How Global is Your Mutual Fund? International Diversification from Multinationals
We show that mutual funds worldwide provide substantial international exposure through their domestic holdings of multinationals. An average domestic fund's international exposure increases by 32 percentage points when we consider international corporate diversification. We find that funds with higher indirect international exposure perform better in both the cross section and the time series. This outperformance is more pronounced among small fund families, and funds that invest in small stocks, growth stocks, and less developed capital markets. Our findings support the hypothesis that international diversification from multinationals reduces the transaction and information costs of investing abroad and captures fund manager skill.
We thank Ines Chaieb, Rich Evans, Hao Jiang, Wei Jiang, David Moreno, Pedro Saffi, Mikhail Simutin, Dragon Tang, Sheridan Titman, and seminar participants at the 2019 China International Conference in Finance, the 2019 Finance Forum, the 2019 Lubrafin Conference, and the 2019 SUNY Albany Symposium on International Investing for helpful comments. We gratefully acknowledge financial support from Fundação para a Ciência e a Tecnologia (FCT) and the Richard A. Mayo Center for Asset Management at the Darden School of Business. Clemens Sialm is an independent contractor with AQR Capital Management. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
Clemens Sialm has received compensation for consulting services and for giving presentations from the following institutions: AQR Capital Management, the U.S. Securities and Exchange Commission, Mercer Advisors, Dimensional Fund Advisors, and MyVest.