at SSRN: https://ssrn.com/abstract=500023

Wenling Lin (Contact Author)

Office of Comptroller of Currency ( email )

400 7th Street SW
Washington, DC 20219
United States

Lisa Kopp

Frank Russell Company

909 A Street
Tacoma, WA 98402
United States

Phillip Hoffman

Frank Russell Company

909 A Street
Tacoma, WA 98402
United States

Mark Thurston

Frank Russell Company

909 A Street
Tacoma, WA 98402
United States

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