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abcd
A N e w G l o b al C o u ntr y - S e ct or
M o d el
Alan Scowcroft
Global Head of Equities Quantitative Research
James Sefton
S enior Quantitative Analyst
Northfields 15th Annual R e search Conference

Tenaya Lodge - 6th May, 2002
I ntr o d u ctio n a n d O v e r v i e w
Major trends in global equity markets
steady increase in market and industry concentration

declining importance of Country factors
increasing importance of global investment
Implications for modelling risk in equity portfolios
comparison of alternative approaches

a proposed new model
Construction of pure industry and country factors
identification and estimation issues
Comparison of results
abcd
at the stock level and portfolio level

implications for strategy
T h e T h r e e M a j or T r e n d s i n G l o b al E q u it y M a r k ets
Demand Side
A steady rise in the number of number of global funds.

A corresponding fall in the degree of home bias.
Supply Side (1)
The rise and rise of the global multinationals

More and more companies business conducted across countries
Supply Side (2)
abcd
An increase in market concentration globally

Leading to increases in industry composition bias in domestic markets
T r e n d 1 : H o m e B i a s o f U S D o m e sti c I n v e st ors
100
90
80
70
60
50
40
30
20
10
0
1980
1985
1990
Share of Foreign Equities in World Portfolio
1995
2000
Share of Foreign Equities in US Portfolio
% Home Bias
abcd
T r e n d 1 : % F u n d s h el d i n F o r e i g n E q u it y - N o n - U S
United Kingdom
Canada
1980
1990
1993
10.1
19
19.7
Mutual Funds
37.1
36
All Investments
18
Pension Funds
1997
34
Pension Funds
4.1
5.8
10.3
Mutual Funds
19.9
17.5
17.1
All Investments
Japan
Germany
Pension Funds
36
0.5
18
19.7
Mutual Funds
7.9
All Investments
Pension Funds
4.5
4.5
Mutual Funds
56.3
45.2
10
All Investments
Source: The figures for pension funds and mutual funds are from Lewis (1999). The figures for all equity investments
for (1990) are from French and Poterba (1991) and the ones for 1997 are from CPIS, IMF (2001).
abcd
T r e n d 1 : % F u n d s h el d i n F o r e i g n E q u it y
100%
90%
80%
70%
60%
50%
40%
30%
20%
Netherlands
Switzerland
Sweden
Australia
UK
10%
0%
Japan
US
1991
Source: Watson Wyatt Global Asset Survey
abcd
1992
1993
1994
1995
1996
1997
1998
1999
2000
T r e n d 1 : D e m a n d S i d e M a tt ers
finance directors at multinational companies have

expressed considerable frustration that the country
where they choose to list their shares determines the
way that they are perceived by investors
Bacon and Woodrow Investment R eport (1999)
abcd
T r e n d 2 : I n cr e a s e i n I nt er n ati o n al B u s i n e s s
35
30
25
20
15
10
5
0
1960
1965
1970
US Exports as % US GDP
UK Exports as % UK GDP
abcd
1975
1980
1985
1990
1995
2000
US Imports as % US GDP
UK Imports as % UK GDP
T r e n d 2 : I n cr e a s e i n I nt er n ati o n al B u s i n e s s
8
0
1960
abcd
1965
1970
1975
1980
1985
1990
US Direct Investment Abroad
Foreign Inward Investment into US
UK Direct Investment Abroad
Foreign Inward Investment into UK
1995
2000
T r e n d 3 : I n c r e a s e i n M a r k e t C o n c e n tr ati o n
1
Concentration Index = n wi
n
i =1
n
Concentration Index
Dow Jones Market
abcd
% Mkt Cap of largest 5%
January
1992
March 2002
January
1992
March 2002
Canada
1.49
1.61
35.0%
37.7%
UK
1.81
3.11
39.0%
59.3%
Japan
2.08
2.30
40.1%
43.6%
United States
2.46
3.30
46.7%
57.0%
Euro Countries
1.85
2.45
37.8%
49.6%
Europe ex Euro and UK
1.37
3.50
30.7%
61.5%
Pacific ex Japan
2.41
2.64
47.9%
49.4%
Latin America
1.94
1.69
48.4%
39.4%
World
2.41
3.66
44.2%
57.3%
T r e n d 3 : I n c r e a s e i n S e c t o r C o n c e n tr ati o n
Concentration Index
Dow Jones Market
abcd
% Mkt Cap of largest 5%
January
1992
March 2002
January
1992
March 2002
Basic Materials
1.80
2.03
37.3%
43.1%
Consumer Cyclical
2.21
2.98
41.1%
51.3%
Energy
2.45
3.59
53.5%
69.6%
Financial
2.48
2.95
45.7%
52.9%
Healthcare
2.40
3.38
54.8%
69.2%
Industrial
2.21
5.28
37.2%
51.9%
Consumer Non Cyclical
2.48
3.04
45.8%
58.5%
Technology
2.50
4.35
50.1%
66.0%
Telecommunications
1.38
2.53
36.4%
58.9%
Utilities
1.48
1.33
32.5%
29.0%
10
T h e i n c r e a s e i n c o n c e n tr ati o n i s i m p o rt a n t
Market concentration measured by either the concentration index, the
increased percentage of total market capitalisation of the top 5% of
companies or the Gini coefficient, has increased dramatically over the
last 10 years in all major markets
This increase in market concentration is not simply due to

consolidation in a few sectors but with the pos sible exception of
utilities occurs across all global sectors
As a consequence, with the exception of the U S , all the major markets

have significant industry composition bias
This has serious implications for portfolio construction
abcd
market performance is more a function of industry composition

stocks are often spuriously highly correlated with market indices
the decomposition of tracking error may be seriously distorted
11
T r e n d 3 : I n c r e a s e i n I n d u str y C o m p o s iti o n B i a s
Industry Bias of Market j =
wi
(w
nS
nS
2
i =1
nS
whe re
wj = wij and
i =1
abcd
January
1992
March
2002
Finland
2.55
5.11
Mexico
2.43
2.39
Portugal
3.13
2.37
2.08
w i w j )
ij
nC
wi = wij
j =1
January
1992
March
2002
1.28
1.58
1.58
2.08
1.82
Italy
Europe ex Eurobloc 1.28
ex UK
1.47
Canada
Germany
1.45
1.23
Austria
Latin America Ex
Mexico
Netherlands
2.33
2.07
Pacific Ex Japan
1.22
1.15
2.22
2.06
Japan
0.91
1.10
Spain
1.94
1.83
France
0.87
1.02
Ireland
2.45
1.76
UK
0.72
0.97
Belgium
1.92
1.75
United States
0.61
0.33
12
R e d u cti o n i n M a r k et S e g m e n t ati o n
The correlation of real quarterly GDP growth between countries over selected 10-year
periods
1965Q11974Q4
1970Q11979Q4
1975Q11984Q4
1980Q11989Q4
1985Q11994Q4
1990Q11999Q4
US/UK
0.29
0.22
0.20
0.11
0.42
0.55
US/CN
0.38
0.33
0.58
0.67
0.60
0.66
US/JP
0.30
0.45
0.19
0.17
-0.04
-0.24
FR/UK
0.26
0.35
0.13
0.01
0.45
0.66
IT/FR
0.15
0.46
0.34
0.58
0.58
0.43
FR/GE
-0.13
0.57
0.50
0.51
0.12
0.01
abcd
13
R o u w e n h o r st ( 1 9 9 8 ) m o d e l - c o u n t r y d i f f e r e n c e s
abcd
14
U p d a t e d R o u w e n h o r st m o d e l f o r E M U c o u n t r i e s
abcd
15
D i s c r i m i n a nt A n a l y s is : C o u n try v s S e ct o rs i n E u r o p e
0.7
0.6
0.5
0.4
0.3
0.2
Countries
Sectors
0.1
0
May-93
abcd
May-94
May-95
May-96
May-97
May-98
May-99
May-00
16
D i s c r i m i n a nt A n a l y s is : C o u n try v s S e ct o rs i n
W o rld
0.7
0.6
0.5
0.4
0.3
0.2
Countries
Sectors
0.1
0
May-93
abcd
May-94
May-95
May-96
May-97
May-98
May-99
May-00
17
M o d e lli n g C o u ntr y / S e ct or R i s k
M
i =1
j =1
Rt = = + > Mkt f t Mkt + > Si f t Si + > Cj f t Cj + A t
L FM:
Time Series Models
Diermeier and S olnik (2000)

MacQueen and S atchell (2001)
R andom Coefficient Models
Heston and Rowenhorst (1994)

C avaglia, Brightman and Aked (2000)
Identifying Restrictions
abcd
Marsh and Pfleiderer (1997)
18
A m o d el co m p aris o n
In Do tracking errors reliably e stimate portfolio risk ? JAM, 2001 we
conduct a monte-carlo simulation to investigate the out of sample
properties of the main approaches to estimating linear factor models
When estimated over a consistent sample period the differences

between tracking error forecasts are not statistically significant.
However, time series models consistently produced smaller out of

sample errors than factor models estimated on cross section data
Possible explanations for the results include:
abcd
betas are not fixed dummy variables

stocks have beta to more than own country and industry
the estimation error of the stock betas tends to cancel at the portfolio level
19
T h e C o u ntry / S e ct or M o d el
LM r
r
M
=
MM M
Nr
1,1
Data: R t
2 ,1
M ,1
Model:
r1,2
r1, N
r2 ,2
M
L
O
r2 , N
M
rM , 2 L rM , N
OP
PP
PQ
LM w
w
M
W =
MM M
Nw
1,1
2 ,1
M ,1
w1,2 L w1, N
w2 , 2 L w2 , N
M
w M ,2
O M
L wM ,N
OP
PP
PQ
vec( Rt ) = f t + A t
where
= vec( Mkt ) vec() | vec(S1) Lvec(SM ) | vec(C1) Lvec(>CN )

f t = f t Mkt 1 | f t S1 L f t SM | f t C1 L f t CN
abcd
20
T h e I d e n t i f y i n g R e stri cti o n s o n t h e B e t a s ( 1 )
LM w 0 L 0
MM 0M wM LO 0M
MM 0 0 L w
C=
MM w w L w
MM 0M 0M LO 0M
MN 0 0 L 0
11
21
11
21
w12
0
M
M1 0
M1 0
w12
M
0
LMC OP vec( )
NC Q
1
0 L 0 L w1N
w22 L 0 L 0
M O M L M
0 L wM 2 L 0
0 L 0 L 0
w22 L wM 2 L 0
M O M L M
0 L 0 L w1N
0
w2 N
M
0
0
0
M
w2 N
OP
PP
PP L O
PP MN PQ
PP
PQ
L 0
L 0
O M
C
L wMN
= 1
L 0
C2
L 0
O M
L wMN
L
O
0 diag( w )
W
=M
P
0
diag
W
(
w
)
N
Q
S
'
(1a)
Mkt
w
>
ij ij = 1
(2)
i =1 j =1
abcd
21
T h e I d e n t i f y i n g R e stri cti o n s o n t h e B e t a s ( 2 )
LMC OP vec( )
NC Q
1
C =
LM
MM0
MM
MM L w >
MM0 MM w >
MM MMw M>
NN
11
diag( w S )
12
S1
11
S1
12
1N
S1
1N
11
LM w >
MM w >
MNw M>
S2
w21> 21
S2
w22 > 22
M
w2 N > 2S 2N
21
L w M 1> SM
M1
SM
L wM 2 > M 2
O
M
L w MN > SM
MN
OP
PP
PQ
M1
C1
11
C1
21
C1
M1
C2
w21> 12
C2
w22 > 11
M
C2
w M 2 > 11
L w1 N > 1CNM
L w2 N > 2CNN
O
M
L w MN > CN
MN
diag( w C )
OPOP
PPPP
PQPP
PP
PP
PP
Q
(1b)
Mkt
w
>
ij ij = 1
(2)
i =1 j =1
abcd
22
T h e I d e n t i f y i n g R e stri cti o n s o n t h e F a ct o r s
L
f O L w
DM P = M
N f Q MN1 1
S
OP L f O = L0O
MPQ N f PQ MN0PQ
wC
L 1 -1 - 1 L - 1
(3)
Mkt
ft = 0
(4)
Mkt
ft = 0
(5)
Si
Cj
abcd
23
Is th e M o d el I d e ntifiabl e ?
Lemma 1. Given the constraint (2) on the global market

betas, either of the constraints (1a) or (1b) on the country
and sector betas and the constraints (3) (4) and (5) on the
estimated sector and country factor returns, then the
Linear Factor Model subject to these constraints is
identifiable.
abcd
24
E sti m ati n g th e M o d el
Step 1: Initialise the model betas with Heston and Rouwenhorst
assumptions
Step 2: E stimate the factors - Constrained least-squares regression

Step 3: Given these factors estimate a new set of betas - Another
constrained least-squares regression
Step 4: Iterate between steps 2 and 3 until convergence

Lemma 2: The estimation procedure described above of the Linear
Factor Model subject to constraints (1a), (2),(3),(4) and (5) is globally
convergent.
abcd
25
E sti m at e d F a ct or R etur ns vs G l o b al S e ct o r R et ur ns
10.00
8.00
6.00
4.00
2.00
0.00
Aug-96
Feb-97
Aug-97
Feb-98
Aug-98
Feb-99
Aug-99
Feb-00
Aug-00
Feb-01
-2.00
-4.00
-6.00
-8.00
Brazilian Devaluation
January 15th 1999
Russian Bond Default
August 17 1998
Turning point in both Tech Boom

and Oil Price Rise
-10.00
Estimated Financial Factor Return
abcd
Dow Jones Financial Sector Return
26
C o m p aris o n w it h R a n d o m C o e ffici e nt M o d el
10.00
8.00
6.00
4.00
2.00
0.00
Aug-96
Feb-97
Aug-97
Feb-98
Aug-98
Feb-99
Aug-99
Feb-00
Aug-00
Feb-01
-2.00
-4.00
Brazilian Devaluation
January 15th 1999
-6.00
Russian Bond Default

August 17 1998
-8.00
Turning point in both Tech Boom

and Oil Price Rise
-10.00
Estimated Financial Factor Return
abcd
Dow Jones Financial Sector Return
Estimated Financial Factor Return (Beta =1 )
27
C o m p a ris o n o f E sti m at e d S e ct o r F a ct ors R e t ur n s

Correlation between
estimated factor return
and corresponding
global sector return
UBS Model H&R Model
abcd
Annualised Standard Deviation of

return series
Global
Sector
UBS Model
Factors
H&R
Factors
Basic Materials
0.96
0.97
13.34
13.16
13.30
Consumer Cyclical
0.63
0.72
5.26
5.70
5.17
Energy
0.95
0.94
16.13
16.03
16.52
Financial
0.87
0.96
10.57
11.44
9.70
Healthcare
0.94
0.92
12.90
12.29
10.52
Industrial
0.52
0.72
5.17
5.49
4.63
Consumer Non Cyclical
0.92
0.90
9.54
9.16
9.21
Technology
0.83
0.83
19.40
20.11
18.56
Telecommunications
0.85
0.96
13.86
12.65
12.96
Utilities
0.88
0.88
9.81
8.50
8.90
28
C o m p a ris o n o f E sti m at e d C o u ntr y F a ct or R e t ur n s

Correlation between
estimated factor return
and corresponding
country returns
UBS Model H&R Model
abcd
Annualised Standard Deviation of

return series
Global
Sector
UBS Model
Factors
H&R
Factors
Canada
0.68
0.73
12.16
10.08
9.67
United Kingdom
0.83
0.86
7.92
7.86
6.28
Japan
0.96
0.97
17.42
17.56
16.04
United States
0.83
0.67
5.51
7.83
5.24
Eurobloc
0.92
0.97
10.92
9.74
10.57
Europe ex Eurobloc and UK
0.92
0.82
10.34
9.70
9.00
Pacific ex Japan
0.96
0.97
18.13
16.69
16.23
Latin America
0.97
0.97
24.07
22.40
23.75
29
V o l a t i l it y o f t h e C o u n t r y a n d S e c t o r F a c t o r s
400
350
Annualised Volatility
300
250
200
150
100
50
Jan-95
Jul-95
Jan-96
Jul-96
Jan-97
Jul-97
Jan-98
Industry Factors
Industry Factors Ex Technology
abcd
Jul-98
Jan-99
Jul-99
Jan-00
Jul-00
Jan-01
Jul-01
Country Factors
Country Factors Ex Latin America
30
A t th e St o c k L e v el
NORTEL
Traditional Risk M odel

Coefficient
M arket Beta
Sector Beta
Country Beta
STA GECOA CH
2.63
0.77
1.42
Sector Beta
Country Beta
abcd
9.13
3.15
3.65
Traditional Risk M odel

Coefficient
M arket Beta
T- Stat
0.87
0.12
1.18
T- Stat
2.91
0.14
2.26
New Risk M odel

Coefficient
T- Stat
2.63
1.29
0.85
9.37
5.73
1.91
New Risk M odel

Coefficient
0.87
1.24
1.61
T- Stat
2.98
1.53
2.96
31
A t t h e i n d u str y l e v e l
The following tables try to address the question: for each local sector
index how much of the variance can be explained by the global
industry factors and how much by the local country factors?
To aid the visualisation:
if the proportion explained by the global industry factor is more than 50%
larger than the local country proportion then the cell is coloured dark blue
If the local country proportion is more than 50% larger than the global
industry proportion then the cell is coloured light blue
otherwise the cell is coloured mid blue
The tables are shown for the are UB S Warburg model, the Heston
and Rouwenhorst model and for value weighted returns
abcd
32
T h e U B S W a r b urg m et h o d
Europe ex
United
United
States
Kingdom
Energy
23.8%
26.9%
15.0%
36.8%
15.4%
Basic Materials
35.7%
34.0%
24.9%
39.3%
31.6%
Industrial
86.3%
43.2%
61.0%
53.8%
Technology
53.4%
29.6%
25.7%
Telecom munications
41.2%
28.8%
Utilities
5.4%
6.5%
Healthcare
23.4%
Consum er Non Cyclical
Canada
Euro-Bloc
Euro-Bloc &
Pacific ex
ex UK
Japan
Latin
Japan
America
36.4%
6.3%
29.4%
37.1%
15.7%
47.1%
54.1%
45.5%
41.5%
36.4%
44.4%
37.2%
37.1%
46.4%
53.4%
35.9%
37.1%
54.7%
30.7%
50.6%
14.5%
25.0%
14.3%
23.1%
4.6%
25.8%
9.4%
36.2%
13.6%
20.9%
40.1%
11.7%
16.7%
48.4%
9.9%
11.4%
35.7%
28.0%
40.2%
20.1%
52.3%
Consum er Cyclical
75.5%
40.5%
48.6%
50.2%
53.5%
53.7%
48.7%
44.3%
Financial
43.5%
40.1%
45.9%
55.9%
52.4%
48.1%
29.4%
31.8%
Energy
61.5%
52.7%
62.2%
35.4%
51.4%
32.9%
14.9%
3.0%
Basic Materials
53.5%
48.7%
54.0%
24.7%
37.7%
33.8%
16.2%
9.3%
Industrial
6.9%
29.9%
19.9%
20.8%
26.1%
7.9%
7.1%
5.8%
Technology
23.0%
24.8%
26.1%
24.2%
22.0%
11.1%
20.4%
Telecom munications
27.7%
37.9%
15.2%
38.7%
20.0%
21.4%
16.6%
Utilities
68.6%
32.0%
44.1%
13.3%
33.4%
29.5%
26.2%
4.9%
Healthcare
68.1%
38.8%
20.4%
23.9%
31.4%
24.2%
20.7%
10.6%
38.2%
45.1%
44.6%
26.3%
31.4%
14.2%
12.5%
9.5%
Consum er Cyclical
12.1%
26.9%
15.0%
18.1%
13.6%
13.3%
10.0%
16.5%
Financial
29.5%
14.2%
24.3%
10.5%
17.0%
5.8%
19.0%
4.6%
Energy
6.8%
11.9%
15.6%
23.1%
14.5%
19.8%
50.9%
49.2%
Basic Materials
6.4%
11.9%
6.1%
30.1%
25.4%
23.9%
50.0%
34.9%
Industrial
3.9%
18.2%
12.8%
21.6%
15.1%
45.2%
47.0%
43.2%
Technology
9.1%
9.0%
5.5%
23.3%
9.1%
22.0%
27.7%
0.0%
Telecom munications
16.3%
15.9%
18.3%
19.9%
30.9%
13.6%
28.4%
25.5%
Utilities
10.7%
33.5%
21.0%
51.1%
33.0%
38.1%
46.3%
59.7%
Healthcare
5.7%
29.0%
19.2%
36.8%
32.8%
22.9%
51.6%
35.9%
6.9%
34.2%
32.2%
37.9%
28.0%
35.5%
53.4%
30.6%
Consum er Cyclical
6.4%
24.4%
31.1%
27.6%
20.1%
30.1%
34.2%
24.6%
Financial
20.9%
31.6%
25.8%
29.2%
28.5%
40.0%
39.7%
54.6%
% of Variance explained by Global Market Factor
% of Variance explained by Global Sector Factors
3.6%
% of Variance explained by Local Market Factors
abcd
33
T h e H e st o n & R o u w e n h o r st m e t h o d
Europe ex
United
United
States
Kingdom
Energy
46.8%
36.1%
31.7%
51.9%
19.2%
27.0%
17.2%
7.8%
Basic Materials
38.0%
35.7%
21.7%
52.9%
37.6%
27.6%
24.8%
17.2%
Industrial
58.1%
56.1%
39.9%
54.1%
53.6%
24.1%
35.3%
11.3%
Technology
15.2%
8.3%
7.4%
17.3%
10.1%
11.4%
19.3%
6.4%
Telecom munications
43.3%
25.0%
15.0%
20.3%
25.5%
19.8%
13.4%
11.8%
Utilities
63.4%
59.5%
57.5%
62.0%
62.5%
35.1%
41.0%
11.5%
Healthcare
60.0%
48.8%
14.5%
63.9%
63.1%
34.7%
32.8%
12.0%
71.3%
68.0%
60.0%
61.1%
69.5%
26.8%
34.9%
21.6%
Consum er Cyclical
61.2%
57.2%
41.8%
48.2%
49.8%
36.7%
39.7%
10.7%
Financial
42.9%
52.3%
36.4%
52.6%
33.5%
21.0%
20.9%
11.8%
Energy
50.8%
37.0%
33.3%
33.0%
19.0%
31.1%
21.3%
9.1%
Basic Materials
25.1%
25.7%
15.0%
27.0%
25.8%
24.6%
19.3%
12.7%
Canada
Euro-Bloc
Euro-Bloc &
Pacific ex
ex UK
Japan
Latin
Japan
America
Industrial
4.9%
5.8%
4.4%
6.1%
6.2%
2.9%
3.8%
1.3%
Technology
22.1%
13.7%
12.6%
34.7%
19.7%
20.1%
36.1%
11.6%
Telecom munications
30.7%
20.3%
9.7%
19.9%
22.0%
13.4%
10.4%
9.3%
Utilities
28.4%
22.2%
16.1%
15.3%
17.6%
10.5%
7.5%
3.5%
Healthcare
31.6%
19.6%
7.1%
17.2%
19.5%
14.4%
9.5%
4.5%
21.9%
16.4%
13.9%
13.4%
12.4%
7.9%
10.0%
5.9%
Consum er Cyclical
7.1%
8.3%
6.3%
8.4%
7.8%
5.6%
2.0%
1.5%
Financial
17.9%
18.0%
11.9%
13.8%
10.3%
5.8%
6.1%
3.9%
Energy
2.4%
10.5%
16.6%
15.1%
7.5%
35.6%
31.9%
31.8%
Basic Materials
4.4%
11.0%
11.2%
18.7%
15.2%
42.4%
43.4%
66.9%
Industrial
5.5%
16.2%
21.7%
27.6%
24.0%
33.0%
55.2%
43.7%
Technology
1.6%
2.4%
3.8%
9.8%
4.7%
14.0%
32.9%
24.8%
Telecom munications
4.6%
7.6%
6.3%
12.0%
11.3%
20.0%
20.2%
42.8%
Utilities
8.2%
18.2%
26.5%
22.7%
19.9%
34.3%
51.4%
35.1%
Healthcare
8.4%
12.9%
8.1%
18.9%
17.4%
37.9%
57.6%
36.1%
6.8%
15.6%
26.1%
25.5%
18.1%
30.7%
50.6%
70.1%
Consum er Cyclical
5.9%
17.2%
22.9%
28.2%
22.3%
46.4%
58.3%
38.9%
Financial
6.5%
16.0%
18.4%
19.9%
12.5%
20.7%
28.3%
42.4%
abcd
34
V a l u e w e i g ht e d i n d e x r et ur n s m e t h o d
Europe ex
United
United
States
Kingdom
Energy
22.7%
26.7%
14.9%
36.4%
15.5%
Basic Materials
35.9%
34.6%
25.2%
39.5%
32.4%
Industrial
82.8%
43.6%
61.2%
60.3%
Technology
53.4%
29.6%
25.7%
Telecom munications
41.1%
28.6%
53.4%
Canada
Euro-Bloc
Euro-Bloc &
Pacific ex
ex UK
Japan
Latin
Japan
America
36.6%
6.5%
29.4%
37.8%
16.2%
47.6%
64.0%
48.9%
42.3%
36.8%
44.1%
37.2%
37.5%
46.6%
0.0%
35.6%
37.0%
54.8%
30.8%
50.6%
Utilities
5.4%
6.5%
14.6%
24.9%
14.5%
23.2%
4.9%
25.9%
Healthcare
18.6%
9.2%
35.9%
13.3%
20.8%
39.9%
11.7%
16.7%
43.9%
9.9%
11.3%
36.3%
28.3%
40.4%
20.5%
52.6%
Consum er Cyclical
75.1%
40.1%
48.4%
58.3%
53.5%
53.8%
49.0%
44.5%
Financial
41.2%
40.2%
45.9%
56.2%
52.9%
48.7%
30.0%
32.2%
Energy
74.9%
60.1%
70.1%
49.6%
34.8%
14.9%
13.0%
4.1%
Basic Materials
48.4%
41.3%
41.3%
31.2%
36.4%
17.3%
16.3%
9.0%
Industrial
6.6%
19.0%
12.9%
9.2%
8.1%
1.5%
6.0%
8.5%
Technology
35.1%
19.5%
15.9%
11.8%
11.9%
8.3%
12.9%
0.0%
Telecom munications
38.0%
37.1%
7.3%
38.7%
28.2%
11.3%
11.1%
3.1%
Utilities
72.4%
33.7%
41.4%
15.5%
14.9%
24.8%
27.2%
6.3%
Healthcare
75.0%
45.2%
14.3%
26.0%
24.6%
16.3%
14.6%
10.6%
48.5%
52.1%
27.3%
27.2%
33.5%
8.9%
11.5%
2.7%
Consum er Cyclical
17.2%
9.9%
4.5%
5.2%
13.9%
3.9%
7.7%
5.5%
Financial
40.8%
17.6%
31.3%
12.3%
15.3%
5.6%
12.4%
3.9%
Energy
2.1%
7.5%
9.1%
7.2%
13.5%
30.2%
48.6%
49.5%
Basic Materials
8.8%
14.5%
17.0%
21.9%
20.2%
37.3%
44.7%
34.5%
Industrial
5.8%
28.6%
21.5%
30.0%
26.3%
49.6%
50.0%
40.0%
Technology
1.5%
7.8%
15.8%
33.9%
16.4%
25.5%
29.6%
0.0%
Telecom munications
13.8%
19.0%
15.4%
20.8%
22.9%
23.3%
34.9%
32.3%
Utilities
11.4%
14.1%
17.5%
35.2%
8.7%
37.9%
37.3%
59.0%
Healthcare
4.4%
18.9%
16.6%
19.5%
37.9%
24.8%
46.3%
30.6%
5.6%
13.5%
24.4%
32.4%
20.6%
40.2%
49.8%
36.9%
Consum er Cyclical
7.1%
30.5%
24.2%
36.1%
17.8%
38.3%
42.0%
34.4%
Financial
17.0%
33.7%
19.7%
29.9%
28.9%
44.3%
47.8%
54.9%
abcd
35
U B S W arb urg m etho d: 1 9 9 4- 9 7

Europe ex
United
United
States
Kingdom
Energy
36.4%
44.0%
20.3%
59.7%
7.3%
Basic Materials
57.2%
38.5%
29.6%
46.1%
39.5%
Industrial
77.1%
18.4%
50.0%
46.8%
Technology
37.3%
21.6%
45.6%
Telecommunications
35.0%
4.9%
Utilities
2.6%
Healthcare
Canada
Euro-Bloc
Euro-Bloc &
Pacific ex
ex UK
Japan
Latin
Japan
America
44.0%
25.6%
27.9%
45.6%
24.2%
17.3%
38.8%
56.0%
42.1%
16.6%
38.4%
21.8%
31.9%
59.6%
11.7%
15.5%
34.8%
11.0%
65.6%
31.9%
28.6%
21.8%
25.0%
31.3%
6.2%
46.6%
20.8%
24.6%
44.7%
33.2%
19.9%
20.7%
20.0%
42.2%
55.0%
1.5%
47.2%
27.3%
41.4%
42.5%
22.7%
43.5%
41.0%
25.0%
Consum er Cyclical
54.8%
33.6%
28.9%
55.5%
34.2%
44.8%
58.7%
20.0%
Financial
45.0%
34.6%
34.2%
36.5%
27.2%
50.7%
42.4%
20.0%
Energy
58.7%
32.0%
44.9%
23.4%
34.8%
13.1%
8.7%
6.0%
Basic Materials
28.3%
20.7%
39.6%
19.0%
28.8%
20.3%
16.8%
4.0%
Industrial
7.4%
29.0%
8.1%
12.1%
19.5%
5.1%
3.0%
2.4%
Technology
52.8%
13.0%
12.5%
15.8%
10.2%
13.5%
14.7%
2.7%
Telecommunications
21.0%
24.0%
16.7%
21.1%
28.8%
8.8%
10.0%
3.4%
Utilities
51.3%
18.7%
25.0%
32.2%
33.5%
12.1%
19.0%
12.2%
Healthcare
17.6%
17.7%
13.6%
29.7%
28.9%
7.6%
8.9%
12.4%
28.6%
9.8%
15.6%
23.7%
35.2%
13.7%
3.7%
2.3%
Consum er Cyclical
18.1%
38.3%
23.1%
8.1%
16.2%
23.0%
8.3%
7.9%
Financial
16.4%
23.0%
19.2%
30.9%
30.8%
7.5%
4.0%
5.9%
Energy
2.3%
18.6%
19.5%
15.8%
11.7%
18.9%
48.6%
48.6%
Basic Materials
6.1%
24.9%
15.0%
30.3%
23.4%
31.5%
51.4%
72.7%
Industrial
12.5%
51.0%
39.4%
40.8%
33.7%
37.5%
48.1%
68.9%
abcd
Technology
0.8%
21.5%
16.0%
34.6%
28.0%
11.1%
13.7%
20.1%
Telecommunications
30.8%
51.0%
31.6%
31.2%
39.6%
15.4%
30.9%
46.7%
Utilities
42.8%
28.6%
37.6%
19.0%
35.9%
20.5%
46.6%
48.5%
Healthcare
31.2%
21.8%
8.6%
40.5%
41.7%
35.4%
33.0%
40.4%
18.8%
53.7%
33.3%
28.5%
42.0%
39.0%
47.4%
62.3%
Consum er Cyclical
25.1%
28.1%
40.5%
34.9%
35.7%
30.2%
29.6%
47.7%
Financial
37.8%
34.8%
38.3%
26.7%
38.6%
36.8%
37.8%
61.9%
36
C o n cl usi o ns
In the introduction we considered the impact of the main trends in
global equity markets
the increase in global investing and consequent decline in home bias

the rise of global companies competing across markets
the increase in market concentration and industry composition bias
These changes have been gradual but pervasive
investors cannot afford to ignore global sector influences
We propose a new estimation procedure which enables us to

compute better estimates of both country and global sector indices
We believe these indices can be used to generate risk profiles of

stocks and portfolios that are more intuitive, in the sense that they
more clearly reflect the underlying return generation process
abcd
37
C o n t a ct i n f or m ati o n
Alan. Scowcroft@ ubsw.com
+44 20 7568 1871
James. Sefton@ ubsw.com
+44 20 7568 1873
abcd
38

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