Across industries

The conventional wisdom is that by investing across national borders, portfolio managers reduce risk while maintaining returns. By picking stockmarkets that do not move in tandem, some will still perform when others fall, and the overall effect will be more stable performance. In this traditional view, picking the companies in those international markets is secondary.

by Cass Business School 2006
Last Updated: 23 Jul 2013

But correlations have risen particularly between the US and developed markets to the point where diversification across industries has been more beneficial. This study of returns between 1992 and 2002 found a sharp decline in the diversified returns across countries and a rapid rise in returns from investing across industries.

Diversifying across certain industries - semiconductors, consumer services, technology, household products, tobacco and entertainment - is particularly rewarding. Fund managers looking to get the best returns from industry diversification should choose businesses that are listed on developed exchanges, but are also based in emerging markets, it is suggested.

Source: A new look at international diversification: should we diversify across industries or across countries
Kate Phylaktis and Lichuan Xia
Cass Business School 2006

Review by Steve Lodge

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