INTERNATIONAL DIVERSIFICATION THROUGH CLOSED-END COUNTRY FUNDS

The primary objectives of this paper are to assess the potential of closed-end country funds (CECFs) as vehicles for achieving international diversification at 'home' and to examine the effect of the closed-end status of these funds on their investment characteristics. The main findings are: First, CECFs exhibit significant exposure to the U.S. market factor and act more like U.S. securities than do their underlying assets. Second, despite these characteristics, CECFs retain significant exposure to their local (home) market factors and provide U.S. investors with substantial diversification benefits. Emerging market funds such as Brazil, Mexico, and Taiwan receive large weights in optimal international portfolios comprised of CECFs, implying that these funds can play a unique role in spanning the opportunity set for U.S. investors. Third, performance evaluations indicate that our sample CECFs generally did not offer significant 'overseas alphas'. Fourth, fund value and net asset value are found to be co-integrated for the majority of CECFs from North America and Europe, but not for those representing the Asian emerging markets.