Unexploited Gains from International Diversification: Patterns of Portfolio Holdings Around the World
Massachusetts Institute of Technology (MIT) - Sloan School of Management; National Bureau of Economic Research (NBER)
Sergio L. Schmukler
World Bank - Development Research Group (DECRG)
NBER Working Paper No. w16629
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.
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Number of Pages in PDF File: 77working papers series
Date posted: December 27, 2010
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