Study suggests they are and it’s bad news for investors
Separating political views from asset management may be a challenge for some mutual fund managers according to a new academic study.
A researcher at the Fowler College of Business at San Diego State University assessed the political affiliations of 1,298 mutual fund managers and those of top executives at the 16,655 firms they invested in, using political contribution records between 1989 and 2016.
They found that fund managers are more likely to invest in firms with leadership that have similar political views to their own.
“We found that partisan-leaning fund-managers allocate about 43% of their assets to firms whose executives have similar political leanings," said finance professor Dr. Yaoyi Xi, who conducted the research along with Dr. M. Babajide Wintoki of the University of Kansas. "We also found that they allocate only 33% of their assets to firms with the opposite political leanings."
The study also found that different industries are favoured by investment managers depending on who holds power. That means a Republican president of the US may mean an increase in oil firms while a Democrat in the White House may lead fund managers to allocate to renewables.
Bad news for investors
The research, due to be published in the Journal of Financial and Quantitative Analysis, determined that funds that appear to invest in firms that share their political bias tend to perform worse than those that do not.
"Specifically, we found that funds with more partisan bias suffer from higher levels of idiosyncratic volatility compared to those with less bias. Therefore, our findings suggest that funds with more partisan bias generate less return for the risks associated with their portfolios," said Xi. "Given that fund managers are tasked with implementing strategies to increase their clients' wealth, the real and significant cost of partisan bias in mutual fund portfolio allocation is worth of investors' scrutiny, to say the least."
#Research conducted by #SDSUFowler finance professor, Dr. Yaoyi Xi, indicates that one of the factors influencing how mutual fund managers invest their clients’ money may have more to do with how they vote than with a stock’s performance.
— Fowler College (@sdsufowler) March 29, 2019
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