Bernhard Breloer
Ph.D. Student, University of Erlangen-Nürnberg, Germany.
Hendrik Scholz
Professor, University of Erlangen-Numberg, Germany.
Marco Wilkens
Professor, University of Augsburg, Germany.Performance of International and Global Equity
Mutual Funds: Country Momentum Matters
This is the first paper to investigate the impact of country
momentum on the performance of U.S. based international and global
equity mutual funds. Based on an international version of the three-
factor model of Fama and French (1993) we introduce country
momentum as fourth factor in a multifactor model in order to measure
fund performance. Similar to Bhojrai and Swaminathan (2006) we
construct a country momentum factor using 45 MSCI country indices.
Our empirical study analyzes the performance of 1.038 U.S. based
international and global funds.
The main results are: i) International and global funds show four-
factor alphas on portfolio and individual fund level that are clearly
lower than the respective three-factor alphas. ii) The loading of the fund
portfolios on country momentum is positive and significant. More than
72% of our individual international and global funds reveal a positive
loading on country momentum which is significant for more than 32%
of the funds. iii) Adding the country momentum to the three-factor
model leads to an increase in the model’s adjusted R^2. iv) However, the
ranking of our sample funds changes only slightly due to the
introduction of the country momentum factor. v) Based on 24-month
evaluation periods we observe persistence in the performance of
international and global equity funds for several performance
measures. vi) Using several augmented multifactor models which
include additional factors covering countries, regions and sectors we
find that fund loadings on country momentum are robust both for
portfolio and individual funds.
To sum up, the application of the innovative country momentum
factor has an impact on the measured performance of international and
global equity funds but does not notably change fund ranking and the
model’s predictive ability.