Working Paper: NBER ID: w16629
Authors: Tatiana Didier; Roberto Rigobon; Sergio L. Schmukler
Abstract: This paper studies how portfolios with a global investment scope are actually allocated internationally using a unique micro dataset on U.S. equity mutual funds. While mutual funds have great flexibility to invest globally, they invest in a surprisingly limited number of stocks, around 100. The number of holdings in stocks and countries from a given region declines as the investment scope of funds broadens. This restrictive investment practice has costs. A mean-variance strategy shows unexploited gains from further international diversification. Mutual funds investing globally could achieve better risk-adjusted returns by broadening their asset allocation, including stocks held by more specialized funds within the same mutual fund family (company). This investment pattern is not explained by lack of information or instruments, transaction costs, or a better ability of global funds to minimize negative outcomes. Instead, industry practices related to organizational factors seem to play an important role.
Keywords: International Diversification; Mutual Funds; Portfolio Allocation
JEL Codes: F30; F36; G11; G15; L20
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Investment scope of mutual funds (G23) | Number of stocks held (G12) |
| Organizational factors (L29) | Mutual fund investment practices (G23) |
| Global funds (G23) | Better risk-adjusted returns (G11) |
| Lack of diversification (G19) | Organizational practices (L29) |
| Family effects (J12) | Variation in the number of stock holdings across funds (G23) |