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An Industrial Organization Approach to International Portfolio Diversification
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An Industrial Organization Approach to International Portfolio Diversification

Evidence from the US Mutual Fund Families

Chae Hee Shin
Federal Reserve Board, 2014
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7

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  • Innovative

Recommendation

Mutual funds are not immune from “home bias” – the tendency of investors not to venture outside their local markets. Economist Chae Hee Shin of the Federal Reserve reveals what may be behind this financial xenophobia. While this study provides new insights into why many US mutual fund families stick to certain parts of the globe, it fails to mention such pertinent factors as the relative performance of global markets or the increased use of indexing strategies that emphasize market-capitalization weightings. Nonetheless, getAbstract recommends this eye-opening analysis to financial industry professionals and investors everywhere.

Take-Aways

  • Research shows that in 2011, the average US mutual fund family invested in just 17 countries out of more than 120 options; almost one-third of firms allocated assets to fewer than five countries.
  • While US, Canadian and UK stocks appear in the holdings of all the fund families analyzed, only about three-quarters of these invest in European equities, and just 63% hold shares in companies in the East/South Asia and Pacific region.
  • Consumers may value international investing, but they also appraise fund families for their longevity, reputation and size. Investors might forgo a wide geographic reach if other fund company traits are attractive, giving firms little reason to venture offshore.

About the Author

Chae Hee Shin, an economist at the Federal Reserve Board of Governors.

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