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Contribution Details

Type Master's Thesis
Scope Discipline-based scholarship
Title Globas vs. Regional Value Investing: A Comparison
Organization Unit
Authors
  • Tim Glaus
Supervisors
  • Thorsten Hens
Language
  • English
Institution University of Zurich
Faculty Faculty of Economics, Business Administration and Information Technology
Number of Pages 78
Date April 2015
Zusammenfassung A large body of academic research has shown that value investing strategies consistently outperform both growth strategies and the market across different stock markets. Chan, Hamao, and Lakonishok (1991) find support for the superior performance of value strategies in Japan, Fama and French (1998, 2011) report evidence for the value premium across both different international markets and regions and Caliskan and Hens (2013) find that value outperforms growth over the long term in 41 countries around the world. While some have suggested that this superior performance is attributable to increased risk (Fama & French, 1992) or data-snooping biases (Kothari, Shanken, & Sloan, 1995), value strategies have generally stood up to the test, the outperformance being neither conditioned by higher risk nor by selection biases (Chan, Jegadeesh, & Lakonishok, 1995; Chan & Lakonishok, 2004; Greenwald, Kahn, Sonkin, & van Biema, 2001). In contrast, the value premium can be attributed to ingrained patterns of investor behaviour which encompass the extrapolation of past performance and the subsequent overpayment for alleged future growth, driving the prices of value stocks below their intrinsic value based on fundamentals. While the merits of adopting value strategies have been amply documented for markets across the world, the issue of the appropriate geographic scope of such strategies has received less attention. This raises the question whether value investing is best applied on a global or regional scale, a decision which is particularly relevant for institutional investors who predominantly outsource the management of financial assets by assigning mandates to third party fund managers. Traditionally, institutional investors in the US and Europe have organised their equity mandate structure by dividing the global investment opportunity set into different geographic building blocks, assigning style specific single regional mandates or multiple regional mandates with corresponding regional managers (Kang, Nielsen, & Fachinotti, 2010). This reflects the conviction that equity returns are driven by region or country factors and that local fund managers have superior expertise due to geographical and cultural proximity to markets. In the wake of increasingly globalised markets, many institutional investors gradually come to the conclusion that a fragmented regional approach to mandate allocations constrains their investment process. Conversely, global equity mandates allow investors to overcome regional constraints and gain access to a broad global equity opportunity set (Kang & Melas, 2010; Omata & Benham, 2012). With respect to value mandates, an unconstrained global approach could be expected to widen the scope for finding undervalued securities, allowing global fund managers to exploit opportunities across regions, countries and sectors worldwide. This thesis examines the performance of global, international and regional value funds to investigate whether the implementation of a global or international value mandate approach generates superior returns than both single value mandates and portfolios of multiple regional value mandates, where international refers to a global fund excluding the domestic market. Further the stock selection abilities (skills) of global and regional value managers are examined, assessing whether institutional investors’ claim on local managers’ informational advantage is justified. Hence, the following research question is answered: Do global value funds generate superior investment returns relative to regional value funds and constructed portfolios of weighted regional value funds? Performance is evaluated using a manually selected, survivorship bias-controlled sample that consists of 2,257 global, international and regional value funds (North America, Europe, Japan, Asia-Pacific ex. Japan and Emerging Markets) for the period January 1991 through December 2014 and for several sub-periods, accounting for different underlying economic conditions. Absolute returns and the Sharpe ratio are employed as performance measures. First, average performance of both global and international value funds is compared to regional value funds in each of the five geographic regions, assessing whether a global value mandate approach achieves superior returns than a single regional value mandate in one of the respective regions. The results obtained suggest that in terms of both non-risk and risk-adjusted returns, on average, there is no statistically significant performance difference between regional value funds and both global and international value funds for all regions with the exception of Japan. Global value funds appear to offer diversification benefits relative to Japanese value funds, which is likely conditioned by Japan’s two decade long bear market between 1990 and 2011, offering few sustainable value opportunities. Overall however, there is no evidence that the assignment of a global value mandate offers consistent diversification benefits relative to single regional value mandates. Secondly, performance of both global and international value funds is compared to constructed portfolios of regional value funds, weighted according to the average geographical mandate distribution of institutional investors, in order to examine whether global and international value mandates with a single manager produce superior returns than a value mandate structure across multiple regions with corresponding local managers. It is found that on average, there is no statistically significant difference in performance between global value funds and constructed portfolios of weighted regional value funds. These findings hold when controlling for both a Graham and a quality value style as well as for specialised value investing companies, using non-risk and riskadjusted returns. In spite of an alleged larger investment universe, the evidence suggests that global value managers do not have superior selection skills than regional value managers. This is likely conditioned by the fact that the most frequently traded share of global stock markets is accessible to all value managers, while the few value opportunities outside of the scope of regional value managers’ mandates do not appear to constitute fundamental return drivers. Moreover, it can be assumed that necessary information to accurately identify undervalued securities and determine intrinsic values tends to be highly specific and local in nature, possibly increasing information asymmetry between regional and global value managers. Lastly, in terms of risk-adjusted returns, on average international value funds are found to significantly underperform portfolios of weighted regional value funds. This suggests that the exclusion of the domestic stock universe from the investment process has a significant effect on international managers’ performance. Seeing that for the large majority of international value funds in the sample, the country of domicile is equal to the country of the value manager, an exclusion of the domestic market essentially translates into forfeiting any informational advantages international value managers might have in their respective home markets. Overall, the evidence suggests that the implementation of an integrated global value mandate with a single global manager does not offer any benefits over partitioned regional mandates across multiple managers, while international value mandates even lead to worse returns for institutional investors. Furthermore, all results are robust when using the Jensen’s alpha as an alternative performance measure. Hence, contrary to suggestions in literature, neither does the adoption of global value mandates appear to create additional value for institutional investors, nor can their conventional regional approach to mandate allocation be considered inferior
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