Didier, Tatiana; Rigobon, Roberto; Schmukler, Sergio L.
Description:
This paper studies how portfolios with a
global investment scope are 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.