Accounting for International Exposure in Mutual Fund Performance Evaluation: Evidence from Target Date Funds

Abstract

This paper examines whether explicitly accounting for international exposure of mutual funds affects conclusions about their performance. We focus on performance of US target date funds as these funds have substantial international exposure, and there is a growing literature on performance of target date funds with inconsistent findings. We find that performance estimates based on factor models that only account for US risk factors are significantly downward biased during our 2010-2020 sample period. The magnitude of this bias increases with investment horizon as target date funds that are further away from their target retirement date have greater international exposure. We show that the disparity in results in the literature stems from omission of international factors, which biases performance estimates considerably. Although our primary focus is on target date funds, our conclusions are relevant for other types of mutual funds as well.
For instance, we find that many US domestic equity mutual funds also have material international exposure, which can similarly bias their performance estimates. Our findings underscore the importance of explicitly controlling for international risk factors when evaluating
performance of mutual funds with substantial international exposure.

Keywords: Target Date Funds, Mutual Fund Performance, International Exposure, Factor Models, Missing Factors JEL Classification: G10, G15, G23, G51, J32

JEL Classification: G10, G15, G23, G51, J32