Does Shifting in Country Exposures Add Value? A Closer Look at European Equity Funds

In this article, we introduce a new return-based measure of active portfolio management, i.e. country-shifting activity, which determines changes in the country exposures of funds. We relate country-shifting activity to the popular activity measure “tracking error” and compare the abilities of both to predict fund performance. Our empirical study covers 334 European-domiciled mutual funds with an investment focus on the European Economic and Monetary Union for an evaluation period from 01/2001 to 03/2012. Results of our analysis show that i) in contrast to tracking error, current country-shifting activity is positively related to future performance. In addition, we find that ii) selecting funds based on country-shifting activity yields considerable future economic value. In this context, we also analyze possible changes due to the European debt crisis starting in December 2009 and reveal iii) no positive relation between current country-shifting activity and performance in the subperiod before the start of the crisis. However, iv) fund managers who actively shifted country exposures in the subperiod after the start of the crisis clearly outperformed those who kept their country exposures relatively constant.