Red Action, Blue Action — MAGA Republicans and Liberal Democrats Bring Politics to Wall Street
Are Republican Investment Advisors Outperforming Democrats?
Given the intensity of U.S. polarization, it was perhaps inevitable that partisanship would creep into the arena of investment advice. And it most certainly is. Numerous studies have confirmed that Republican advisers tend to invest more in companies led by Republican-friendly CEOs, for example, just as Democratic advisers invest more in Democratic-leaning companies.
But do these differences lead to a difference in performance?
A good starting point to answer this question is with two exchange-traded funds that were created around the time of the 2020 US presidential election: The American Conservative Values ACVF ETF,
and the Democratic Large Cap Core ETF DEMZ,
Since November 7, 2020, the earliest date for which FactSet has performance data for both ETFs, ACVF has produced an annualized return of 14.4%, while DEMZ has produced an annualized return of 14.2%. (See chart below; data through April 29.)
Given the variability of their returns, these two ETFs are at a statistical dead end.
I have not included in the chart another ETF that focuses on Republican themes: Point Bridge GOP Stock Tracker MAGA,
It is older than these two new ETFs, having launched in September 2017. There is no corresponding Democratic-leaning ETF that was launched around the same time, so there is no comparison direct. From its inception through April 29, MAGA rose 11.9% annualized, lagging the S&P 500 comparable return of 13.7%.
Investment and politics don’t mix
We shouldn’t be surprised by these results, as they’re consistent with what researchers have found over the years. Consider a study that appeared in the August 2020 issue of the Journal of Quantitative and Financial Analysis, titled “Partisan bias in fund portfolios.” It was led by Dr. Babajide Wintoki from the University of Kansas and Yaoyi Xi from San Diego State University. They found that although “fund managers are more likely to allocate assets to firms managed by executives and directors with whom they share a similar partisan political affiliation, … this bias is not associated to an improvement in the performance of the funds”.
Another major study appeared ten years ago in the Journal of Financial Economics, titled “Red and Blue Investing: Stocks and Finance.” It was led by Harrison Hong of Princeton University and Leonard Kostovetsky of the University of Rochester. They divided US equity mutual fund managers into two groups based on their contributions to federal election candidates. A manager was considered Democratic-leaned if he made significantly more contributions to Democratic candidates, and Republican-leaned if he leaned towards Republican candidates. (Researchers ignored mutual fund managers who made no contribution to either party for the purposes of their comparison.)
Although they found significant differences in the stocks held by Democratic and Republican-leaning managers, the researchers found that “the overall performance of Democratic and Republican managers did not differ significantly.”
A similar result was reached in a 2017 study in the Journal of Banking and Finance, titled “Hedge fund policy and portfolios.” Its authors were Luke Devault of Clemson University and Richard Sias of the University of Arizona. They used a methodology similar to that of Hong and Kostovetsky, classifying a hedge fund manager as Democratic (or Republican)-leaning if it made significantly more contributions to Democratic (or Republican) candidates.
As was the case with mutual funds, the portfolio of the average hedge fund run by a Democratic-leaning party was significantly different from that of the average hedge fund run by Republicans. Despite these differences, Sias, in an interview, said he and his co-author found no significant differences in the performance of Democratic and Republican hedge fund managers.
Profit over partisanship
These results make sense. If the stock-picking criteria used by Democratic managers actually led to beating the market, Republican managers would waste no time applying those criteria themselves, and vice versa.
In other words, profits trump partisanship. Wall Street fund managers are some of the most competitive people on the planet, going to great lengths to gain a few basis points advantage over their competitors. There is no doubt that they would willingly sacrifice their political biases if it helped them emerge victorious in the performance contest.
This is one of the reasons why betting markets are generally more reliable than opinion polls. Talking is cheap. But when our money is at stake, we tend to become less partisan and more objective.
One investment implication you might draw from these studies is that it’s okay to align your portfolio with your political affiliation, as it shouldn’t cause your portfolio to underperform. In other words, you don’t have to invest in companies or funds whose policies you find particularly distasteful in order to perform as well as companies or funds you find distasteful.
This implication might go too far. The studies cited above are based on the averages of many different funds, and there is wide variation between the results of individual funds. There is no guarantee that, in your personal situation, aligning your portfolio with your political beliefs will not lead to underperformance, as has been the case with the MAGA ETF, for example.
In any case, the strongest investment implication I draw from these studies is that you are on shaky ground if you believe that investing in companies whose policies match yours leads to beating the market.
Mark Hulbert is a regular MarketWatch contributor. His Hulbert Ratings tracks investment newsletters that pay a fixed fee to be audited. He can be reached at [email protected]
After: “It’s a MAGA-hat wearing a Republican, and I’m pretty liberal.” This worries me: shouldn’t my financial adviser have similar beliefs to mine?
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