I
f there’s anything we’ve learned over
the past few years, it’s that there’s a
lot of political bias in this country. So
maybe it shouldn’t come as a surprise
that mutual fund managers are sus-
ceptible, too.
A recent study shows that managers
tend to invest in companies run by ex-
ecutives who share their politics—to
the detriment of their fund investors.
Prior research has already shown that
fund managers prefer stocks from
their own countries, their own cities
and states, and the states where they
grew up.
The study was conducted by finance
professors at San Diego State Univer-
sity and the University of Kansas and
published in the Journal of Financial
and Quantitative Analysis. The re-
searchers looked at fund man-
agers from 1,298 funds and
executives of 16,655 firms in
which the funds invested,
culling political donation
records from 1989 to 2016
to determine everyone’s
political leanings.
A relatively simple
analysis of the data
found a striking pat-
tern of favoritism.
Partisan-leaning
managers invested
about 43% of
assets in firms
whose executives
shared the man-
agers’ party
affiliation, and
only about 33%
of assets in firms
whose executives
had the opposite
affiliation. After
controlling for a
variety of fund,company and other characteristics, the
researchers found that overall, both
Republican and Democratic fund man-
agers invested 4% to 7% more of their
fund’s assets in companies managed by
politically like-minded executives than
did fund managers who had opposite
political leanings. Furthermore, man-
agers were more likely to hold on lon-
ger to losing stocks of firms run by ex-
ecutives who shared their partisan
orientation, the research found.No insider info. Investing along party
lines might be okay if managers got a
competitive edge by hobnobbing—say,
in the neighborhood, at the club or at
social events—with like-minded execs.
But the researchers didn’t find any
enhanced information channels along
those lines or any increased
familiarity with the compa-
nies. What they found was
a simple preference, long
documented in socialpsychology research,
for people similar
to themselves—a
favoritism that
leads people to
confer superior-
ity to members
of their own
group. In this
case, that led the
managers to con-
sider firms run
by executiveswhose politics were similar to their
own to be superior investments.
Fund managers were also more
likely to invest in firms with politically
similar management when their own
political party was in power. This ten-
dency dovetails with prior research
that found investors perceive the mar-
kets to be less risky when their own
party is in power.
What price do investors pay for cast-
ing their lot with politically biased
fund managers? Some results from the
research showed that these funds per-
form slightly worse than comparable
funds with no political bias; other re-
sults suggested the returns were com-
parable, says study coauthor Yaoyi Xi,
a finance professor at San Diego State.
What is clear is that the funds with
more partisan holdings tended to have
significantly higher risks, measured
by volatility. “This pattern does not fit
well with the principle that investors
should expect higher returns when
bearing greater
risks,” says Xi.
The good news
for anyone who
prefers an unbi-
ased manager is
that political bias
is muted in man-
agers with more
experience, and it becomes less evi-
dent when corporate information is
readily available. So, as always, look
for managers with long and solid track
records, who aren’t likely to take f liers
on companies that are less than forth-
coming about business results. And
consider index funds if you want to
excise manager bias of any sort from
your portfolio. ■ANNE KATES SMITH IS EXECUTIVE EDITOR OF KIPLINGER’S
PERSONAL FINANCE MAGAZINE. YOU CAN CONTACT HER AT
[email protected].Is Your Mutual Fund Politically Biased?
YOUR MIND AND YOUR MONEY Anne Kates SmithPOON WATCHARA-AMPHAIWANRESEARCH FINDS THAT FUNDS WITH
MORE PARTISAN HOLDINGS TEND TO
HAVE SIGNIFICANTLY HIGHER RISKS.INVESTING Commentary38 KIPLINGER’S PERSONAL FINANCE^ 04/2020