Costs of Political Polarization: Evidence from Mutual Fund Managers during COVID-19
75 Pages Posted: 23 Nov 2020 Last revised: 4 Apr 2022
Date Written: April 1, 2022
Political orientation is more consequential for the asset management industry than previously believed. During the Covid-19 crisis, partisan mutual fund teams – whether Democratic or Republican – have lower fund returns and lower fund flows, compared to non-partisan teams. Higher non-partisan returns come from aggressive risk-taking during the stock market crash and diverse pre-existing portfolio positions. Non-partisans appear to individually add value to their team through greater cognitive and ideological flexibility. Higher non-partisan flows result from partisan investor clienteles. Institutional investors use negative screens to rule out fund managers with misaligned political values. As a result, politically misaligned funds – with Republican managers and Democratic-leaning clienteles – experience abnormal outflows. Non-partisan funds receive more net flows overall by mitigating this political misalignment effect.
Keywords: COVID-19, mutual funds, politics, polarization
JEL Classification: G01, G11, G12, G14, G41
Suggested Citation: Suggested Citation