Geography, Informal Information, and Mutual Fund Portfolios

This paper explores how informal information channels impact the investment performance of mutual funds. We measure the strengths of two specific information channels linked to the geographical location of fund managers: information transfers among managers (fund-fund links), and between fund managers and the companies in which they invest (fund-company links). We analyze the marginal impact of these information channels on abnormal returns generated from stock holdings. We find that each channel increases investment performance in the absence of the other. Investment performance is reduced when the two information channels act in combination, an effect that appears to be driven by “crowded trades” that reduce profitability. The stock selections that are associated with the presence of one information channel but the absence of the other earn positive future returns. Overall, our results show that the economic benefits of informal information channels depend critically on the nature of their interactions