Research and Insights Library

Should You Tilt Your Equity Portfolio to Smaller Countries?

This paper, published in The Journal of Portfolio Management, Fall 2017 edition. examines the relationship between country size (as measured by aggregate equity market capitalization) and country equity market performance. Our results indicate that small countries have reliably higher average returns as well as higher country-specific volatility when compared to large countries.

When we analyze equity strategies that limit the exposure the portfolio can have to any one country, we find that reducing the portfolio weights 0f large countries and reallocating that capital to smaller countries can improve risk-adjusted performance due to higher returns and a more equal capital distribution across countries. We perform this analysis for both developed market and emerging market equities, with similar results.

The paper contributes to the literature on factor-based, quantitative investment strategies by examining how the country size premium can be used to improve investment outcomes for international equity investments.

Click here to download a PDF of the full article.


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