Quantitative Investing

Are frontier markets the next emerging markets? And if so, should global equity investors include them in their portfolios? From a risk parity perspective, investors could benefit from a frontier markets allocation well in excess of the market weight of the asset class. A risk parity portfolio tends to outperform a market cap-weighted portfolio during periods of positive equity returns while delivering comparable returns during crisis periods. Even if portfolio managers could not follow a risk parity asset allocation strategy due to benchmark tracking considerations, overweighting frontier markets could help them outperform their benchmarks during upside periods without increasing downside risks significantly.

The Norwegian Government Pension Fund Global was recently ranked the largest fund on the planet. It is also highly rated for its professional, low-cost, transparent, and socially responsible approach to asset management. Investment professionals increasingly refer to Norway as a model for managing financial assets. We present and evaluate the strategies followed by the Fund, review long-term performance, and describe how it responded to the financial crisis. We conclude with some lessons that investors can draw from Norway’s approach to asset management, contrasting the Norway Model with the Yale Model.

This study investigates a number of anomaly variables in capital markets research around the world, including asset growth, book-to-market, investment-to-assets, momentum, net stock issues, size, and total accruals. We use zero-cost trading strategies, the Fama-French factor model, and the newly developed alternative investment-based three-factor model (Chen, Novy-Marx, and Zhang 2010) to show that these anomalies produce significant abnormal returns across countries. We show that abnormal returns vary dramatically among countries and between developed and emerging economies. We provide strong evidence to support the limits of arbitrage theory in international equity markets by documenting a positive correlation between idiosyncratic risk and abnormal returns for all of the anomalies. We also show that idiosyncratic risk has less impact on abnormal return for developed countries than emerging countries. Our results support the mispricing explanation of the existence of various anomalies around the world.