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

Author: Tatiana Didier

Publisher:

Published: 2010

Total Pages: 40

ISBN-13:

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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.

Multinationals and the Gains from International Diversification
Multinationals and the Gains from International Diversification

Author: Patrick F. Rowland

Publisher:

Published: 2002

Total Pages: 61

ISBN-13:

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One possible explanation for home bias is that investors may obtain indirect international diversification benefits by investing in multinational firms rather than by investing directly in foreign markets. This paper employs mean-variance spanning tests to examine the diversification potential of multinational firms and foreign market indices for investors domiciled in Canada, France, Germany, Italy, Japan, the United Kingdom and the United States. We find that in most countries and most time periods, the portfolio of domestic stocks spans the risk and return opportunities of a portfolio that includes domestic and multinational stocks. However, there is weak evidence that U.S. multinationals provided global diversification benefits in the full 1984-92 sample and in the post-1987 subsample. We also find that the addition of foreign market indices to a domestic portfolio - inclusive of multinationals - provides diversification benefits. The economic importance of the shift of the portfolio frontier - measured as the utility gain from diversification - varies considerably from market to market and often reflects the benefits of large short positions in certain markets.