Countries Versus Industries in Europe: A Normative Portfolio Approach

Abstract

The relative benefits of country diversification and industry diversification are critical for investors, portfolio managers, and investment banks. The unification of Europe has had a substantial impact on these relative benefits and the ultimate goal of this article is to evaluate their temporal evolution. We find that although a country approach outperformed an industry approach in the early 1990s under three different performance measures, the opposite was the case in the late 1990s and early 2000s. We also find that this shift does not seem to be a temporary phenomenon associated with the TMT bubble. Overall, our results validate both the increasing emphasis on industry diversification, as well as the recent reorganization of research departments of investment banks, previously organized along country lines and currently organized along industry lines. There seems to be little question that in Europe industry expertise has become more important than country expertise.

Keywords: Portfolio management, Country versus industries, Europe

JEL Classification: G11