Here's a statement of the obvious: The opinions expressed here are those of the participants, not those of the Mutual Fund Observer. We cannot vouch for the accuracy or appropriateness of any of it, though we do encourage civility and good humor.
Is Your Mutual Fund Politically Biased? A recent study showed that partisan-leaning managers invest about 43% of assets in firms whose executives share the managers’ party affiliation.
Yes, but you're assuming a binary classification, while the paper classifies firms (and funds) into three categories: Democratic-leaning, Republican-leaning, and neutral. So while a Republican-leaning manager might invest 43% in Republican-leaning firms and 57% in non-Republican-leaning firms, the latter might break down further into 33% Democratic-leaning and 24% neutral firms.
From the study's intro:
Further inspection suggests that, among funds for which we can identify the partisan leaning of their managers, we find that they allocate about 43% of their assets to firms with whose executives they share a similar partisan affiliation, and only about 33% of their assets to those firms whose executives have the opposite partisan affiliation. While this simple inspection based on sample averages is merely univariate and only allows limited inference, it provides the first piece of suggestive evidence for partisan bias among fund managers.
In multivariate tests, in which we control for a variety of firm and fund characteristics ... we confirm these univariate patterns in the data. The results from our baseline multivariate model suggest that Republican (Democratic) fund managers allocate 4% to 7% more of their funds’ total net assets to companies that are managed by Republican (Democratic) executives than Democratic (Republican) fund managers do.
Why does this matter?
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 may be considered small. However, we find that partisan bias leads to statistically and economically significantly higher levels of fund idiosyncratic volatility.
Is Your Mutual Fund Politically Biased? If so I would say they are not acting on the behalf of the shareholders. I would also hope that a smart, responsible fund manager would know enough not to make investment decisions based on politics or political affiliation(s).
The paper describes political bias as just another form of systemic bias, like hometown (or home country) bias. Sometimes systemic biases can be justified. Invest in companies near you because you have better information about them (e.g. Mairs and Powers Growth Fund, MPGFX).
The objective of the research was to ascertain whether political bias could provide a similar advantage:
[P]olitical similarity may provide an information channel through which fund managers are able to acquire value-related information about politically similar firms. Mutual fund managers and firm executives who hold similar political ideologies may belong to the same social clubs, share similar social interests, and may even tend to live in close geographical proximity to each other. This possibility means that fund managers may be socially connected with executives and directors with whom they share a similar partisan orientation. Research suggests that connected investors share information with each other.
The authors call this the "information channel". They give two other possible reasons for political bias, in-group favoritism and familiarity. The latter don't provide an advantage, and increase volatility.
As long as this information gives fund managers a comparative advantage, they will exploit the advantage by overweighting their portfolio allocation towards firms in which they have positive information, and underweighting firms in which they have negative information. Overall, if political partisan bias is due to the information channel, mutual fund managers who invest in politically similar firms should earn higher returns. In contrast, if partisan bias arises through familiarity or in-group favoritism rather than superior information, we would not expect managers who invest in politically similar firms to earn higher returns. Indeed, mutual funds with more of such biases may suffer higher levels of idiosyncratic risks because their fund managers reduce the pool of stocks they can use for diversification purposes.
The point is that to invest on the basis of political bias, or any other systemic bias, is not necessarily a failure to act on behalf of the shareholders. The question addressed in the paper was whether this bias is justified.
It's the same type of question asked about ESG funds. Do companies that score higher on ESG metrics do better, or at least as well as "bad" companies? If so, then ESG investing can be justified based purely on performance.
@msf - I don't argue with the paper. What I will say is that if the fund is managed that way then the shareholders should know that upfront. Although in real life it's probably unavoidable to escape political biases I'd prefer not to see them as a factor in investment decisions.
My point was that, absent this research to the contrary, one can not conclude that a fund investing based on politics is "not acting on the behalf of the shareholders." Such a strategy could actually inure to the shareholders' benefit (though the paper showed otherwise).
If you prefer not to invest in funds that have a political bias, that's fine, that's a personal decision. That's different from saying unconditionally (i.e. without supporting research) that funds that invest based on a systematic bias, whether it's political, regional, religious, social, or anything else, are not acting on the behalf of the shareholders.
Out of curiosity, have you eschewed funds where the managers for the past decade have bemoaned the large deficits? They were making political (and economically incorrect) statements. Assuming that they invested according to their macroeconomic beliefs, they actually were harming shareholders.
FWIW, given that I extremely rarely make fund changes, and given that I could not quantify the impact of these manager biases, I held my nose and stayed the course.
My point and what I was trying to say is that if political bias, and by that I mean party affiliation, is a premise of management decisions then I want to know that upfront and center. Period. That to me is quite different from deficits and macroeconomic beliefs.
Last week I did nothing, but I did smash my fingers with a baseball bat several times when tempted to enter the mosh pit. Like you I rarely make mutual fund changes. The last one was 5 years ago when I swapped a large chunk of FCNTX for BIAWX.
Comments
From the study's intro: Why does this matter? Partisan Bias in Fund Portfolios
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2933270
The objective of the research was to ascertain whether political bias could provide a similar advantage:The authors call this the "information channel". They give two other possible reasons for political bias, in-group favoritism and familiarity. The latter don't provide an advantage, and increase volatility. The point is that to invest on the basis of political bias, or any other systemic bias, is not necessarily a failure to act on behalf of the shareholders. The question addressed in the paper was whether this bias is justified.
It's the same type of question asked about ESG funds. Do companies that score higher on ESG metrics do better, or at least as well as "bad" companies? If so, then ESG investing can be justified based purely on performance.
If you prefer not to invest in funds that have a political bias, that's fine, that's a personal decision. That's different from saying unconditionally (i.e. without supporting research) that funds that invest based on a systematic bias, whether it's political, regional, religious, social, or anything else, are not acting on the behalf of the shareholders.
Out of curiosity, have you eschewed funds where the managers for the past decade have bemoaned the large deficits? They were making political (and economically incorrect) statements. Assuming that they invested according to their macroeconomic beliefs, they actually were harming shareholders.
FWIW, given that I extremely rarely make fund changes, and given that I could not quantify the impact of these manager biases, I held my nose and stayed the course.
Last week I did nothing, but I did smash my fingers with a baseball bat several times when tempted to enter the mosh pit. Like you I rarely make mutual fund changes. The last one was 5 years ago when I swapped a large chunk of FCNTX for BIAWX.