Country Strategy

Investors could apply a similar strategy using single country index funds in their foreign-equity allocations. For this analysis, I included the MSCI country indexes for all members of the developed-markets MSCI World ex USA Index with a December 1969 inception date. This left 17 country indexes. Each month from December 1970 through July 2016, I ranked these indexes by their returns for the previous 12 months and selected the five with the best returns. The same weighting and rebalancing approach described for the sector strategy applies here. As before, I also ran a modified version of this strategy. This version refreshes quarterly and applies a buffer rule that favors existing holdings that rank in the top seven of the 17 indexes.

The pure momentum strategy significantly outperformed the market-cap-weighted MSCI World ex USA Index and equal-weighted portfolio of the 17 country indexes. The consistency of its (back-tested) outperformance is surprising, though there have been rough patches, such as the first half of 2009. And it would have required 20.4 trades per year on average. The modified version of the strategy didn’t work quite as well, but it still posted a higher return than its benchmarks, albeit with greater volatility. And similar to the modified sector strategy, it required less than half of the original’s turnover.