Dissecting The Value-Momentum Spread: Sector Allocation Effect Versus Country Allocation Effect

Abstract

Empirical literature suggests that sector allocation might be a more effective approach in gaining diverse exposures in the global equity market compared to country allocation due to the growing integration of economic activities amongst countries. In addition, sector allocation often provides unique exposures to a variety of investment styles. We undertake to investigate the relative importance of sector allocation versus country allocation in explaining the return differences between investment style indexes in the global equity market. After constructing the global value and momentum style indexes from global equities, we conduct performance attribution on the global value-momentum spread over the period from 01 January 1991 to 31 December 2008. The results show that both sector and country allocation effects explain the significant variations in the global value-momentum spread over the examination period. While the sector allocation effect explains 39.342% of the variations in the value-momentum spread, the country allocation effect only explains 10.444% of the variations. Our study results support the rising importance of sector allocation policy relative to country allocation policy in managing global equity style investments.