Geography, Informal Information Flows and Mutual Fund Portfolios

Abstract

Previous papers have uncovered the existence of different information flows linked to the geographical location of portfolio investors. Yet, the potentially crucial interactions of multiple information flows linked to geographical location have not received much empirical scrutiny. The primary focus of this study is on the value and interaction of two types of information flows linked to the location of mutual fund managers: information transfers among fund managers (fund-fund flows), and between the holding companies and the fund managers (fund-company flows). We show that while these informal information flows can increase risk-adjusted returns from holdings, the relationship depends critically on the interactions between the two types of information channels considered. Empirical results support the notion of a counter-effective rather than reinforcing relationship between the different information channels. Specifically, we find that (1) fund-fund (fund-company) information flows help in generating positive risk-adjusted returns from holdings in the absence of fund-company (fund-fund) flows; (2) any informational advantages are reversed when the two information flows cumulate. The stocks selected in the more beneficial information environments (defined ex-post) during a portfolio quarter also exhibit positive future returns beyond the quarter, alluding to the ability of these information flows to aid in picking undervalued assets.