International Investing Beyond Diversification

We develop a (latent factor) framework to identify international investment gains from two sources: differences in global factor risk premia across countries and country-specific factors unavailable domestically. Using individual stocks from 27 countries over 1966-2022, we construct country-specific portfolios that exploit local factors and segmentation portfolios that capture cross-country premia differences. Country-specific portfolios nearly quadruple the Sharpe ratio of a US market investor, while segmentation portfolios remain highly profitable even among G7 countries – challenging the prevailing view of integrated global equity markets. Our results demonstrate substantial untapped opportunities beyond traditional index-based diversification.