Navigating Geoeconomic Risk: Evidence from U.S. Mutual Funds

Firm-level geoeconomic risk can affect even broadly diversified mutual fund portfolios. We study U.S. export controls that restrict sales of cutting-edge technology to selected Chinese firms for national security reasons. The stock prices of affected domestic suppliers drop immediately after the policy introduction. Mutual funds holding these stocks experience increased volatility and lower returns. Fund managers respond by selling stocks of exporters to China, buying lottery-like stocks, and increasing portfolio concentration. While stock-picking and market-timing skills do not help, specialist and high-fee funds are better at navigating geoeconomic risk.