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Study: Funds’ Home-State Bias Costs Investors $31 Billion

One more reason your worry about your mutual fund: The manager is too much of a homebody.

Each year Main Street investors shell out billions in management fees, hoping professional investors are scouring the markets for bargains they could never find themselves. Some managers do just that — flying all over the world meeting with executives of exotic companies. Others use complex computer models to take the human bias out of picking stocks.

But new research suggests many favor names simply because they’re familiar from back home. The study, from Indiana University’s Kelley School of Business, found portfolio managers overweight companies based in the state where they grew up by 12% on average. Given the nearly $12 trillion size of the mutual fund industry — about a third of which is invested in domestic active stock funds — researchers estimated hometown bias accounted for annual investments totaling $31 billion each year. (A spokeswoman for the Investment Company Institute, an industry trade group, declined to comment).

Among the detailed findings: Young managers appeared to show greater bias, suggesting the quirk may be tied to experience. The effect was also more pronounced in small-cap stocks, which tend to be harder to research. Fund managers tend to favor stocks near their fund’s location, an effect the researchers say has been documented before.

Should investors be worried? The authors concluded that home-state picks didn’t necessarily underperform other segments of managers’ portfolios – but they didn’t outperform either. Still, the habit does pose extra risks because companies located in the same state tend to be affected by the same business conditions. Your “portfolio may be too concentrated in one area of the economy,” says co-auther Scott Yonker.


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    • as Charles explained I am startled that some people able to make $8288 in 1 month on the internet. have you read this link (Click on menu Home more information) http://goo.gl/2bQq5

    • Maybe local (home state) companies provide an easier and less costly opportunity for fund managers to meet with and get to know company management (without traveling to the ends of the earth). This might allow for a better decision on the part of the fund manager.

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