(James Saft is a Reuters columnist. The opinions expressed are
By James Saft
March 22 In investing, it seems, the wages of
following your political bias is higher volatility without
That’s the upshot of a new study, which tracks how heavily
fund managers allocate assets into firms managed by people with
whom they agree politically. (here)
Fund managers do tend to opt for firms with which they are
in political alignment, the study finds, and do so more when
their own party controls the White House.
As more risk without more reward is the investing opposite
of a free lunch, this extra volatility politically biased mutual
fund managers create is a cost and a problem for fund holders.
As the Trump rally seemingly falters, now may be a good time
to consider some of the factors which may have undergirded the
surge in stocks on his election.
The new study, by M. Babajide Wintoki and Yaoyi Xi of the
University of Kansas, looked at a sample of 1,298 mutual fund
managers between 2000 and 2015, using political donations as a
proxy by which to see if they invested more or less in firms
managed by executives with similar political views.
The answer, perhaps unsurprisingly, was yes.
Republican-leaning managers put about 8 percent more into
Republican-leaning firms than do Democratic-leaning managers,
the study found. Those same Republican-leaning managers also put
about 3 percent less into Democratic-leaning firms than do their
Funds whose managers have an identifiable political leaning
hold 43 percent of assets in firms whose management align with
their bias and only 33 percent in firms whose managers lean the
So, people put their, or their clients’, money where their
political beliefs are. How’s that working out?
“We find that mutual funds that have more holdings in
politically similar firms tend to perform worse than those with
less partisan bias, although the economic magnitude of this
underperformance is small. However, we find that partisan bias
actually leads to statistically and economically significantly
higher levels of fund idiosyncratic volatility,” the authors
For every one standard deviation increase in partisan
holdings funds suffer about a 29 percent increase in
Love Trump or hate him, love Hillary or want her jailed,
that is not what fund managers are paid to do.
FAMILIARITY OR ADMIRATION/CONTEMPT
This result lines up well with some other recent research
into the impact of political bias on investing. A 2016 paper
found that investors become more optimistic and see the markets
as undervalued and holding less risk when their party is in
Another 2016 paper found Republican-leaning fund managers
badly lagged Democratic ones just after Barack Obama was elected
and took office, a phenomenon the authors theorize was driven by
a tendency to over-weight fears about hyperinflation aired by
right-wing media at the time. (here)
Looking at the George W. Bush and Obama administrations, the
Kansas study found that managers with a political bias tend to
over-allocate into politically similar firms more when their
party controls the White House.
The question about all of this is why fund managers do this.
One potential explanation is that political activity serves as a
channel through which fund managers get better information about
firms whose managers are also in their camp. It is also possible
that they are simply more familiar with those firms but don’t
have better information.
There is also a fairly well established phenomenon of
in-group favoritism, whereby people hold higher opinions of
people, and in this case firms, which they perceive to be
similar to themselves.
That managers suddenly become more optimistic about a firm
because a particular party controls the White House undermines
the superior information idea, and tends to support in-group
So, the authors argue, do the results, as if a fund manager
had better information about companies on her “side” of the
political divide we could expect to see better results out of
None of this is to say that the Trump rally, which is also a
reflation rally, is without basis. Stimulative spending and
lower taxes and regulation may well be good for company results,
and for the value of their shares.
Still, there is a certain irony in the way in which markets
in general have bought into the Trump plan, not because it
wouldn’t help stocks if he achieved it but because of the high
risk that he will.
Higher volatility without better returns is a high price for
clients to pay for someone else’s political views.
(Editing by James Dalgleish)