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Essay on the Impact of Geographical Location on Mutual Fund Performance and Behaviour
Wista Amalia Narulita, August 2011
The University of New South Wales
Abstract
This thesis presents three related essays on the impact of geographical location for U.S. mutual funds. The U.S. mutual fund industry is chosen as a laboratory for this thesis given its size and maturity. The thesis investigates the implications of fund company location on fund performance, strategy, money flows and fee competition, and its effect on the home bias of fund companies.
The first essay examines the performance, strategy, and money flows of fund managers when they relocate within the U.S. The findings suggest decreased risk-adjusted fund performance following a manager’s relocation that cannot be attributed to strategy changes. Investors react to fund manager relocations with reduced fund flows. Funds that relocate from urban to rural areas experience increased flows after relocating.
The second essay investigates the implications of Van Nieuwerburgh and Veldkamp’s (2009) equilibrium model of learning and portfolio choice for relocating mutual funds. The essay analyses the stock selection of managers that relocate relative to their former bases and new locations. This thesis finds that relocating firms form a significant new bias towards their new premises, and, post-relocation, new portfolio holdings deliver better performance than the former holdings. Relocating fund managers mimic the portfolios of their new neighbours, suggesting the relevance of word of mouth or information diffusion as a source of new
information. Fund managers tend to relocate to the new premises with high local concentrations of their peers relative to available local stocks.
The third essay examines fee competition in the mutual fund industry using a geographical instrument. The essay argues, based on recent studies, that geographical proximity to financial centres is related to fund performance due to information quality considerations and investigates its correlation with fund Management Expense Ratios (MERs). The results show that within selected financial centres – Boston, Chicago, Los Angeles, New York, Philadelphia, and San
Francisco – the MERs of local funds are lower than those of distant funds after controlling for well-established determinants of fund expenses. The differences in fund MERs are stronger among similar funds, and cannot be attributed to the differences in fixed costs in each financial centre. Our findings suggest that fee setting in the U.S. mutual fund industry is competitive.
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