FIN-04-014

The Impact of Mutual Fund Family Membership on Investor Risk

May 2004

Edwin J. Elton, Martin J. Gruber and T. Clifton Green

ABSTRACT
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 fund families, which reduces the benefits of investor diversification. 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.

Edwin J. Elton
Institution: Stern School of Business, New York University
Email: eelton@stern.nyu.edu
Home Page: http://www.stern.nyu.edu/~eelton


Martin J. Gruber
Institution: Stern School of Business, New York University
Email: mgruber@stern.nyu.edu
Home Page: http://www.stern.nyu.edu/~mgruber


T. Clifton Green
Institution: Goizueta Business School, Emory University
Email: clifton.green@emory.edu

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