Relative importance of industry and country factors in security returns

This paper addresses the question whether security returns are determined primarily by country factors or industry factors using a sample of closed-end funds. In the past, some studies have concluded that country effects are more significant whereas others have reported evidence that industry effects have gained in importance. Using very recent data and a novel methodology to measure relative importance of these effects, the present paper shows that country effects are still more significant than industry effects and that there is no clear trend showing industry effects have gained in importance. The methodology presented is robust enough to examine this trend in the coming years. For the time being, this paper suggests that top-down fund managers should continue to focus on country selection in their portfolio construction.