The individual attributes of a fund manager, including his or her name, should not matter at all to investors seeking the best returns on their investments.
However, a new study has found that in the U.S., many investors seem to make a distinction between managers whose names they are familiar with and those whose names are what Oliver Spalt, a professor of behavioral finance at Tilburg University in The Netherlands, calls “foreign sounding,” even though there may be no difference between the composition of and the performance of the investment products managed by both managers.
In theory, there should be no discrimination at all in financial markets, so the fact that a “foreign sounding name triggers negative sentiments is disturbing,” Spalt said, “particularly because we find no performance differences between investment products. If investors who care about returns also care about whether names sound foreign or not, then the question is, ‘Do we really understand investors at all?’”
Spalt collaborated with Alok Kumar, Gabelli Asset Management professor of finance at the University of Miami, and Alexandra Niessen-Ruenzi, professor at the University of Mannheim in Germany, on the study. They obtained the names of 6,000 fund managers who managed an active U.S. equity fund between 1993 and 2011. The researchers asked a random sample of 150 U.S. residents to evaluate the names and determine which names sounded foreign to them. They then used statistical tools to show that for funds managed by someone with a name perceived as foreign, annual fund flows were 10% lower than for funds managed by someone with a more familiar American name.
Their analysis showed that funds managed by people with foreign names are missing out on around $133,000 in fees annually. Within that group, fund managers with Middle Eastern and South Asian names experienced the greatest drop in fund flows, particularly after 9/11, which “changed the consciousness on who is foreign and who isn’t,” Spalt said, and the 2013 Boston Marathon bombings.
“Ours is the first study to show that a fund managed by someone called Mustafa triggers negative feelings, whereas a fund managed by someone called William, for example, triggers more positive feelings, even if Mustafa and William are managing the same product,” Spalt said. “The U.S. mutual fund world is the largest, most liquid market in the world, but the study leads us to believe that things may be the same in other investment contexts, and that this kind of discrimination may also apply to the world of CEOs, analysts and so on.”
The study also underscores yet again that investor behavior is driven more by gut feelings than by rational decisions, and that investors are not “super computers,” Spalt said. About 64% of his survey respondents said that fund manager identity is an important determinant of their fund choices, and 57% of the respondents reported that they knew their fund managers’ names when they made their fund choices.
Spalt believes that his study should serve as the starting point for more detailed research on how discrimination affects the mutual fund industry and in turn, the investment objectives and outcomes of individual investors.
“Our study could be interpreted by mutual fund companies in such a way that if they are targeting a certain investment population, they may want to think about who they want to run a particular fund,” Spalt said. “This can be alarming, and though you could take the position that if investors aren’t hurt, who cares, I still find it disturbing to think that there can be discrimination based on names.”
For investors, of course, deciding where to invest based on a money manager’s name can prove counterproductive, and the study raises to light another layer of behavioral bias for financial advisors to be aware of.
While there have been several studies done on such issues as gender and religion and their impact on investing, ethnic origin is a new area, Spalt said, but one that is extremely important, particularly today when geopolitical tensions are high and the notions of identity are getting increasingly more complex.
“We are exploring different ways in which to take this research further,” he said.
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