Countries versus industries in Europe : A normative portfolio approach

The relative benefits of country diversification and industry diversification are critical for investors, portfolio managers and investment banks. The unification of Europe has had a substantial impact on these relative benefits and the ultimate goal of this paper is to evaluate their temporal evolution. It is found that, although a country approach outperformed an industry approach in the early 1990s under three different performance measures, the opposite was the case in the late 1990s and early 2000s. It is also found that this shift does not seem to be a temporary phenomenon associated with the TMT bubble. Overall, the results validate both the increasing emphasis on industry diversification and the recent reorganisation of research departments of investment banks, previously organised along country lines and currently organised along industry lines. There seems to be little question that, in Europe, industry expertise has become more important than country expertise.