Financial Product Design and Catering: Evidence from the Global Mutual Fund Industry

Abstract

I provide novel evidence on catering-driven investments in the asset management industry by examining actively managed equity mutual funds worldwide. Mutual funds cater to their investors’ preference for “local” stocks, and they overweight stocks headquartered in client countries, i.e., countries where funds are sold, by 55% to 120% compared with their peers. I refer to this behavior as “client-country overweighting.” The catering scheme helps funds attract investors despite delivering underperforming portfolios. Overall, my results provide a novel driver, unrelated to funds’ familiarity bias or an information advantage, of mutual funds’ portfolio decisions and suggest that catering-driven investments hurt fund performance.

Keywords: International finance, behavioral finance, portfolio choice, catering

JEL Classification: G15, G23