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Unexploited Gains from International Diversification: Patterns of Portfolio Holdings Around the World

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  • Tatiana Didier
  • Roberto Rigobon
  • Sergio L. Schmukler

Abstract

This paper studies how portfolios with a global investment scope are actually allocated internationally using a unique micro dataset on U.S. equity mutual funds. While mutual funds have great flexibility to invest globally, they invest in a surprisingly limited number of stocks, around 100. The number of holdings in stocks and countries from a given region declines as the investment scope of funds broadens. This restrictive investment practice has costs. A mean-variance strategy shows unexploited gains from further international diversification. Mutual funds investing globally could achieve better risk-adjusted returns by broadening their asset allocation, including stocks held by more specialized funds within the same mutual fund family (company). This investment pattern is not explained by lack of information or instruments, transaction costs, or a better ability of global funds to minimize negative outcomes. Instead, industry practices related to organizational factors seem to play an important role.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16629.

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Date of creation: Dec 2010
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Handle: RePEc:nbr:nberwo:16629

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Cited by:
  1. Claudio Raddatz & Sergio L. Schmukler, 2011. "On the International Transmission of Shocks: Micro-Evidence from Mutual Fund Portfolios," NBER Working Papers 17358, National Bureau of Economic Research, Inc.
  2. John Ammer & Sara B. Holland & David C. Smith & Francis E. Warnock, 2012. "U.S. international equity investment," International Finance Discussion Papers 1044, Board of Governors of the Federal Reserve System (U.S.).
  3. Bengui, Julien & Nguyen, Ha, 2011. "Consumption baskets and currency choice in international borrowing," Policy Research Working Paper Series 5870, The World Bank.
  4. John Ammer & Sara B. Holland & David C. Smith & Francis E. Warnock, 2012. "U.S. International Equity Investment," NBER Working Papers 17839, National Bureau of Economic Research, Inc.

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