Costs of Political Polarization: Evidence from Mutual Fund Managers during COVID-19

Abstract

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