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An Industrial Organization Approach to International Portfolio Diversification

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An Industrial Organization Approach to International Portfolio Diversification

Evidence from the US Mutual Fund Families

Federal Reserve Board,

5 min read
5 take-aways
Audio & text

What's inside?

Most investors tend to underdiversify internationally. Understanding the US mutual fund industry may help explain why.

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Editorial Rating

7

Qualities

  • Innovative

Recommendation

Mutual funds are not immune from “home bias” – the tendency of investors not to venture outside their local markets. Economist Chae Hee Shin of the Federal Reserve reveals what may be behind this financial xenophobia. While this study provides new insights into why many US mutual fund families stick to certain parts of the globe, it fails to mention such pertinent factors as the relative performance of global markets or the increased use of indexing strategies that emphasize market-capitalization weightings. Nonetheless, getAbstract recommends this eye-opening analysis to financial industry professionals and investors everywhere.

Summary

Millions of private and institutional investors invest through US mutual fund companies, thanks to funds’ relatively low costs, liquidity and ease of diversification. In 2013, 46% of American households used mutual funds, which held 29% of all US corporate shares. Fund firms offer insights into how financial intermediaries shape diversified portfolios.

Studies often point to investors’ lack of international diversification – a “home bias.” Research shows that in 2011, an average US fund company invested in just 17 countries out of more than 120 options; almost one-third of firms allocated...

About the Author

Chae Hee Shin, an economist at the Federal Reserve Board of Governors.

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