Working Paper: NBER ID: w12346
Authors: Charles P. Thomas; Francis E. Warnock; Jon Wongswan
Abstract: This paper evaluates the ability of U.S. investors to allocate their foreign equity portfolios across 44 countries over a 25-year period. We find that U.S. portfolios achieved a significantly higher Sharpe ratio than foreign benchmarks, especially since 1990. We test whether this strong performance owed to trading expertise or longer-term allocation expertise. The evidence is overwhelmingly against trading expertise. While U.S. investors did abstain from momentum trading and instead sold past winners, we find no evidence that these past winners subsequently underperformed. In addition, conditional performance measures, which directly test reallocating into (out of) markets that subsequently outperformed (underperformed), suggest no significant trading expertise. In contrast, we offer strong evidence of longer-term allocation expertise: If we fix portfolio weights at the end of 1989 and do not allow reallocations, we still find superior performance in the recent period.
Keywords: International equity portfolios; US investors; Performance analysis; Trading expertise; Allocation expertise
JEL Codes: G11; G12; F21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| US portfolios (G11) | higher Sharpe ratio than foreign benchmarks (G15) |
| superior performance (D29) | not due to trading expertise (G19) |
| US investors (G24) | do not exhibit superior skill in reallocating into markets that subsequently outperformed (G19) |
| longer-term allocation expertise (G11) | superior performance (D29) |
| initial deviations from benchmark weights (C46) | superior performance (D29) |
| insider ownership (G34) | allocation decisions (G11) |
| US investors (G24) | prior knowledge of superior outcomes (D80) |