Fund Manager Skill in an Era of Globalization: Offshore Concentration and Mutual Fund Performance

Abstract

We use textual analysis to construct a new measure that captures a mutual fund’s offshore exposure concentration through holding U.S. multinational firms. We find that funds with a higher offshore concentration index are associated with significantly better performance, with the difference in four-factor alpha between the top and bottom OCI deciles amounting to 2.95% per annum. Fund managers’ overweighing of firms with operations in certain countries can be partly attributed to their foreign ethnicity. Further analysis shows that high OCI funds have an information edge regarding firms’ fundamentals such as future earnings. Overall, our study suggests that fund managers have country-specific expertise and specialization, which is of particular importance in an era of globalization.

Keywords: Mutual funds, Manager Skill, Offshore Concentration, Fund Performance, Multinational Firms, Textual Analysis, Supervised Machine Learning

JEL Classification: G11, G23, J24