Country and Sector Drive Minimum-Volatility Investing in Emerging Markets Too

Abstract

We find that the benefit of minimum-volatility (min-vol) investing in Emerging Markets can be earned through country and sector allocation in lieu of individual stock selection. The country-sector approach delivers implementation benefits such as lower turnover and more liquid holdings, which lowers transaction costs. To further test the importance of sector and country allocation we constrained a stock selection portfolio so that country and/or sector exposure matched the capitalization-weighted benchmark. Limiting active country and sector exposure significantly reduced risk-adjusted return. Our results confirm findings by De Boer et al. (2013) about country and sector effects for minimum-volatility investing in Developed Markets.

Keywords: minimum volatility, low volatility, emerging markets, equities, portfolio construction

JEL Classification: G12, G15