Building Global Equity Portfolios
Research shows that approximately 30%-40% of the variability in global equity securities can be explained by top-down country and industry memberships. Active management of global equity portfolios in the asset management industry, however, focuses almost exclusively on bottom-up security selection approaches, either minimizing or purposefully eliminating top-down exposures. In this paper, QMA shows that a systematic factor-based cross-sectional top-down framework combining local country and global industry exposures can significantly increase the investable opportunity set in global equity portfolios and augment excess returns. The team explains how their decision-making framework can be used to capture these often-neglected exposures without adding uncompensated risk, and suggests that this approach can be used independently or in combination with bottom-up approaches. Asset owners looking to diversify their active bottom-up global equity portfolios, either systematic or fundamental, can benefit by evaluating this top-down portfolio construction option.