Overseas exposures, global events, and mutual fund performance

Abstract

We reveal a positive relationship between fund overseas exposure (OE) and future performance in the Chinese mutual fund industry, where strict restrictions on direct overseas investments exist. We use the fund portfolio-weighted average of the foreign-to-total sales ratios to measure OE. Results indicate that the top quintile portfolio of funds with the highest levels of OE outperforms the bottom quintile by 4.22 % on an annualized basis. We provide strong evidence that the positive relationship between OE and future fund performance is robust and statistically significant. Furthermore, the positive effect increases after the outbreak of the US–China trade war and that of COVID-19. The outperformance of high OE mutual funds is more likely driven by fund managers' skills in selecting stocks and timing the foreign market than managers' information advantage or multinational firms’ outperformance. Finally, the positive effect is more pronounced for small funds that are managed by small fund families and funds that invest in large and growth firms.