How Global Is Your Mutual Fund? International Diversification from Multinationals

Abstract

We show that mutual funds worldwide provide substantial international exposure through their domestic holdings of multinationals. The international exposure of domestic funds increases, on average, 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 effect is primarily driven by the fund managers’ ability to invest in multinationals, rather than the performance of those multinationals. Our findings support the hypothesis that international diversification from multinationals reduces the transaction and information costs of investing abroad. Authors have furnished an Internet Appendix , which is available on the Oxford University Press Web site next to the link to the final published paper online.