The Role of Domestic Industries in Foreign Portfolio Decisions

Abstract: I analyze foreign portfolio decisions and performance of international mutual funds. In their foreign portfolios, funds overweight and concentrate in industries that are large in their home country. On the country level, they underweight countries with a different industry structure relative to home. This Foreign Industry Bias is concentrated in funds with a classical Home Bias. For those funds, Foreign Industry Bias is associated with superior performance and foreign stock picking is a significant contributor to that performance. Their foreign trades co-move with current home country and global industry returns and subsequently predict foreign stock returns. Both portfolio characteristics and performance are persistent at the one year horizon. Taken as a whole, the evidence supports the view that some funds successfully use domestically-rooted industry information when investing abroad and suggests that domestic industry structures proxy for the relative informational advantage enjoyed by different foreign investors