Unexploited Gains from International Diversification
70 Pages Posted: 20 Mar 2009
Date Written: December 23, 2008
Using unique micro data on U.S. institutional investor portfolios, this paper studies how capital, meant to be invested globally, is actually diversified internationally. We show that although the mutual fund industry has moved toward funds that have more flexibility to invest across countries and regions (global funds), mutual funds invest in a finite, rather small number of firms, almost independently of the set of available instruments. The number of mutual fund holdings in stocks and countries from a given region declines as funds become more global. This restricted investment practice has a cost: there are unexploited gains from international diversification. Mutual funds could achieve better returns by broadening their investment scope to include stocks held by specialized funds within the same mutual fund family. This investment pattern is neither explained by the lack of available instruments or information, nor by a better ability of global funds to minimize losses.
Keywords: financial integration, globalization, mutual funds, risk diversification
JEL Classification: F30, F36, G11, G15, G23
Suggested Citation: Suggested Citation