Home-State Bias Problem for Funds

Mutual fund managers add to risk by overweighting stocks from home state, a study shows.

Mutual-fund managers who lack experience or resources tend to be swayed by a home state advantage, according to a new study from Indiana University’s Kelley School of Business.

While it’s common for portfolios to show a preference for nearby companies, it hasn’t been clear whether bias or a greater amount of information drives the predisposition toward investing in familiar companies, such as those headquartered in the manager’s home state. A forthcoming paper in the Review of Financial Studies, “No Place Like Home: Familiarity in Mutual Fund Manager Portfolio Choice,” is the first to document and quantify this bias among professional investors. The study by three Kelley School professors examined 42,109 quarterly fund observations for more than 2,000 funds.  

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