Geographic Shareholder Dispersion and Mutual Fund Flow Risk

Exploiting the Securities Holdings Statistics from the Eurosystem, we study the relation between shareholder country concentration and flow risk for euro area mutual funds. We find that funds with a more geographically dispersed investor base experience more volatile flows. The link between shareholder country concentration and flow risk is a widespread phenomenon: It holds for funds investing in different asset classes and in different regions. However, we find no difference in net performance between funds with more and less concentrated shareholders, which suggests that any potential costs of investors’ geographic dispersion are offset by either enhanced liquidity management or superior performance. Additional tests reveal that investors in funds with higher geographic shareholder dispersion are more sensitive to fund performance, consistently with a clientele effect driving our findings. Finally, we show that the positive association between geographic investor dispersion and flow risk holds for different measures of flow risk and is not driven by institutional investors, non-euro area investors, or the COVID-19 episode.