How Global is Your Mutual Fund? International Diversification from Multinationals
73 Pages Posted: 10 Aug 2020 Last revised: 18 Jul 2022
Date Written: August 2020
We show that mutual funds worldwide provide substantial international exposure through their domestic holdings of multinationals. An average domestic fund's international exposure increases 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 and captures fund manager skill.
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