The Impact of International Diversification: A Study of the French Mutual Fund Industry

The first French open-end mutual funds (called SICAV's) were founded in 1964.By the end of 1972 their number had grown to 70 with combined assets of 21.8 billion francs, which amounted to 6.8 percent of the mar- ket value of all listed French bonds and stocks.The purpose of this study is to present a comprehensive analysis of this industry, with par- ticular emphasis on the investment performance achieved.The investment performance of United States mutual funds has been analyzed by several authors (notably Sharpe [23], Jensen [13] and Pogue [22]).The analysis is simplified for the U.S. market by the fact that virtually all of the fund assets are invested in U.S. stocks and bonds.Thus, single market models, such as the Sharpe [24]-Lintner [16] Capital Asset Pricing Model can be used to evaluate fund performance.For the French funds, however, the situation is more complicated.French mutual funds typically offer the investor an internationally diversified portfolio.In fact, at the end of 1972, the proportion of fund assets invested in foreign com- mon stocks exceeded that invested in French stocks.In this study we will examine the performance of the French funds using a series of French national and international security pricing models.The study is organized as follows:Chapter II describes the operations, growth and regulation of the Industry.Previous studies are summarized and reviewed in Chapter III.Chapter IV presents both time series and cross-sectional results for two single-index modelsa French index model and a world single index model.Two multi-national index models are described and applied in Chapter V.Finally, Chapter VI presents a summary of the results and their implications for explaining investment performance.Of the three main model types used in this study, the multinational index models have, by far, the largest explanatory power: 81 percent of the variance of the SICAV returns is explained, on average, com- pared to 68 percent and 46 percent for the French and world models respectively.The cross-sectional regression for the SICAV's point towards an international pricing of risk, but with a dependence