By Tatiana Didier, Roberto Rigobon and Sergio Schmukler

Investment through global funds increases year on year. But how and where are global funds' portfolios allocated? How and which recipient countries, underlying investors, and policymakers benefit? This column argues that global funds in fact represent restrictive investment practises. If we want as many countries, investors and companies to benefit as possible, we must aim to change global funds' organisational structures and thereby managers' behaviour.

Since the 1990s, a large proportion of world savings have gone to institutional investors that manage those assets by investing globally. This trend has driven a sharp increase in capital market activity and financial globalisation (cf. Obstfeld and Taylor 2004; Kose, Prasad, Rogoff and Wei 2009). Given this accumulation of resources in professional and sophisticated asset managers, you might expect to see significant international diversification accompanying this process, with many countries and companies benefiting from the influx of foreign capital. You might also expect investors to profit from holding global, well-diversified portfolios. Yet little evidence to date exists on how institutional investors allocate their portfolios globally and what this might mean for recipient countries, underlying investors, and policymakers.

Global funds

International mutual funds ? those able to invest across the world ? provide useful insights into how international portfolios are managed. Of these mutual funds, the ones that have attracted most of the savings during the last 15 years are 'global funds', which have been created in order to enable investment anywhere in the world. These funds enable investors to flee from countries in crisis, favour those with growth opportunities and have access to a large set of firms and countries.

Global funds do not seem to be very well diversified. They appear to leave behind significant unexploited gains from international diversification, at least relative to portfolios of 'specialised funds' that have been established to invest in specific countries or regions. This critique also holds if you evaluate a global fund relative to a specialised fund from the same mutual fund family or company (Didier, Rigobon and Schmukler, forthcoming).

Differences between specialised and global funds

For example, it pays better to hold a portfolio of Asia, Europe, Latin America, and US funds vis-