How the politics of your fund manager could affect your portfolio

Does politics affect the way you invest? It could be impacting how the fund manager that looks after your money does.

Fund managers are increasingly managing their portfolios based on their political views, according to a new study from Harvard Business School and Washington University.

An analysis of the political leanings of fund managers in the US found that Republicans increased their equity holdings by about two per cent when Donald Trump became president, keeping it at the higher levels throughout his presidency.

However, when centre-left Joe Biden was elected, their exposure to equities dropped again.

Similarly, the right-wing fund managers increased their holdings in cyclical stocks compared to defensive stocks under Trump, therefore increasing their portfolio risk.

The difference is even stronger when looking at environmental, social and governance (ESG) investing. Democrat-aligned fund managers were more than twice as likely to run ESG funds than Republicans.

“One thing experienced investors know is to keep their political views out of their investment decisions,” said Joachim Klement, investment strategist at Panmure Liberum.

“The market does not know whether you are left or right politically and it does not know if a business is left or right. Making investment decisions based on your politics is a guaranteed way to miss out on opportunities.”

Meanwhile, the study showed that credit analysts were more likely to issue worse ratings and stronger downgrades when they didn’t support the incumbent president, while the political views of corporate bankers affected their loan pricing decisions.

Institutional investors were similarly affected, being more likely to invest in ESG funds, while Democrat-aligned retail investors were willing to pay more than twice as much in fees for an ESG funds than Republicans.

“Partisans not only differ in their willingness to invest in companies pursuing non-financial goals, they also differ in their views of how severely companies should be punished for different types of misbehaviour,” said the paper.

So why is there a difference in the investments of the left and the right?

A variety of studies have shown that consumer sentiment is stronger affected by a person’s political party, with Republicans much more likely to say the economy is doing well under Trump than under Biden or Obama. It makes sense that this would extend into the investing world.

While partisanship in the UK hasn’t quite reached the levels of the US, there is a growing divide, and we could soon see studies showing similar patterns in Britain.