How Global is Your Mutual Fund? International Diversification from Multinationals

Abstract

We show that mutual funds worldwide provide substantial international exposure through their domestic holdings of multinationals. The international exposure of domestic funds increases, on average, by 32 percentage points when we consider international corporate diversification. We find that funds with higher indirect international exposure perform better in both the cross section and the 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 diversification from multinationals reduces the transaction and information costs of investing abroad.

Keywords: Home bias, Mutual funds, Performance, International diversification, Multinationals

JEL Classification: F23, G11, G15, G23