Separating politics from portfolios
By Joel Dresang
One of my ambitions going into college was to someday have a beige corduroy suit like Robert Redford wore in “All the President’s Men.” I was part of a wave of students flooding into journalism schools in the wake of Watergate.
I grew up fascinated by politics and government. Some of my first library books were biographies of America’s founding fathers. I have fond memories of watching the political conventions with my mom, thinking about how we were witnessing history, Mom anticipating when the roll call reached Wisconsin.
In high school, I got involved in student government and Badger Boys State. I read Thomas Jefferson and the Federalist Papers. At 15, I bused to visit Washington, D.C., where my sister was living. I returned at 19 as a congressional intern.
The pageantry and rhetoric of another presidential election stir my civic pride. I’m as enthused as some people get for the Olympics or the next Star Wars movie.
But new research reminds me to keep my interests in perspective.
Economists from San Diego State University and the University of Kansas have studied the political partisan bias of mutual fund managers. What they found suggests investors are best served by separating their wallets from their ballots.
The scholars’ research, published in the Journal of Financial and Quantitative Analysis, examined patterns of political contributions by managers at 1,298 mutual funds and top executives at 16,655 firms in which the managers invested. The study revealed “in-group favoritism,” through which managers tended to invest in companies with politically like-minded executives.
For instance, managers who contributed more to Republicans invested about 8% more where executives leaned Republican and about 3% less in Democrat-leaning firms, compared to Democrat-biased fund managers.
The bottom line: Political bias messes with investment decisions.
“We find that mutual funds that have more holdings in politically similar firms tend to perform worse than those with less partisan bias,” according to the study.
“Specifically, we found that funds with more partisan bias suffer from higher levels of idiosyncratic volatility compared to those with less bias,” Yaoyi Xi, the researcher from San Diego State, said in a news release. “Therefore, our findings suggest that funds with more partisan bias generate less return for the risks associated with their portfolios.”
Xi and co-author M. Babajide Wintoki found that partisan bias was even more pronounced when the U.S. president was from the fund managers’ favorite party, thus confusing political power with investment influence.
Although the research is new, questions about using politics to pick investments are not.
Corporate earnings and interest rates are what move the financial markets long term, Bob explained. Consumer spending drives nearly 70% of the U.S. economy. Bob noted that consumers don’t think twice about who’s in office when they’re buying a car or planning a remodeling or shopping for groceries.
“Politically, sure, all sorts of things matter, but when it comes to the stock market, it’s basically about interest rates and earnings. Politicians really can’t do a whole lot about either one,” Bob said.
“I don’t want people to misinterpret my remarks,” Bob added. “I think it matters who’s president. But frankly, for the stock market, it’s not even in the top ten.”
According to the researchers, political bias was most apparent among inexperienced fund managers investing in stocks for companies that disclose relatively little information.
“As part of our selection process, we look for tenured managers running investments with a history of strong performance,” Kyle Tetting said. “While they may still have political opinions, they’ve proven that financial decisions are at the heart of what they do.”
Established professional fund managers “never talk politics,” Bob said. “It’s not even on their radar screen. So, I find it so intriguing that individual investors think it matters way more than the pros think it matters.”
I double-majored in political science and journalism in college, and before I graduated, I was covering state government and politics for the local NBC TV affiliate. I didn’t have a corduroy suit, and I wasn’t working alongside Walter Cronkite, but I was on my way.
My stint in television began during an economic recession that lasted eight months. A year later, the harsher 1982 downturn began.
Although I still had the state government beat, I found myself reporting more on people losing jobs and families struggling to make ends meet. The TV station where I worked laid off some of my senior colleagues who had mortgages and young children.
I realized that the petty political kerfuffle I might have been covering in a legislative subcommittee meant little in the day-to-day lives of television viewers compared to the grander global forces that were killing jobs and squeezing bank accounts. That’s when I started getting more interested in following economics and personal finance.
A buddy of mine recently related how he’d be conflicted betting on sports teams because his allegiances would cloud his judgment. Besides, the financial consequences would detract from his enjoyment of the games.
Likewise, I’m content to take interest in the political process without confusing it with an omnipotent force that steers how my investments should be allocated.
I like the way Bob put it: “People that are very closely attuned to politics seem to think, incorrectly, that it’s the be-all and end-all. And it’s not.”
Joel Dresang is vice president-communications at Landaas & Company.
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(initially posted September 4, 2020)
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