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Unexploited gains from international diversification : patterns of portfolio holdings around the world

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  • Didier, Tatiana
  • Rigobon, Roberto
  • Schmukler, Sergio L.

Abstract

This paper studies how portfolios with a global investment scope are 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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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 5524.

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Date of creation: 01 Jan 2011
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Handle: RePEc:wbk:wbrwps:5524

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Keywords: Mutual Funds; Debt Markets; Emerging Markets; Rural Development Knowledge&Information Systems; Access to Finance;

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Cited by:
  1. Didier, Tatiana & Schmukler, Sergio L., 2013. "Financial development in Latin America and the Caribbean : stylized facts and the road ahead," Policy Research Working Paper Series 6582, The World Bank.
  2. Didier, Tatiana & Schmukler, Sergio L., 2013. "The financing and growth of firms in China and India: Evidence from capital markets," Journal of International Money and Finance, Elsevier, Elsevier, vol. 39(C), pages 111-137.
  3. Raddatz, Claudio & Schmukler, Sergio L., 2012. "On the international transmission of shocks : micro-evidence from mutual fund portfolios," Policy Research Working Paper Series 6072, 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.
  5. Bengui, Julien & Nguyen, Ha, 2011. "Consumption baskets and currency choice in international borrowing," Policy Research Working Paper Series 5870, The World Bank.
  6. John Ammer & Sara B. Holland & David C. Smith & Francis E. Warnock, 2012. "U.S. international equity investment," International Finance Discussion Papers, Board of Governors of the Federal Reserve System (U.S.) 1044, Board of Governors of the Federal Reserve System (U.S.).

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