This is not an article about politics. Nor is its point to reveal the results of an investing competition between the political parties. But those readers who would like to know whether to invest with Democrat or Republican fund managers finally have some guidance, thanks to a new study, Red and Blue Investing: Values and Finance, by Harrison Hong, a professor of Economics at Princeton, and Leonard Kostovetsky, a Business professor at the University of Rochester.
Hong and Kostovetsky are the first to study political leanings and their effect on fund management. Using publicly available data from the Federal Elections Committee’s Web site, they determined which fund managers were contributing more to Democratic candidates and which were contributing more to Republicans.
If manager contributed more, on balance, to a particular party, he or she was assigned to that party. Moreover, if the manager contributed at least $2,000 (the original cap for individual contributions in an election cycle under the McCain-Feingold Act), the manager was labeled a strong Democrat or Republican.
Using data from 1992 to 2006, they found contribution data for approximately 600 of the 2,100 managers in Morningstar’s universe. Of these, 60% were Republicans and 40% were Democrats.
The authors’ goal was not to determine which party attracts better investors, but since that is what I – and, I suspect, most readers – want to know, I’ll discuss those results first.
Republican managers did better than Democratic managers, on an absolute basis and on a risk-adjusted basis. The difference, however, was very small – approximately 36 basis points per year. The authors caution that these results cannot be the foundation of a trading strategy, since the political affiliations were determined ex-post (after the fact). They also note, however, that political affiliations are relatively stable over time so, all else being equal, you might eke out a few basis points with a Republican manager.
Both Republican and Democratic managers performed better than non-donors. That discrepancy may reflect mere self-selection, however, since successful managers accumulate wealth that allows them to make political contributions.
The authors’ primary focus was to examine more broadly how political affiliations affect investment decisions. Their key finding was that Democratic fund managers held less (than Republican and non-donor managers) in industries that are considered socially irresponsible (e.g., tobacco, guns, defense, and natural resource exploration). Strong Democrats under-weighted these stocks by about 1%, after adjusting for style and size characteristics. Republican managers over-weighted politically sensitive industries by .37%, but that finding was not statistically significant.
A higher proportion of socially responsible investing (SRI) funds are run by Democrats. But the authors dropped SRI funds from their study to avoid any bias; they wanted to study manager decisions in funds that did not have an SRI mandate.
SRI funds under-weight politically sensitive stocks by 1.6%, slightly more than the under-weighting by strongly Democratic managers. The authors controlled for a number of other personal characteristics of managers (such as gender, age, and graduate degree), so they are confident the under-weighting is related to the managers’ political affiliation.
