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

75 Pages Posted: 23 Nov 2020 Last revised: 4 Apr 2022

See all articles by Blair Vorsatz

Blair Vorsatz

University of Chicago - Booth School of Business

Date Written: April 1, 2022

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

Suggested Citation

Vorsatz, Blair, Costs of Political Polarization: Evidence from Mutual Fund Managers during COVID-19 (April 1, 2022). Available at SSRN: https://ssrn.com/abstract=3734026 or http://dx.doi.org/10.2139/ssrn.3734026

Blair Vorsatz (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

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