The Performance of Diverse Teams: Evidence from U.S. Mutual Funds

Abstract

We use the U.S. mutual fund industry to study the relation between team diversity and performance. Focusing on diversity concerning political ideology, we find that diverse portfolio manager teams outperform homogeneous teams and have a higher active share, and tracking error. These results are robust to controlling for manager and family fixed effects, as well as other dimensions of diversity, manager political connections, and incentives. We also find that political polarization has a strong limiting effect of diversity on performance, consistent with a reversal of the benefits of diversified perspectives when external forces negatively affect team trust and cooperation. In assessing possible mechanisms for the observed outperformance, we find evidence consistent both with improved decision-making due to the increased variety of perspectives, as well as increased monitoring by heterogeneous team members. Lastly, in exploring why diverse teams are not more prevalent in the industry, we find that entrenched managers prefer homogeneous teams and that local labor markets are constrained in their supply of ideologically diverse managers.

Keywords:  Mutual fund, Campaign Contributions, Dispersion in Beliefs, diversity, Labor incentives, PACs, Polarization, Political Ideology, Teams

JEL Classification: G11, G23, J33, J44, L22, L25, L84, M12, M52