An Empirical Study of Regional Mutual Funds’ Diversification Value

  • Javier Rodriguez University of Puerto Rico - Río Piedras
Keywords: regional mutual funds, diversification value, portfolio diversification, Herfindahl index

Abstract

This article studies three samples of United States-based regional mutual funds from the Asia-Pacific, Europe, and Latin America, to assess whether higher fund diversification translates into higher diversification values to fund shareholders. To measure mutual funds’ portfolio diversification, we implement a modified Herfindahl index.  To assess diversification values we employ a methodology that considers Sharpe ratio funds and its correlation with existent portfolios.  We found that Asian-Pacific funds are the most diversified, whereas European funds provide the highest diversification value to fund shareholders. The correlation between fund diversification and diversification value is positive only in the case of Asian-Pacific funds. To the best of our knowledge, the relation between portfolio diversification and diversification value of regional mutual funds has not yet been addressed in the literature.     

Author Biography

Javier Rodriguez, University of Puerto Rico - Río Piedras
Professor of Finance

References

Babalos, Vassilis, Emmanuel C. Mamatzakis, and Roman Matousek. "The Performance of US Equity Mutual Funds." Journal of Banking & Finance (2015).

Chiou, Wan-Jiun Paul. "Benefits of international diversification with investment constraints: An over-time perspective." Journal of Multinational Financial Management 19.2 (2009): 93-110.

Comer, George. "Hybrid Mutual Funds and Market Timing Performance*." The Journal of Business 79.2 (2006): 771-797.

Cressy, Robert, Alessandro Malipiero, and Federico Munari. "Does VC fund diversification pay off? An empirical investigation of the effects of VC portfolio diversification on fund performance." International Entrepreneurship and Management Journal 10.1 (2014): 139-163.

Dor, Arik Ben, Ravi Jagannathan, and Iwan Meier. "Understanding mutual fund and hedge fund styles using return-based style analysis." Journal of Investment Management 1.1 (2003): 94-134.

DeMaskey, Andrea L., Wilfred L. Dellva, and Jean L. Heck. "Benefits from Asia-Pacific mutual fund investments with currency hedging." Review of quantitative finance and accounting 21.1 (2003): 49-64.
Driessen, Joost, and Luc Laeven. "International portfolio diversification benefits: Cross-country evidence from a local perspective." Journal of Banking & Finance 31.6 (2007): 1693-1712.

Elton, Edwin J., Martin J. Gruber, and Joel C. Rentzler. "Professionally managed, publicly traded commodity funds." Journal of Business (1987): 175-199.
Elton, Edwin J., Martin Jay Gruber, and Christopher R. Blake. "Survivor bias and mutual fund performance." Review of Financial Studies 9.4 (1996): 1097-1120.

Errunza, Vihang, Ked Hogan, and Mao‐Wei Hung. "Can the gains from international diversification be achieved without trading abroad?." The Journal of Finance 54.6 (1999): 2075-2107.

Gelos, Gaston, and Eduardo Borensztein. A panic-prone pack? The behavior of emerging market mutual funds. No. 0-198. International Monetary Fund, 2000.

Harvey, Campbell R. "Predictable risk and returns in emerging markets." Review of Financial studies 8.3 (1995): 773-816.

Hayden, Evelyn, Daniel Porath, and Natalja V. Westernhagen. "Does diversification improve the performance of German banks? Evidence from individual bank loan portfolios." Journal of Financial Services Research 32.3 (2007): 123-140.

Kaminsky, Graciela, Richard Lyons, and Sergio Schmukler. Mutual fund investment in emerging markets: An overview. Springer US, 2001.

Polwitoon, Sirapat, and Oranee Tawatnuntachai. "Diversification benefits and persistence of US-based global bond funds." Journal of Banking & Finance 30.10 (2006): 2767-2786.

Rodríguez, Javier. "A Portfolio's Country Exposure Management: The Case of Latin American Mutual Funds." Emerging Markets Finance and Trade 43.2 (2007): 5-18.

Rodriguez, Javier. "European mutual funds and portfolio's country exposure: does active management add value?" Applied Financial Economics 18.8 (2008): 683-689.

Rowland, Patrick F., and Linda L. Tesar. Multinationals and the gains from international diversification. No. w6733. National bureau of economic research, 1998.

Sharpe, William F. "Asset allocation: Management style and performance measurement." The Journal of Portfolio Management 18.2 (1992): 7-19.

Shen, Yang-pin, Chiuling Lu, and Zong-Han Lin. "International real estate mutual fund performance: diversification or costly information?" The Journal of Real Estate Finance and Economics 44.3 (2012): 394-413.

Tkac, Paula A. "The performance of open-end international mutual funds." Economic Review-Federal Reserve Bank of Atlanta 86.3 (2001): 1-18.

Woerheide, Walt, and Don Persson. "An index of portfolio diversification." Financial Services Review 2.2 (1993): 73-85.
Published
2018-06-15

How to Cite
Rodriguez, J. (2018). An Empirical Study of Regional Mutual Funds’ Diversification Value. Applied Finance Letters, 7(1), 22-31. https://doi.org/10.24135/afl.v7i1.80
Section
Articles