How Global is Your Mutual Fund? International Diversification from Multinationals

Abstract

We show that mutual funds worldwide offer substantial indirect international exposure through their stock holdings of multinational corporations. Domestic funds' international exposure increases by 32 percentage points when we take into account international corporate diversification. We find that funds with higher indirect international exposure perform significantly better in both the cross section and time series. This outperformance is more pronounced among small fund families, and funds that invest in small stocks, growth stocks, and less developed capital markets. Our findings support the hypothesis that international portfolio diversification from multinationals reduces the transaction and information costs of investing abroad.

Keywords: Home bias, Mutual funds, Performance, International diversification, Multinationals, Cross-border M&A

JEL Classification: F23, G11, G15, G23