Out of Sight, Out of Mind: When Proximities Matter for Mutual Fund Flows

We analyze the aggregate investment of 22,900 worldwide mutual funds and question factors that promote accessibility to foreign stock markets for these investors when they allocate their assets outside their domestic market. A gravity model is proposed to test the influence of geographical, institutional and cognitive proximity in explaining asset trading by mutual funds. While mutual funds invest primarily in large stock markets and in countries with similar legal systems and the same language or culture, we find robust evidence of a geographical pattern in the distribution of their assets. Investments are located primarily in countries close to home, attesting that despite the globalization of stock markets and the high mobility of capital, geography is still relevant for understanding transactions of mutual funds. Results depending on which geographical, institutional and cognitive proximity promotes accessibility to foreign markets remain robust when introducing the issue of time horizons of investors.