The Geography of International Mutual Funds

We investigate how geographic locations of international mutual funds affect fund performance and investment behavior for both emerging and developed markets. Using one- and three-factor alphas, we find that local funds outperform remote ones especially in emerging markets. However, under the four-factor alpha, they tend to underperform. A plausible explanation is that the excess returns for local fund managers are attributable to momentum and thus disappear when this is controlled. Regarding trading behavior, we compare herding among same or local-region versus different or remote-region fund managers. We find that fund trades correlate more with trades of other funds in the same (local) regions than with those in different (remote) regions. This phenomenon is more profound in the case of emerging markets. This finding is consistent with the networking (word-of-mouth) effect among investors. We also find that local funds exhibit more market timing behavior but are less active in stock picking. The result suggest that local managers are more affected by market sentiment and therefore their trading is more affected by market movements whereas remote fund managers focus more on stock fundamentals. This is the first study to test the relation between the international fund performance and geography and contributes to the literature on funds and international investments.