The Impact of Mutual Fund Family Membership on Investor Risk

Many investors confine their mutual fund holdings to a single fund family, either for simplicity or through restrictions placed by their retirement savings plan. We find evidence that mutual fund returns are more closely correlated within than between fund families. As a result, restricting investment to one fund family leads to a greater total portfolio risk than diversifying across fund families. The increased correlation is due primarily to common stock holdings, but is also more generally related to families having similar exposures to economic sectors or industries. Fund families also show a propensity to focus on high risk or low risk strategies, which leads to a greater dispersion of risk across restricted investors. An investor considering adding an additional fund either inside or outside the family would need to believe the inside fund offered an additional 50 to 70 basis points in return to achieve the same Sharpe ratio. Elton, [email protected], and Gruber, [email protected], are Nomura Professors of Finance at the Stern School of Business at New York University. Green, [email protected], is Assistant Professor of Finance at Goizueta Business School, Emory University. We thank Yakov Amihud, Jacob Boudoukh, Stephen Brown, Jeff Busse, Jennifer Carpenter, Robert Whitelaw, and Jeff Wurgler for helpful comments. The Impact of Mutual Fund Family Membership on Investor Risk