A New Framework for International Investing

Abstract

Three interrelated issues in international investing are explored here. First, despite (or because of) years of underperformance, international equity investment strategies are very much worth pursuing. Second, high levels of active risk are not necessarily a winning strategy in international equities; an aversion to active risk is just as rational in international markets as it is domestically. Finally, when investment decisions that are naturally separate are in fact separated, the efficient frontier moves up and to the left?portfolio efficiency improves?because we use more of the information collected by the analyst. Thus, in international portfolios, the investment manager should make security, country, and currency decisions independently of one another, and arguably admit short as well as long positions.